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.

ITEP, CTJ, and dozens if not hundreds of other organizations have argued for years that a well-designed sales tax should apply to nearly all retail sales, including both goods and services. We have shifted over the years from an economy in which most people sell goods to an economy in which most people sell services. Taxing only the sale of goods is an antiquated and inadequate approach for any state or local government to take.

So why don't all states with sales taxes expand them to apply to services? The answer has nothing to do with what's good policy and has everything to do with politics. Pretty much every business that provides a service can conjure up some argument as to why this particular service is vital to the health and happiness of the state's residents, and from there will argue that a tax (no matter how minimal) will destroy their ability to provide this service.

The most recent example comes from Washington, DC. The DC yoga lobby flexed their political muscle yesterday, urging yoga consumers (apparently known as yogis) across the District of Columbia to oppose expanding the District’s sales tax base to include yoga services and gym memberships.  The “DC Yogis Against the Yoga Tax” — which appears to be a coalition of yoga studios, teachers, and consumers — argues in their boilerplate letter to the Council that “most yogis and gym members are middle income-ers who've simply made it a priority to invest in their health and well-being.  The DC Council should reward their behavior, and encourage more people to take responsibility similarly for their own well-being.” 

Their plea then subtly attempts to downplay the revenue that could be gained by a tax on yoga, implying that such a tax would encourage people to abandon yoga, and therefore result in losses in productivity, self-reliance, and basic human functioning — all of which would adversely impact DC’s coffers.

If you live in the District of Columbia, we suggest that you write to your council member to tell them you support this tax proposal, which is essentially just an attempt to expand the base of the sales tax.

For more information, the DC Fair Budget coalition has additional details on the proposed sales tax base expansion, as well as on fiscal 2011 revenue options more broadly.  Also see the DC Fiscal Policy Institute’s take on sales tax base expansion, and on the recent outcry from the yoga community.

DC's yoga lobby is not unique. Maryland’s recent attempt to tax a handful of services met similar obstacles.  After proposing a list of perfectly sensible expansions of the sales tax base, industry lobbyists skillfully removed their clients from the list, one-by-one, until only the computer services industry remained (and of course, in time, the computer services industry was eventually able to avoid taxation as well). 

During all of this, the circling of the Annapolis capital building by lawn care trucks provided one of the most memorable and oft-cited examples of the influence that special-interests can have in a tax policy debate. 

For more on the importance of taxing services, be sure to read this recent op-ed by Sharon Parks of the Michigan League for Human Services.  In it she explains the history and merits of taxing services in Michigan, and advocates strongly for the proposal put forth by Michigan Governor Jennifer Granholm to expand the state’s sales tax base to include a host of new services, and to return some of the revenue gained to Michiganders via a 0.5 percentage point decrease in the sales tax rate.

Across the nation, state lawmakers wary of further increasing their general sales tax rates are looking (sensibly) for ways of broadening the tax base in order to maximize their "bang for the buck" from the existing tax rates. As a recent New York Times survey documents, half a dozen states are thinking seriously about expanding their sales tax to include previously untaxed services, from haircuts to hot-air-balloon rides.

From a policy perspective, this approach is a slam dunk: a good first principle for sales tax design is that your sales tax liability should depend only on how much you spend — not on what you buy. However, proposals to tax services in Maryland and Michigan have recently run aground because of politics, not policy.

But there is a much more straightforward (and more politically viable) sales tax base broadening strategy that virtually every state can tap right now. Interestingly, even the Wall Street Journal found it difficult to argue against a growing effort by states to enforce collection of their "use tax" (a companion to the sales tax that is designed to apply to goods and services purchased in other states).

From a policy perspective, this is every bit as sensible as taxing services: if you buy a book, the sales tax should be the same whether you buy it in a store or on-line. But the politics are substantially more promising in this case: among the parties most aggrieved by the use tax loophole are small, "bricks and mortar" businesses that collect sales taxes on all their purchases and face a clear tax-based disadvantage compared to Amazon.com and other Internet-based retailers.

In the wake of recently passed legislation in Colorado designed to encourage more taxpayers to pay the use tax on their own, more states will likely seek to replicate Colorado's approach.

The following letter to the editor of the Wall Street Journal points out that their widely-cited op-ed on the Maryland "millionaires' tax" is both misleading and factually inaccurate.  The letter makes clear that the Journal's general interpretation of the Maryland "millionaires' tax" -- which it first began touting nearly one year ago -- is grossly distorted. Perhaps as a result, the letter went unpublished.

Your March 12 editorial, “Maryland’s Mobile Millionaires,” (Review & Outlook, March 12) states that “one-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008.” But this is simply wrong. The most recent data from the Maryland Comptroller’s office show that just 6.8% of Maryland’s 2007 millionaires have yet to file their 2008 returns, far below the 12.5% your “one-in-eight” figure implies. And as the Comptroller’s Office has reminded anyone who will listen, there are two reasons to be skeptical that even this 6.8% figure can be attributed to the state’s “millionaires’ tax.”

First, Marylanders—like all Americans—were quite mobile before the millionaire’s tax was introduced. In the seven years before the enactment of the tax hike in question, an average of 5.6 percent of Maryland’s millionaire filing population moved out from one year to the next—not that different from the 6.8 percent we’re seeing in 2008 so far. Moreover, there are quite sensible reasons why upper-income taxpayers would be late filing their 2008 taxes. As Maryland Comptroller Peter Franchot noted in a May 2009 letter, “It is possible that, with the economic turmoil experienced in the last half of 2008, the tax situations of many wealthy individuals are more complicated than usual, and a higher proportion will therefore use the filing extension than is typical.”  In other words, it’s far too soon to call these numbers final. It’s a shame that the Journal’s editorial board has jumped the gun on this once again.

Despite a lack of data to support their claims, some lawmakers and business groups continue to insist that extending Maryland’s 0.75 percentage point income tax rate hike on incomes over $1 million has caused an exodus of millionaires from the state.  To help clear things up, this week ITEP released a two-page brief explaining why evidence surrounding a similar policy in New Jersey does not provide support for this claim (despite many assertions to the contrary), and testified before the Maryland Senate Budget and Tax Committee on the merits of extending the “millionaires’ tax.”

In 2004, New Jersey implemented a 2.5 percentage point increase in the top tax rate on incomes over $500,000, frequently called the “half millionaires’ tax.”  Opponents of the Maryland “millionaires’ tax” have recently begun to portray the New Jersey experience as a horribly failed experiment in order to discredit any attempts at extending Maryland’s version of the tax.

In response, ITEP's brief looks specifically at two academic studies that have recently been touted as evidence against the New Jersey policy. One study was published by Boston College, the other by Princeton University.  The Boston College (BC) study, in particular, has recently become a favorite among opponents of Maryland’s “millionaires’ tax.”  But while the BC study does show that $70 billion in wealth left the state over the 2004 to 2008 period, it makes absolutely no attempt to focus its analysis on that small subset of New Jerseyans actually affected by the “half millionaires’ tax,” and does not mention taxes even once as a potential contributing factor.

The Princeton study, in contrast, actually does attempt to evaluate the “half-millionaires’ tax,” and finds that its effect in driving people from the state was “small.”  It goes on to conclude that “if the New Jersey experience is any guide, Maryland’s ‘millionaires’ tax’ is likely to generate substantial revenues and very little out-migration.”  Oddly, these straightforward findings never seem to find their way into the talking points used by the anti-taxers.  Simply put, opponents of the “millionaires’ tax,” unhappy with the results of the Princeton study, have turned toward the infinitely less relevant BC study to create the appearance that the facts are on their side.

ITEP also relayed the facts behind the “millionaires’ tax” to the Maryland Senate Budget and Tax Committee in testimony it gave this past Tuesday.  In addition to refuting claims that the “millionaires’ tax” has resulted in an exodus among the rich, the testimony also explains how the “millionaires’ tax” reduces the unfairness inherent in Maryland’s tax system, and how the tax results in a sizeable federal tax cut for millionaires, as they are able to write-off the tax increase as a federal itemized deduction.

Read ITEP’s Brief on the New Jersey Migration Studies’ Relevance (or Lack Thereof) to Maryland.

Read ITEP’s Testimony on Extending the Maryland “Millionaires’ Tax”.

As the current economic storm continues to batter state budgets, policymakers in numerous states are continuing to talk of raising taxes to help mitigate cuts in state services.  In Maryland, lawmakers are debating an extension of the state’s temporary “millionaires’ tax,” while a new policy brief out of Georgia proposes to eliminate an unwise (and rare) deduction currently only offered in just seven other states — Arizona, Hawaii, Louisiana, Oklahoma, New Mexico, Rhode Island, and Vermont.

Maryland's legislature is currently considering whether to extend a temporary "millionaires’ tax" enacted as part of a major 2007 tax reform effort. ITEP staff testified Thursday at a hearing of the state House Ways and Means Committee. ITEP's testimony highlighted several important details, such as the fact that the millionaires’ tax modestly reduces the overall unfairness of Maryland's tax system. With the tax in place, low-income families still pay more of their income in Maryland taxes than millionaires must pay — and if the tax is repealed, this inequity will become even worse.

The testimony also explains why claims by anti-taxers that millionaires have fled the state in response to the millionaires’ tax are unfounded. As ITEP's analyses have shown, the primary cause of the decline in the number of Maryland millionaires in the past year is that they stopped being millionaires due to the recession.  The claim that the decline in the number of millionaires is due to the high income tax would be news to lawmakers in Utah (the only other state in which there is publicly available data on the change in the number of millionaires between 2007 and 2008). In the same year that Maryland lost 30 percent of their millionaires, Utah lost 60 percent of theirs. And while Maryland hiked their income tax on wealthy taxpayers the previous year, Utah cut theirs.

In Georgia, some attention is beginning to be paid to a progressive idea passed by the New Mexico legislature just last week.  On Thursday, the Georgia Budget and Policy Institute (GBPI) released a brief explaining why the state’s deduction for state income taxes paid — which costs the state $450 million each year — should be eliminated to help fill the state’s budget gap.  The vast majority of states already disallow this deduction (which originates from federal tax rules) in order to avoid the bizarre, circular situation in which one’s state tax payment can be used to reduce their state taxes.  

Finally, a new report from the Center on Budget and Policy Priorities (CBPP) helps put these developments in Maryland and Georgia into perspective.  The report notes that states have increased taxes by a combined $32 billion during the current recession.  In total, thirty three states have raised taxes to help fill their budget gaps, with twenty two of those having enacted “significant” tax increases, meaning increases that total more than 1 percent of their total revenues.  The report’s appendices provide an excellent summary of the multitude of state tax changes that have been enacted during these difficult budgetary times.

Like their counterparts in most states, legislators in Maryland are expected to face some pretty rough sledding as they attempt to craft a balanced budget for the coming fiscal year.  As a result of the ongoing national recession, revenues have remained well below prior projections and the state now faces a budget shortfall of roughly $2 billion in FY 2011 alone.  Fortunately, as Neil Bergsman of the Maryland Budget and Tax Policy Institute pointed out this past week, legislators who recognize that revenue increases are an important part of a balanced approach to addressing budget deficits have multiple options available to them.  

Two of the most progressive of those options are the preservation of Maryland’s so-called “millionaires’ tax” and the implementation of combined reporting.  As ITEP explains in its latest report, to compensate for the loss of revenue arising from the repeal of a tax on computer services, Maryland enacted a temporary change in its income tax in 2008. That change, the so-called “millionaires’ tax,” created a new top income tax bracket with a rate of 6.25 percent applicable solely to taxable income over $1 million.  As ITEP observes, the change is slated to expire at the end of 2010, but preserving it would generate close to $100 million in annual revenue, while affecting fewer than 5,000 Marylanders each year.

Adopting combined reporting – as Texas, West Virginia, New York, Michigan, Massachusetts, and Wisconsin have all done within the last five years – would have a similarly salutary effect on Maryland’s long-term fiscal outlook. 

As this issue brief from ITEP argues, combined reporting represents the most comprehensive option available to states seeking to halt the erosion of their corporate tax bases and to curtail corporate tax avoidance. 

Indeed, a 2009 study by Maryland’s Office of the Comptroller suggested that the implementation of combined reporting in Maryland could yield as much as $100 million per year in additional revenue, simply by preventing large corporations from using legal and accounting maneuvers to shift income out of state.

Of note, according to the Maryland Gazette, Delegate Roger Manno has already introduced legislation that pairs these two options to help improve pension funding in the state.

Recent developments in Oregon and Massachusetts demonstrate how relying too heavily on tax breaks to accomplish policy goals can quickly cause things to get out of hand.  Policymakers in Maryland should heed these warnings when considering the Governor’s recent proposal to create new tax incentives for businesses, despite the state’s dire budgetary outlook.

In Oregon, the controversy involves the state’s Business Energy Tax Credit (BETC, or “Betsy”).  The BETC program is purportedly designed to encourage the growth of “green” energy companies in Oregon.  Under pressure from the Governor’s office, the Oregon Department of Energy is reported to have deliberately (and drastically) low-balled the cost-estimate attached to the BETC program.  This lower cost estimate allowed the program to be enacted with much less scrutiny than would otherwise have been the case.  Of course, if the program had instead been operated as a traditional spending program, its overall size would have been limited to whatever dollar amount the legislature decided it deserved during the appropriations process.

The Oregon credit has also taken heat in recent weeks for its lack of accountability – specifically, by providing benefits to businesses that have done little or anything to create jobs or improve the environment.  And moreover, because of the “transferability” of these credits, the program has also resulted in huge windfall benefits to businesses, including Walmart, that have made absolutely no attempt to promote the credit’s environmental goals.

In order to quell the outrange expressed by Oregonians at this blatant misuse of state resources, the Governor has since proposed, among other things, to cap the overall size of the BETC program and force the government to prioritize potential projects in order to bring the cost of the program beneath that cap.  It remains to be seen whether the Governor’s recommendations will be enough to salvage this so far disastrous program.

While Oregon’s recent experience with BETC provides anecdotal evidence of the danger of relying upon the tax code as a tool of economic development, evidence from Massachusetts provides an even more comprehensive picture of this problem.  The Massachusetts Budget and Policy Center’s (MBPC) recent analysis of economic development tax incentives shows that while traditional government “spending” has been forced downward by the economic recession, spending on business tax incentives has continued to rise sharply.  The 2.8% drop in FY10 appropriations, for example, contrasts sharply with a 4.2% increase in FY10 economic development tax breaks.  MBPC explains the cause of this asymmetry as follows:

“Tax expenditures are in many ways similar to direct appropriations. Both seek to achieve certain policy goals through the use of the state’s economic resources, and both have an effect on the state’s bottom line. A primary difference is that budget appropriations must be reauthorized by the Legislature each year, while tax expenditures remain in effect without the Legislature having to take action.  The effectiveness of these tax expenditures is rarely examined in any detail and very little data is available to analyze.”

In order to correct this bias in favor of special tax breaks, the MBPC proposes six reforms designed to shine a brighter light on these programs.  The first such reform, “provide information on the purpose and effectiveness of each tax expenditures,” mirrors a proposal made by CTJ just last month.

On the heels of this disappointing news from Oregon and Massachusetts comes a proposal from Maryland Governor Martin O’Malley to provide businesses with a $3,000 tax credit for each employee they hire.  While the Governor has thankfully proposed to cap the overall credit at $20 million, one can’t help but wonder whether another economic development tax break is really the best use of the state’s very scarce resources.

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

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

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

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

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

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

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

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

Kentucky

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

Idaho

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

Maryland

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

Arizona

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

Ohio

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

Anyone who has ever wondered about the extent of corporate tax avoidance in Maryland need wonder no longer: a new analysis from the state’s Bureau of Revenue Estimates (BRE) suggests that it is quite substantial.  The analysis, mandated by law two years ago, answers some very important questions: if Maryland had used combined reporting as part of its corporate income tax in 2006, how much more revenue would the state have collected and how would it have affected the taxes paid by certain businesses and industries? 

Combined reporting, as this ITEP issue brief explains, is the single most effective means of curbing corporate tax avoidance available to state policymakers. Given the degree of corporate tax avoidance at the state level, its adoption should, overall, be expected to generate significant amounts of additional tax revenue. This is true even if some corporations, due to varying levels of profitability among their subsidiaries, end up paying less in taxes.

Not surprisingly, that is what the BRE’s analysis finds.  Had combined reporting been part of Maryland’s tax code in 2006, the state, on net, would have collected as much as $170 million in additional revenue, an amount equivalent to nearly 20 percent of total corporate income tax collections that year. 

What’s more, as a related analysis from the Maryland Budget and Tax Policy Institute (MBTPI) points out, it is typically larger businesses that would pay additional taxes under combined reporting.  The data released by the BRE indicate that as much as 70 percent of corporations with incomes over $25 million would have owed higher taxes in 2006 had combined reporting been in effect.

To be sure, the BRE’s analysis goes to great lengths to emphasize that, given current economic conditions and other factors, Maryland would not immediately realize $170 million in new revenue if the Assembly and the Governor were to enact combined reporting legislation tomorrow or next week – and you can be certain that opponents of combined reporting will strive to make the same point. 

Still, as the MBTPI argues, there’s no time like the present for action.  Combined reporting is not some new or risky gambit. The majority of states that have corporate income taxes now use it. (Some have used combined reporting for over sixty years.) Nor will waiting longer to adopt it help address Maryland’s long-term fiscal problems.  Fortunately, it appears that some Maryland legislators, such as Senator Paul Pinsky, may be ready to take up the issue once the Assembly reconvenes next year.

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

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

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

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

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

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

For several decades, the American economy has shifted from producing consumer goods to providing services. As a result, states that tax the purchase of goods but not the purchase of services will increasingly find themselves unable to raise the revenue needed to support public services.

The Center on Budget and Policy Priorities released a report this week that explains why states should expand their sales tax bases to include services. The report offers various reasons why taxing services is a good policy prescription including: increased short- and long-term revenues, the potential for less volatility in the sales tax, and the potential for more administrative compliance.

A helpful discussion of the pros and cons of taxing business-to-business services is also included. Advocates interested in knowing how much revenue could potentially be raised from expanding the sales tax base to include services will also find the state-by-state estimates included in the paper very informative.

The Maryland Business Tax Reform Commission met last Thursday specifically to discuss trends in business taxation across the country. During the meeting ITEP offered testimony regarding the wide variety of options policymakers have when seeking to reform their business taxes.

For example, in the past several years, a handful of states, including Ohio and Texas, have completely changed how they tax businesses operating within their boundaries. Other states like California have modified their basic apportionment formulas, while still more continue to offer a variety of tax credits and inducements with the aim of luring or retaining employers.

ITEP's remarks specifically focused on one particular trend: the move to require combined reporting of a corporate group's nation-wide income to state tax authorities. Under combined reporting, a multi-state corporation calculates its income for tax purposes by adding together the income of all its subsidiaries -- without regard to their location -- into one total. That total is then apportioned to the state using the combined apportionment factors of the entities that comprise the corporation.

Without this reform, corporations can use various accounting tricks and sham transactions (which exist only on paper) to shift profits into a state that has no corporate income tax. Simply put, combined reporting represents the most comprehensive option available to states seeking to halt the erosion of their corporate tax bases and to curtail corporate tax avoidance.

Since 2004, seven states have adopted combined reporting. In fact, a majority of the states that levy a corporate income tax of some kind now use this approach to determining the tax liabilities of multi-state businesses. Read ITEP's testimony here on the importance of combined reporting and the gains experienced by states that have enacted the measure.