In a stark departure from the last few years, one of the most debated state tax policy issues in 2013 has been the gasoline tax (PDF).  Until this February, it had been almost three years since any state’s lawmakers approved an increase or reform of their gasoline tax.  That changed when Wyoming Governor Matt Mead signed into law a 10 cent gas tax hike passed by his state’s legislature.  Since then, Virginia has reformed its gas tax to grow over time alongside gas prices, and Maryland has both increased and reformed its gas tax.  By the time states’ 2013 legislative sessions come to a close, the list of states having improved their gas taxes is likely to be even longer.

Massachusetts appears to be the most likely candidate for gas tax reform.  Both the House and Senate have passed bills immediately raising the state gas tax by 3 cents per gallon, and reforming the tax so that its flat per-gallon amount keeps pace with inflation in the future (see chart here).  In late 2011, the Institute on Taxation and Economic Policy (ITEP) found that Massachusetts is among the states where inflation has been most damaging to the state transportation budget—costing some $451 million in revenue per year relative to where the gas tax stood in 1991 when it was last raised.  Governor Deval Patrick has expressed frustration that legislators passed plans lacking more revenue for education—in sharp contrast to his own plan to increase the income tax—but he has also signaled that there may be room for compromise.

Vermont lawmakers are also giving very serious consideration to gas tax reform.  At the Governor’s urging, the House passed a bill increasing the portion of Vermont’s gas tax that already grows alongside gas prices.  The bill also reforms the flat-rate portion of Vermont’s gas tax to grow with inflation.  The Senate is now debating the idea, and early reports indicate that the package may be tweaked to rely slightly more on diesel taxes in order to reduce the size of the increase on gasoline.

Pennsylvania Governor Tom Corbett has also proposed raising and reforming his state’s gasoline tax.  While Pennsylvania’s tax is technically supposed to grow alongside gas prices, an obsolete tax cap limits the rate from rising when gas prices exceed $1.25 per gallon.  Corbett would like to remove that cap in order to improve the sustainability of the state’s revenues, and members of his administration have been traveling the state to explain how doing so would benefit Pennsylvanians.  While the legislature has yet to act on his plan, the fact that it has the backing of the state’s Chamber of Business and Industry is likely to help its chances.

In New Hampshire, the Governor has said she is open to raising the state gas tax and the House has passed a bill doing exactly that.  But there are indications that lawmakers in the state Senate might continue procrastinating on raising the tax, as the state has done for over two decades.

Nevada lawmakers are discussing a gas tax increase following the release of a report showing that the state’s outdated transportation system is costing drivers $1,500 per year.  ITEP analyzed a gas tax proposal receiving consideration in the Nevada House and found that even with the increase, the state’s gas tax rate (adjusted for inflation) would still remain low relative to its levels in years past.

Iowa lawmakers have been debating a gas tax increase for a number of years, and there may be enough support in the legislature to finally see one enacted into law.  The major stumbling block is that Governor Branstad will only agree to raise the gas tax if it’s part of a larger package that cuts revenue overall—particularly revenues from the property tax.  As we’ve explained in the past, such a move would effectively benefit the state’s roads at the expense of its schools.

Earlier this year, Washington State House lawmakers unveiled a plan raising the state’s gas tax by 10 cents per gallon and increasing vehicle registration fees.  Senate leaders are reportedly less excited about the idea of a gasoline tax hike, though there are indications they would consider such an increase if it were to pass the House.  While talk of a 10 cent increase has since quieted down, there are rumors that a smaller increase could be enacted.

Unfortunately, some states where the chances of gas tax reform once appeared promising have since begun to move away from the idea.  In Michigan, while the Governor and the state Chamber of Commerce have voiced strong support for generating additional revenue through the gas tax, neither the House nor the Senate appears likely to vote in favor of such a reform this year.  Meanwhile, the chances for a gas tax increase in Minnesota seem to have faded after the Governor came out against an increase and the House subsequently unveiled a tax plan that leaves the gas tax untouched.

Overall, 2013 has already been a significant year for state gas tax reform.  Both Maryland and Virginia have abandoned their unsustainable flat gas taxes in favor of a better gas tax that grows over time, just like construction costs inevitably will.  Hopefully, within the next few months, more states will have followed their lead.

Idaho Senate leadership took a difficult stand on a high-profile issue in favor of good tax policy by refusing to give the Girl Scouts a special tax break on their famous cookies. Their counterparts in the Idaho House, however, weren’t nearly as principled, bowing to the pressure of some of the nation’s youngest tax policy lobbyists and voting 59-11 in favor of the special break. The Girl Scouts plan to return to the statehouse next year in hopes of convincing the Senate to support the new tax subsidy, which is like any other (PDF) subsidy.

Nevada lawmakers are debating whether they should join Maryland and Wyoming as the third state to raise its gasoline tax this year.  The Institute on Taxation and Economic Policy (ITEP) provides some important context with a new chart showing that even if the state’s gas tax were raised by 20 cents over the next 10 years (as the Senate is considering), the rate would still be below its historical average in value.

Texas business owners are pushing state lawmakers to repeal the state’s largest business tax, trotting out familiar arguments about the economic benefits of tax cuts. Fortunately, as the Austin American Statesman reports, “a $1.2 billion annual price tag ... appears to have doomed the effort.”

Massachusetts House lawmakers set up a showdown with Governor Patrick over transportation funding in the Bay State with the passage of their less ambitious revenue package this week. Governor Patrick’s budget includes almost $2 billion in new revenues to boost transportation and education spending raised primarily through increasing the personal income tax. The Governor’s plan also includes a sharp reduction in the state’s sales tax. The House package, by contrast, raises just over $500 million through increases in fuel and cigarette taxes as well as a few business tax changes. Governor Patrick threatened to veto any tax package from the House or Senate that does not raise significant revenue for both transportation projects and education.

(Photo courtesy Bitterroot Star)

Need further proof that the poor are often taxed more heavily than wealthier folks? Take a look at this recent New York Times piece by sociologist Katherine Newman based on her book. She writes that “tax policy is particularly regressive in the South and West, and more progressive in the Northeast and Midwest. When it comes to state and local taxation, we are not one nation under God. In 2008, the difference between a working mother in Mississippi and one in Vermont — each with two dependent children, poverty-level wages and identical spending patterns — was $2,300.” Newman concludes with suggestions for offsetting the regressive impact of state taxes.

The Atlanta Journal Constitution is doing an investigative series on tax breaks and incentives, and here’s their latest article – a look into “the Georgia Agricultural Tax exemption program, [designed] to allow farmers and companies that produce $2,500 in agricultural services or products a year to receive sales tax breaks on equipment and production purchases.” What they found, however, is that construction firms, mineral companies, horse ranches and even dog kennels have applied for the breaks, along with hundreds of out-of-state businesses, with addresses as far afield as Texas and Colorado.” The newspaper found very few requests for this tax break were being rejected, and the governor is imploring businesses to police themselves. The newspaper concludes that it was the absence of clear criteria and lack of resources for screening and evaluating applications that’s resulted in the fiscal and logistical chaos.

Washington State lawmakers are trying to get a better handle on the numerous special tax breaks (PDF) being added to the state’s tax code every year. Under a bill that passed the state senate unanimously, new tax breaks would have to include a statement of purpose against which to judge their subsequent success, and an expiration date that would force lawmakers to vote on them again after a certain number of years.  Both of those reforms (along with others) have been recommended by our partner organization, the Institute on Taxation and Economic Policy (ITEP).

Massachusetts Governor Deval Patrick cited a recent report from ITEP’s “Debunking Laffer” series while testifying in favor of his proposed income tax increase: “Last month, the non-partisan Institute on Taxation and Economic Policy issued a report evaluating the economic growth per capita of several states. The report compared nine states with relatively high income taxes to nine states with low or no income tax. The analysis made clear that the nine states with “higher” income taxes actually saw considerably more economic growth per capita than the nine states with low or no income tax. The states with no income tax have seen a decline in median income.”

Note to Readers: This is the fifth of a six part series on tax reform trends in the states, written by The Institute on Taxation and Economic Policy (ITEP).  Previous posts in this series have provided an overview of current trends and looked in detail at “tax swaps,” personal income tax cuts and progressive tax reforms under consideration in the states.  This post focuses on one of the most debated tax issues of 2013: raising state gasoline taxes to pay for transportation infrastructure improvements.

States don’t tend to increase their gas tax rates very often, mostly because lawmakers are afraid of being wrongly blamed for high gas prices.  The result of this rampant procrastination is that state gas tax revenues are lagging far behind what’s needed to pay for our transportation infrastructure.  Until last week, the last time a state gas tax increase was signed into law was three and a half years ago—in the summer of 2009—when lawmakers in North Carolina, Oregon, Rhode Island, Vermont, and the District of Columbia all agreed that their gas tax rates needed to go up, albeit modestly in some cases.  (Since then, some state gas taxes have also risen due to provisions automatically tying the tax to gas prices or inflation.)

But Wyoming was the state that ended the drought when Governor Matt Mead signed into law a 10 cent gas tax increase passed by the state’s legislature.  And Wyoming is not alone.  In total, lawmakers in nine states are seriously considering raising (or have already raised) their gas tax in 2013: Iowa, Maryland, Massachusetts, Michigan, New Hampshire, Pennsylvania, Vermont, Washington, and Wyoming. And until recently, Virginia appeared poised to increase its gas tax, too.In addition to Governor Mead, Republican governors in Pennsylvania and Michigan and Democratic governors in Massachusetts and Vermont have proposed raising their state gas taxes despite the predictable political pushback that such proposals seem to elicit.  The plans under discussion in these four states are especially reform-minded since they would not just raise the gas tax rate today, but also allow it to grow over time as the cost of asphalt, concrete, machinery, and everything else the gas tax pays for grows too.

In New Hampshire, meanwhile, Governor Hassan has said that the state needs more funding for transportation and is open to the idea of raising the gasoline tax, among other options.  The state House is debating just such a bill right now.  The situation is similar in Maryland where Governor O’Malley, who pushed for a long-overdue gasoline tax increase last year, recently met with legislators to discuss a gas tax increase proposed this year by Senate President Mike Miller.  Washington State Governor Jay Inslee has also not ruled out an increase in the gas tax—an idea backed by the state Senate majority leader and the House Transportation Committee chair.  And in the Hawkeye State, Governor Branstad once described 2013 as “the year” to raise Iowa’s gas tax (which happens to be at an all-time low, adjusted for inflation), although he has since said that he would support doing so only after lawmakers cut the property tax.

Other states where gas tax increases have gotten a foothold so far this year include Minnesota, Texas, West Virginia, and Wisconsin, though it’s not yet clear how far those states’ debates will progress in 2013.

Across the country, no state has received more attention this year for its transportation debates than Virginia, where Governor Bob McDonnell kicked off the discussion by actually proposing to repeal the state’s gasoline tax.  But while Governor McDonnell’s idea was certainly attention-grabbing, it also failed to gain traction with most lawmakers, and the Virginia Senate responded by passing a bill actually increasing the state gasoline tax and tying it to inflation.  Since then, the preliminary details of an agreement being negotiated between House and Senate leaders are just now emerging, but early indications are that the legislature will try to cut the gas tax in the short-term, but allow the tax to rise alongside gas prices in the future.  The size of the cut will also depend on whether Congress enacts legislation empowering Virginia to collect the sales taxes owed on online purchases.

It’s good to see Virginia lawmakers looking toward the long-term with reforms that will allow the gas tax to grow over time.  But asking less of drivers through the gas tax today—when the state is facing such serious congestion problems—is fundamentally bad tax policy.  For more on the merits of the gas tax and the reforms that are needed to improve its fairness and sustainability, see Building a Better Gas Tax from the Institute on Taxation and Economic Policy (ITEP).

Note to Readers: This is the fourth of a six part series on tax reform in the states. Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” and personal income tax cut proposals.  This post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax reform proposals are not all bad news this year.  There are some good faith efforts underway that would fix the structural problems with state tax codes, rather than simply dismantling or eliminating entire revenue sources and calling it “reform.”  Proposals in Minnesota, Kentucky, Utah, and Massachusetts would improve the fairness, adequacy and sustainability of those states’ tax systems through various combinations of base broadening, tax breaks for low- and moderate-income families, and increases in the share of taxes paid by wealthy households. Other states to watch include Nevada, California, New York and Hawaii, though the specific proposals that will be considered in these states have yet to be fully fleshed out.

Minnesota Governor Mark Dayton recognizes that his state’s tax structure is in need of an overhaul and is looking at long-term solutions that will set the state’s revenues on a sustainable path now and in the future.  As he sees it, the current system is fraught with problems. It does not reflect the modern economy in many ways. It has shifted the responsibility for funding government to those with the least ability to pay. It is out of balance due to its heavy reliance on property taxes.  And, it is riddled with expensive and ineffective tax breaks that make the state’s revenues less sustainable.  Out of all the high-profile state tax reform plans unveiled this year, Governor Dayton has put forth the best example of a comprehensive and progressive tax reform proposal.  It will make Minnesota’s tax code more fair, adequate, and sustainable.  The Governor’s plan includes: broadening the sales tax base to services and using some of the additional revenue to lower the state’s sales tax rate; reducing property taxes; adding a new personal income tax bracket for the state’s wealthiest taxpayers; and closing corporate tax loopholes.  The plan also raises more than $1 billion a year to boost investments in public education and restore structural balance to the state’s budget.

Kentucky Governor Steve Beshear signaled his support for overhauling the Bluegrass State’s tax code in his State of the State address in early February and indicated he would be looking to the recommendations from his appointed Blue Ribbon Tax Commission as a starting point for a proposal.  With a few exceptions, the Commission’s recommendations (released in December) were courageous and forward-looking, including a proposal to expand the sales tax base to services (PDF) while simultaneously adopting an Earned Income Tax Credit (EITC) (PDF) to offset the impact on low-income working families.  The recommendations also included broadening the personal income tax base by limiting itemized deductions for wealthy households, lowering the very large exclusion for pension income (and phasing it out for high wealth retirees), and lowering personal income tax rates.  Like the Minnesota plan, if taken as a whole, the Kentucky Tax Commission’s recommendations would shore up state revenues over the long term and more immediately raise revenue for current needs.

Utah lawmakers are looking at a proposal to raise the sales tax rate applied to groceries and couple that change with two new refundable credits to offset the impact on low- and moderate-income families: a food credit (PDF) and a state EITC (PDF).  While less comprehensive than the proposals under consideration in Minnesota and Kentucky, an ITEP analysis found that the Utah plan would reduce the regressivity of Utah’s tax code (PDF).  In other words, low-income working families would ultimately pay less of their income in taxes while upper-income families would pay slightly more.  Simply exempting food from state sales taxes (or taxing it at a lower rate) is a poorly targeted and costly policy that narrows the tax base and extends the break to wealthier taxpayers who don’t need it. Therefore, refundable credits of the kind Utah is considering are a smart, less costly alternative that can be designed to reduce taxes for specific groups of taxpayers in need of relief.

Massachusetts Governor Deval Patrick’s FY14 budget included a tax package that will boost revenues now and in the future and make slight improvements to the fairness of the state’s tax system. While many governors this year are looking to replace progressive income taxes with regressive sales taxes, Governor Patrick wants the Bay State to do the reverse and rely more on the personal income tax and less on the sales tax.  His plan would raise the state’s flat personal income tax rate from 5.25 to 6.25 percent, double the personal exemption, and eliminate more than 40 personal income tax breaks that tend to benefit the wealthiest families.  The sales tax rate would drop from 6.25 to 4.5 percent and computer software, soda, and candy would be newly subject to the tax.  He also recommends a $1 increase to the cigarette tax. Governor Patrick’s plan would raise close to $2 billion when fully phased in. The Campaign for Our Communities coalition praised the proposal, saying that it “creates growth and opportunity through long-term investments in education, transportation and innovation funded by making our tax system simpler and fairer.”

• The Boston Globe covers an important new report finding that: “Over the past 16 years [Massachusetts] has more than doubled the amount of tax breaks it provides businesses to spur economic development but has only a vague idea whether the incentives are worthwhile.”  The full report, from the Massachusetts Budget and Policy Center, has more data on the large and growing cost of these breaks, and urges the state to thoroughly evaluate whether these so-called “incentives” are the best use of Massachusetts taxpayers’ dollars.

• The value of Louisiana’s film tax credit is being seriously questioned.  According to the Louisiana Budget Project (LBP), the cost of the credit has ballooned in recent years, while producing little in the way of long-term benefits.  LBP finds that the state is paying a steep price of $60,000 for each job created by the credit, despite many of those jobs being only temporary.

• Low-income Garden Staters are feeling the pinch from Governor Christie cutting back the state’s Earned Income Tax Credit (PDF) – an effective, targeted tax reduction for low- and moderate-income workers.  According to a New Jersey Policy Perspectives analysis, at a time when the number of New Jersey families living below the poverty line has increased by 25 percent, the reduced EITC has meant that nearly 500,000 families have lost on average $200 a year.  State lawmakers have attempted to restore the credit to 25 percent of the federal version (Christie cut it to 20 percent in 2010) and even the governor included a restoration in his original budget proposal this year.  However, politics got in the way and Christie vetoed legislation to restore the EITC until lawmakers agree to his expensive tax cut plan that benefits the wealthiest New Jersey residents.

Photo of Chris Christie via David Shankbone Creative Commons Attribution License 2.0

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

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

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

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

In a span of less than two weeks, commissions in two very different states – Massachusetts and Oklahoma – have issued remarkably similar recommendations on how to deal with the slews of special tax breaks that evade scrutiny and accountability year after year, budget after budget. As CTJ has pointed out, state budget processes are essentially rigged in favor of tax breaks (loopholes, subsidies) and as a result it’s become far too easy for lawmakers to enact (and extend) tax giveaways for virtually any purpose imaginable.

In Massachusetts, the Tax Expenditure Commission just released eight recommendations designed to deal with this very problem.  According to the Commission, lawmakers should clearly specify the purpose of all tax breaks (or “tax expenditures”) so that analysts can begin evaluating their effectiveness on an ongoing basis and providing realistic policy recommendations to lawmakers.  The Commission further urged that those evaluations be carefully timed to coincide with the state’s normal budget process, and even suggested that some tax expenditures be scheduled to sunset (or expire) so that lawmakers are forced to debate those breaks after the evaluations are complete and the facts are out.

In Oklahoma, the Incentive Review Committee recently released its set of recommendations dealing with one category of tax expenditures in particular: those ostensibly aimed at spurring economic development.  As in Massachusetts, the Oklahoma Committee said that lawmakers need to more clearly articulate the purpose of tax breaks, and that evaluations of those breaks should be done in a rigorous and ongoing fashion. One of the Oklahoma Committee’s more important recommendations might sound obvious at first, but it’s actually often overlooked: good evaluations take time and resources, and the state should adequately fund whichever department is charged with completing the evaluations.

Jon Stewart hilariously skewered the phrase “spending reductions in the tax code” as another way of saying taxes need to be raised. These tax commissions (as well those in Minnesota, Missouri, and Virginia), tasked with realistically assessing state budgets, are forcing Americans to recognize that spending through the tax code exists and that it requires the same level of scrutiny as spending through government programs, as previously outlined by CTJ.

• The Institute for Research on Poverty at the University of Wisconsin-Madison released a report showing that Wisconsin poverty rates actually dropped between 2009 and 2010 – from 11.1 to 10.3 percent – thanks to safety net programs that were effective in keeping people out of poverty during the recession. The Institute’s director praised the earned income tax credit and food stamp programs saying that they “have done a fantastic job in this recession.”

• Rhode Island’s House Committee on Finance considered five bills this week that would raise income taxes on the wealthiest Rhode Islanders.  Read ITEP’s testimony to learn how these proposals are the best option for Rhode Island policymakers who want to both raise revenue and improve tax fairness.

• Massachusetts Governor Deval Patrick created a special Tax Expenditure Commission last year to examine the more than $26 billion in tax breaks the state hands out each year (which amounts to more money than the state is expect to take in this year!).  After months of meeting, the members unanimously approved a report that the Commission Chair referred to as a “comprehensive roadmap” to reforming the system.  Many of the Commission’s recommendations mirror those in CTJ’s recommendations for cleaning up state tax codes – and the process by which they are modified. The 8 formal recommendations in Massachusetts include: reducing the number and cost of current tax expenditures; periodically reviewing expenditures and including an automatic sunset every five years; and identifying and publishing clear policy purposes and outcomes for each expenditure.

• And this article is about a sales tax holiday for meals that’s been proposed as an actual piece of legislation in Massachusetts.  A week long sales tax holiday on meals purchased at restaurants? Sounds like a boondoggle of a loophole to us. Thankfully, commonsense prevailed and the idea was solidly defeated.

This week brought news of a few more states tackling the challenge of taxing purchases made over the Internet in the same way as purchases made in “brick and mortar” stores.  Nevada and Tennessee got agreements from Amazon.com, the mother of all online retailers, to start doing its part to collect those taxes, and it looks like Massachusetts isn’t far behind.

• In Nevada, Amazon.com will begin collecting sales taxes in 2014 under a new agreement announced on Monday.  The company already has major warehouses and distribution centers in the state.  Amazon’s agreement with Nevada is similar to deals struck in California, Indiana, South Carolina, Tennessee, and Virginia.
• As in Nevada, Amazon’s deal to begin collecting sales taxes in Tennessee won’t take effect until 2014, but a lesser known part of that agreement has already taken effect.  Amazon is mailing notices to all its Tennessee customers from throughout the past year letting them know that they may owe sales tax on the items they bought from the company, even though Amazon didn’t collect those taxes for them.  Similar annual notices will be sent by February 1st in both 2013 and 2014.
• The Massachusetts Main Street Fairness Coalition is continuing its calls for the state to require that Amazon collect sales taxes, and The Boston Globe just chimed in to support the idea as well.  As the Globe explains, the company’s new offices in Massachusetts should be enough to bring the company within reach of the state’s sales tax collection laws.

Of course, these efforts are only partial solutions at best.  Amazon.com may be the world’s biggest online retailer, but they’re hardly the only one.  Nevertheless, until the federal government acts to allow all states to enforce their sales tax laws on all purchases, these piecemeal victories are the best news we can hope for.

Note to Readers: Over the coming weeks, the Institute on Taxation and Economic Policy will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would increase state revenues to pay for important public investments. 

Given the number of Governors calling for major tax cuts in their states, you’d think that states are suddenly awash in cash and well on the road to economic recovery.  But the reality is that very few states are back to where they were before the recession hit in terms of tax collections and public spending.  Many were limping along with federal stimulus funds, but now that’s dried up, too. Recognizing the need to begin restoring investments in education, transportation, and health care or prevent even more devastating cuts to these services, a handful of Governors have put tax increases on the table.  The proposals range from across-the-board rate increases to tax hikes only on the wealthiest, permanent to temporary changes, and plans that require only legislative approval to ballot initiatives for the public to decide.

California Governor Jerry Brown is taking his proposed tax increase to the voters in November.  In an effort to prevent damaging cuts to public education, Brown is asking wealthy Californians to pay more income taxes and everyone to chip in with a higher sales tax for the next five years.  A recent poll shows Californians are overwhelmingly on his side- more than 2/3rds of those surveyed support the Governor especially when the tax increases are linked to investments in education.

Maryland Governor Martin O’Malley included several revenue raising measures in his recent budget proposal to help close a $940 million gap.  Most notable is a plan to raise taxes on upper-income Marylanders through limiting the amount of itemized deductions and personal exemptions they are able to claim - a recommendation ITEP made last year.

O’Malley also proposed taxing internet transactions, digital downloads and increasing taxes on tobacco products and the state’s “flush tax.”  He recently announced a plan to apply the sales tax to gasoline rather than an increase in the designated gas tax to address transportation needs in the state.

Washington lawmakers are facing off on how best to address a $1 billion budget gap this year.  Governor Christine Gregoire is pushing for a temporary half-cent sales tax increase that would raise roughly $500 million, and to close the remaining gap with spending cuts.  At least two competing proposals, however, have emerged that would raise needed revenue and improve the fairness of the state’s tax structure.  The first is a one percent tax on corporate and personal income that would raise $500 million and allow for a reduction in the state’s sales and business-occupations taxes. Another plan would tax realized capital gains at five percent, raising between $215 million and $650 million a year. 

Given Washington’s restrictive rules on revenue-raising (a two thirds legislative supermajority is required to enact increases), any proposed tax increase will likely end up on a ballot (which a legislative simple majority can implement) for the voters to decide this Spring or Fall.

North Carolina Governor Beverly Perdue recently proposed reinstating most of a temporary sales tax increase that expired last year.  She wants to invest the $800 million the tax would raise in the state’s public schools, community colleges and universities, all of which suffered massive cuts over the past four years.

Massachusetts Governor Deval Patrick is promoting some revenue raising ideas he says are supported by the public.  His $230 million revenue package includes a 50 cent per pack increase in the cigarette tax (bringing the total to $3.01), increases on other tobacco products, expanding the bottle bill so that a wider range of beverages require a redeemable nickel deposit, and taxing candy and soda at the state’s 6.25 percent rate (both are currently exempt from taxation).

Rhode Island After failing to gain legislative support last year for his reform-minded and sensible tax plan, Governor Lincoln Chafee has offered up a hodgepodge of tax changes this year he thinks lawmakers can stomach.  Chafee’s$88 million tax package includes some modest expansion of the sales tax to items such as taxi and limousine rides and pet services.

Photo of Christine Gregoire via Studio 8, photo of Deval Patrick via Green Massachusetts, and photo Jerry Brown via Steve Rhodes Creative Commons Attribution License 2.0

There are few areas of policy where lawmakers’ shortsightedness is on display as fully as it is with the gasoline tax.  Now, with a series of twenty six new charts from the Institute on Taxation and Economic Policy (ITEP), you can see the impact of that shortsightedness in most states as shareable graphs.

Overall, state gas taxes are at historic lows, adjusted for inflation, and most states can expect further declines in the years ahead if lawmakers do not act.  Some states, including New Jersey, Iowa, Utah, Alabama, and Alaska, are levying their gas taxes at lower rates than at any time in their history.  Other states like Maryland, Oklahoma, Massachusetts, Missouri, Tennessee, Arkansas, and Wyoming will approach or surpass historic lows in the near future if their gas tax rates remain unchanged and inflation continues as expected.

These findings build on a 50-state report from ITEP released last month, called Building a Better Gas Tax.  ITEP found that 36 states levy a “fixed-rate” gas tax totally unprepared for the inevitable impact of inflation, and twenty two of those states have gone fifteen years or more without raising their gas taxes.  All told, the states are losing over $10 billion in transportation revenue each year that would have been collected if lawmakers had simply planned for inflation the last time they raised their state gas tax rates.

View the charts here, and read Building a Better Gas Tax here.

Note for policy wonks: Charts were only made in twenty six states because the other twenty four do not publish sufficient historical data on their gas tax rates.  It’s also worth noting that these charts aren’t perfectly apples-to-apples with the Building a Better Gas Tax report, because that report examined the effect of construction cost inflation, whereas these charts had to rely on the general inflation rate (CPI) because most construction cost data only goes back to the 1970’s.  Even with that caveat in mind, these charts provide an important long-term look at state gas taxes, and yet another way of analyzing the same glaring problem.

Example:

In 2000, when the economy was strong and the state appeared to be flush with funding, Massachusetts taxpayers voted to incrementally roll back the personal income tax rate from 5.75 to five percent.  In 2002, the state legislature halted the rollback at 5.3 percent in response to an economic downturn with a provision that it could resume if revenues exceeded 2.5 percent growth.  The fiscal restraint inherent in this provision is admirable, but did not quite accomplish the legislature’s primary goal – preventing unaffordable tax cuts when the state can least afford them.

This year, it looks like the tax rollback will resume since revenues are expected to increase between 4 and 5 percent over 2010.  But these figures actually represent a decrease in revenue when compared to pre-recession levels.  In 2008, tax revenues were nearly $21 billion.  That number dropped to just over $18 billion in 2009, and increased incrementally to $18.5 billion in 2010.  This year’s projections put the state’s revenue at slightly over $20 billion, leaving the state less well-off than it was in 2008.

The pinch on the state’s budget has been felt by almost every Massachusetts resident.  Sweeping funding cuts in education, law enforcement, health care, housing, and transportation have increased the burden on low- and middle-income families year after year.  Facing a $1.9 billion budget gap in 2012, this fiscal year’s budget also includes drastic spending cuts.  The largest of these cuts include carving out $63.8 million from higher education funding, $316.7 million from MassHealth (the state’s Medicaid program), $56.8 million from transportation funding and $100.5 million from the budget for courts and legal assistance (primarily reducing the state’s indigent defense system).  "What I've seen in my district is continued cuts to education, environmental aid and affordable housing," said State Senator Jamie Eldridge of Acton. "People are really talking about how the budget cuts that have already happened are very negative."

Proponents of the tax rollback refer to the reduction from 5.3% to 5.25% as “miniscule.”  Yet for 2012, that reduction represents $114 million in lost revenue for the state.  Obviously, that is not enough to make up for the state’s $1.9 billion budget shortfall, but it could stave off further tuition spikes in the state university system and mitigate planned transit fare hikes. 

Massachusetts also has an opportunity to learn from its mistakes.  When the economy was flush in the early 90’s, Massachusetts dropped its tax rates, then spent years trying to fill in its budget gaps.  The same pattern has developed again, made worse by a deep and unrelenting recession.  Using the first glimpses of economic recovery as an excuse to lower taxes yet again is imprudent.  Instead, the state should use the revenue surplus to revoke a portion of the drastic cuts implemented in this year’s budget, or at the very least, retain the surplus to stave off future budget shortfalls.

Photo of Massachusetts State Senate Chambers via Cody Hanson Creative Commons Attribution License 2.0

Late last week the Massachusetts legislature passed, and the Governor signed, legislation making Massachusetts the 17^th state to offer a back-to-school sales tax holiday.  This is the same Deval Patrick who recently said he supported the legislation “frankly, not because it is particularly fiscally prudent, but because it is popular…. People want it."

We couldn’t agree more. Sales tax holidays may be politically popular, but they are poor fiscal policy. There’s scant evidence they make a long term difference for retailers, and they fail to target tax relief to those consumers most in need.

The holidays can also be costly to the treasury (Massachusetts expects to lose $20-25 million) and create administrative headaches.

We hope Governor Patrick will take a look at our brief on sales tax holidays between now and next year; it will give him the facts and courage he needs to say no to lousy policy.

Photo via WebN-TV Creative Commons Attribution License 2.0

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, 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.

The stakes will be high for state tax policy on Election Day, with tax-related issues on the ballot in several states. With a couple of notable exceptions (a new income tax in Washington and rollback of corporate tax breaks in California), these ballot initiatives would make state taxes less fair or less adequate (or both).

Personal Income Tax

Colorado: Proposition 101 would reduce or eliminate various fees and immediately reduce the state’s income tax rate from 4.63 to 4.5 percent and eventually to 3.5 percent).  If passed, Proposition 101 will result in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Washington: Initiative 1098 would introduce a personal income tax, reduce the state property tax and eliminate the Business and Occupation tax for small businesses. If passed, this legislation would improve tax fairness in the state with the most regressive tax structure in the country.  For more read CTJ's Digest articles about this initiative.

Business Tax Breaks

California: Proposition 24 would eliminate several business tax breaks enacted in 2008 and 2009 and increase state revenues by more than $1.3 billion.  For more details on these tax breaks, read the California Budget Project's Budget Brief on the initiative.

Super-Majority Voting Requirements

California: Proposition 25 would remove the current two-thirds super-majority requirement needed to pass the state budget (replacing it with a simple majority vote), while Proposition 26 would institute a new super-majority requirement for raising certain fees (classifying them as taxes).  For more details on these initiatives, read the California Budget Project’s initiative summaries.

Washington: Initiative 1053 would, if approved, ensure that no tax increases (no matter their size) become law without either approval by a two-thirds majority in the legislature or a public vote of the people. The Washington Budget and Policy Center gives a helpful summary of the initiative and its potential impact.   

Earnings Taxes

Missouri: Proposition A, if approved, would require that voters be asked every five years to decide whether or not local earnings taxes levied in St. Louis and Kansas City should exist. (If voters then decide to not allow them, they will be phased out over a ten-year period). The Proposition would also exclude any other local government from levying its own earnings taxes. For more on Proposition A, read Missouri Budget Project’s fact sheet.

Sales Taxes

Massachusetts: Question 1 and Question 3
A diverse coalition of businesses, advocacy organizations, citizens groups and political leaders have joined together to defeat Question 3, an initiative that would cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 would remove the sales tax on alcohol which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 would repeal the new sales taxes on a variety of goods including soda, bottled water, and candy. For more information, read CTJ's Digest article on the issue and the Washington Budget and Policy Center’s summary.

Despite the regressive nature of the sales tax, it's an important revenue source. Slashing it in either Washington or Massachusetts without replacing the lost revenue with another source would cripple the ability of those states to provide core services such as education and public safety to their residents.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 would exempt fully disabled prisoners of war (POWs) from paying property taxes. Read Missourians for Tax Justice’s take on this issue.

Virginia: Question 2 would change Virginia’s constitution to exempt veterans and their surviving spouse from paying property taxes if the veteran is 100 percent disabled.

Property Tax Caps

Colorado: Amendment 60 would take away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes.  Currently, voters can approve an increase in property tax rates above the constitutional limit which caps increases at the rate of inflation plus a small measure of local growth.  The amendment would also require school districts to cut property tax rates in half over the next ten years and replace the lost revenue for K-12 schools with state funding (an estimated $1.5 billion will be required from the state, meaning reductions will have to made to other services to support an increase in K-12 spending).

Indiana: Public Question #1 will ask Indianans to decide if their state's constitution should be permanently altered to limit property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. Voters may find it helpful to read this brief from the Indiana Institute for Working Families.

Real Estate Transfer Fees

Missouri: Constitutional Amendment 3 would prohibit the state from enacting any type of real estate transfer tax. Missouri currently doesn’t levy any such tax.  Placing the question before voters is seen as a preemptive move by the Missouri Association of Realtors to ensure that the state can’t create a transfer tax.

Montana: Constitutional Initiative 105 would, if approved, prohibit the state from enacting any type of real estate transfer tax.  The state currently doesn’t levy such a tax. The Billings Gazette has weighed in on this Initiative.

Government Borrowing

California: Proposition 22 would amend California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.  For more information, read the California Budget Project’s brief on the initiative.

Colorado: Amendment 61 would prohibit or restrict all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.

California

Californians have a plethora of fiscal related ballot initiatives to vote on in November. 

In addition to Proposition 24 (ending business tax breaks), voters will be asked whether to impose an $18 vehicle fee to fund the state park system (Prop 21), amend the state Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs (Prop 22), allow for a simple majority legislative vote requirement for passage of the state budget (Prop 25), and reclassify certain fees as taxes meaning that legislative votes on fees would then require the now necessary two-thirds approval for passage of tax increases. 

The California Budget Project has published five informative budget briefs on the propositions that are very helpful tools for voters.

Massachusetts

In Massachusetts, a diverse coalition of businesses, advocacy organizations, citizens groups and political leaders have lined up to defeat Question 3, an initiative that would cut the state’s sales tax rate from 6.25 to 3 percent.  Opponents argue that the resulting annual loss of $2.5 billion from the proposed cut would cripple the state’s ability to provide core services such as education and public safety to Massachusetts residents.  Despite the depth and fundraising power of the opposing coalition, recent polling showed residents are pretty much split on whether or not the proposal is a good idea for the state. 

Missouri

This November, Missouri voters will be asked to make a judgment call on Amendment 2. If passed, this constitutional amendment would exempt fully disabled prisoners of war (POWs) from paying property taxes. Of course, everyone respects the sacrifice that POWs made, but this Amendment raises some important tax policy concerns.

First, should tax policies, especially ones that will assist so few people (estimates are that only 100 people would be impacted), really be written into a state's constitution?

Secondly, is it fair to single out a specific group of people and offer them a tax break? Missouri already allows countless exemptions and offers special treatment to a variety of taxpayers. Perpetuating this treatment of special groups violates fundamental tax fairness principles. In fact, most veterans already qualify for a special property tax credit.

We couldn't agree more with the Kansas City Star when it opines, "Disabled prisoners of war are deserving of honor. But changing property tax laws isn’t the way to do it."

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.

Candidates across the country are gearing up for the November elections. Over the coming months we'll highlight just some of the candidates running in local, state, and national races with an eye toward evaluating their positions in terms of tax fairness.

√ Current Iowa Governor Chet Culver - Iowa's film tax credit program has been costly and controversial. This week current Governor Chet Culver came out against keeping the program. He said in a recent news conference, "We’re not going to be taken for suckers. People, unfortunately, exploited that program.”

√ Current Illinois Governor Pat Quinn - During the Democratic primary we wrote about Governor Quinn's proposal to raise income taxes in a progressive way. Now Candidate Quinn is proposing that, in combination with an income tax hike, he would urge local school districts to reduce regressive property taxes. He recently said, "If you get additional new money from Springfield, from the state government, then I think part of the bargain has to be that the local school districts at least roll back a portion of their property taxes. It's a fair bargain."

√ Current Massachusetts Governor Deval Patrick - Massachusetts voters will be asked to decide Question 3, which would slash the state sales tax from 6.25 to 3 percent. Despite the regressive nature of the sales tax, taking a hammer to this revenue stream would have a disastrous impact on the state budget. Current Governor and gubernatorial candidate Deval Patrick has come out against Question 3, saying that if the sales tax is reduced it would be "a calamity."

X South Carolina gubernatorial candidate Nikki Haley - South Carolina collected $147 million in corporate income tax revenue in the last fiscal year. Nikki Haley has said that she would eliminate the tax altogether in hopes of attracting more businesses. She said at a recent fundraiser, "If we become a no-corporate-income-tax state, we will become a magnet for companies." Instead of proposing to throw out an entire revenue source, she should take a minute to read ITEP's latest policy brief on economic development.

X Vermont gubernatorial candidate Brian Dubie - Candidate Dubie is campaigning on a promise to cut $240 million in income and property taxes paid by Vermonters. Specifically, he would drastically reduce personal income tax rates, cut corporate income tax rates, and support a property tax cap.  But when he was asked how the tax cuts would be paid for in terms of fewer services, Dubie couldn't offer any details.

We’re in the heart of sales tax holiday season now.  Despite cooler heads prevailing in DC and Georgia, where sales tax holidays have been scrapped due to gloomy budget projections, Massachusetts and North Carolina have recently decided to move ahead with their holidays, and Illinois has decided to join the party for the first time.

By now, you may be familiar with all the reasons why sales tax holidays are a bad idea (read this ITEP policy brief if you’re not).  Aside from those groups with a vested interest in the holidays (e.g. retailers looking for free advertising, politicians looking to build their anti-tax credentials, and confused parents thinking these things actually save them money), just about everyone seems to agree that sales tax holidays are a worthless political gimmick.  Stateline pointed out last week that analysts as varied as those at Citizens for Tax Justice and the Tax Foundation have come to an agreement on this point.

But as long as sales tax holidays remain popular enough to remain impervious to most state budget crises, we might as well take a moment to marvel at some of their more glaring absurdities.  For example, this year, Massachusetts’ sales tax holiday will apply to alcohol.  College students in the state clearly have quite an effective lobbying presence in Boston.  Interestingly, neither tobacco nor meals will be included in the holiday.

In Illinois, which doesn’t have any experience with sales tax holidays, one columnist speculates that his wife isn’t alone in erroneously believing that the back-to-school holiday applies only to children’s clothes.  Indeed, adult clothes are included as well; as are aprons and athletic supporters.  Work gloves, however, will still be subject to tax.  You’d think that the Illinois Department of Revenue already has enough on its plate without having to worry about such minutia.

Finally, in South Carolina, it looks like the state’s Tax Realignment Commission is going to recommend quite a few changes to the state’s tax holidays.  For starters, the state’s bizarre post-Thanksgiving tax holiday on guns has to go, according to the Commission.  And changes could be in store for the August holiday as well.  The State reports that if the Commission gets its way, “this could be the last year to get your wedding gown, baby clothes, pocketbooks and adult diapers at a discount on back-to-school tax-free weekend.”  Interestingly, the South Carolina representative who first introduced the sales tax holiday idea actually agrees, claiming that he wanted only the holiday to apply to stereotypical “back to school” purchases – that is, things other than wedding gowns and adult diapers.

When the budget hole is big and deep it makes sense to stop digging it bigger and deeper, right? Apparently not, according to some Massachusetts lawmakers. The state House of Representatives has approved a bill that would reduce the tax on capital gains income for start-ups.

We agree with Noah Berger of the Massachusetts Budget and Policy Center, who says, “There is very little evidence of what they would do to help the economy, and they are fairly costly over the long run. The basic question is whether it is worth making cuts in other parts of government, like education or local aid, in order to pay for the new corporate tax cuts.’’

Voters this November in a variety of states may have the opportunity to vote against anti-tax initiatives, as well. Right-wing activists were successful recently in gathering signatures for a handful of misguided anti-tax initiatives in Colorado, Massachusetts and Washington.  

Colorado voters are going to have a congested ballot come November. Proposition 101 and Amendments 60 and 61 have all qualified for the ballot and would have an enormous impact on Coloradans' way of life. About these three proposals the Denver Post opines, "The operating language within each one is a virus that would cripple the ability of our local and state governments to provide the most basic of services — from building schools for our children to supplying clean water to our homes. Both Democratic and Republican politicians have joined leaders in business and community organizations to oppose the initiatives."

According to the Ballot Initiative Strategy Center: "Amendment 60 would overturn voters' decision to opt out of Colorado's TABOR limitations. The initiative also cuts property tax rates in half over a ten-year period. The statutory Proposition 101 would slash state and local revenues to the tune of $1.7 billion by reducing the state income tax, motor vehicle fees, and telecommunications fees." Amendment 61 would prohibit all levels and divisions of government from bonding, even if they previously had the authority to do so. These measures would have a disastrous impact on Coloradans' way of life.

The Boston Herald is reporting that an initiative proposing to reduce the Massachusetts sales tax from 6.25 to 3 percent is likely headed to the November ballot. The proposal would cost the state a jaw-dropping $2.4 billion annually. Proponents of the legislation delivered more than the required 11,099 signatures to the Secretary of State's office Wednesday. In somewhat brighter news, none of the four candidates for governor appear to support the initiative and have said that if it passes, deep cuts in state and local services would be all but guaranteed. Despite the regressive nature of the sales tax, it's important because slashing it would cripple Massachusetts' ability to provide for its residents.

Another initiative that reportedly has enough signatures to appear on the November ballot, backed by beer and wine wholesalers, would eliminate the new sales tax on alcohol.  Last year, state lawmakers removed the sales tax exemption on beer, wine and liquor and added them to the state’s sales tax base in order to raise $80 million for substance abuse programs.

Tim Eyman, Washington state's notorious anti-tax crusader, is up to his old, tired tricks again. Initiative 1053 would permanently re-establish the requirement for a two-thirds supermajority vote in the Legislature or a statewide popular vote in order to pass tax increases.  A similar measure won at the ballot in 2007, but that measure allowed the legislature to repeal the rules by a simple majority vote after two years.  Facing a $2.8 billion budget gap this year, Washington legislators suspended the requirement in February for 16 months to pass tax increases to mitigate cuts to vital state services.  If passed this initiative impairs the ability of Legislators to do what they were elected to do — legislate.

Eyman is also supportive of Initiative 1107, which would roll back the new state taxes on a variety of goods including soda, bottled water, and candy. (Advocates of both initiatives turned in over 700,000 signatures to see that these issues will be placed before the voters in November.) Of course sales taxes are regressive, but the cost of removing the sales tax from these items is pretty stark. According to the Children's Action Alliance, "The choice for us is clear, a few extra pennies or the loss of essential services for kids."

Not surprisingly, the main financial backer of Initiative 1107 is the American Beverage Association, which has reportedly spent more than $1 million on the ballot effort thus far.

Washington recently joined with 30 other states to tax candy. If you want to see how your state taxes candy, see Washington State Budget and Policy Center's handy map on the subject.

And then there were seven.  With the enactment of a tax expenditure reporting requirement in Georgia late last week, only seven states in the entire country continue to refuse to publish a tax expenditure report — i.e. a report identifying the plethora of special breaks buried within these states’ tax codes.  For the record, the states that are continuing to drag their feet are: Alabama, Alaska, Indiana, Nevada, New Mexico, South Dakota, and Wyoming. 

But while the passage of this common sense reform in Georgia is truly exciting news, the version of the legislation that Governor Perdue ultimately signed was watered down significantly from the more robust requirement that had passed the Senate.  This chain of events mirrors recent developments in Virginia, where legislation that would have greatly enhanced that state’s existing tax expenditure report met a similar fate. 

In more encouraging news, however, legislation related to the disclosure of additional tax expenditure information in Massachusetts and Oklahoma seems to have a real chance of passage this year.

In Georgia, the major news is the Governor’s signing of SB 206 last Thursday.  While this would be great news in any state, it’s especially welcome in Georgia, where terrible tax policy has so far been the norm this year. 

SB 206 requires that the Governor’s budget include a tax expenditure report covering all taxes collected by the state’s Department of Revenue.  The report will include cost estimates for the previous, current, and future fiscal years, as well as information on where to find the tax expenditures in the state’s statutes, and the dates that each provision was enacted and implemented. 

Needless to say, this addition to the state’s budget document will greatly enhance lawmakers’ ability to make informed decisions about Georgia’s tax code. 

But as great as SB 206 is, the version that originally passed the Senate was even better.  Under that legislation, analyses of the purpose, effectiveness, distribution, and administrative issues surrounding each tax expenditure would have been required as well.  These requirements (which are, coincidentally, quite similar to those included in New Jersey’s recently enacted but poorly implemented legislation) would have bolstered the value of the report even further.

In Virginia, the story is fairly similar.  While Virginia does technically have a tax expenditure report, it focuses on only a small number of sales tax expenditures and leaves the vast majority of the state’s tax code completely unexamined.  Fortunately, the non-profit Commonwealth Institute has produced a report providing revenue estimates for many tax expenditures available in the state, but it’s long past time for the state to begin conducting such analyses itself.  HB355 — as originally introduced by Delegate David Englin — would have created an outstanding tax expenditure report that revealed not only each tax expenditure’s size, but also its effectiveness and distributional consequences. 

Unfortunately, the legislation was greatly watered down before arriving on the Governor’s desk.  While the legislation, which the Governor signed last month, will provide some additional information on corporate tax expenditures in the state, it lacks any requirement to disclose the names of companies receiving tax benefits, the number of jobs created as a result of the benefits, and other relevant performance information.  The details of HB355 can be found using the search bar on the Virginia General Assembly’s website.

The Massachusetts legislature, by contrast, recently passed legislation disclosing the names of corporate tax credit recipients.  While these names are already disclosed for many tax credits offered in the state, the Department of Revenue has resisted making such information public for those credits under its jurisdiction. 

While most business groups have predictably resisted the measure, the Medical Device Industry Council has basically shrugged its shoulders and admitted that it probably makes sense to disclose this information.  Unfortunately, a Senate provision that would have required the reporting of information regarding the jobs created by these credits was dropped before the legislation passed.

Finally, in Oklahoma, the House recently passed a measure requiring the identities of tax credit recipients to be posted on an existing website designed to disclose state spending information.  If ultimately enacted, the information will be made available in a useful, searchable format beginning in 2011.

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.

One tax break, three companies, $281 million in lost revenue. 

That’s one of the key findings of a recent analysis, conducted by the Massachusetts Department of Revenue (DOR), of a provision included in the Commonwealth’s corporate tax reform legislation in 2008.  As the Massachusetts Budget and Policy Center (MBPC) explains, the provision, added under questionable circumstances during legislative debates, was designed to ”give a new tax break to companies ‘if book-tax differences … result in an increase to a net deferred tax liability or decrease to a net deferred tax asset for any taxpayer affected by this section.’” 

Yet, as the MBPC points out, at the time the provision was added to the legislation, there was no publicly available explanation of what it would cost or any description of the policy goals it was intended to achieve.  The DOR’s analysis finally puts some numbers to those expected costs:  over the next seven years, 128 corporations will realize tax reductions totaling $535 million due to the provision, with over half -- $281 million – going to just a trio of companies. 

Needless to say, given Massachusetts financial woes, the DOR’s report has some legislators rethinking the wisdom of this particular feature of the tax code.

As the New York Times reported earlier this month, California's tax incentive for film production - a loss of $100 million in exceptionally revenue scarce tax revenue - seems likely to escape the budget cutting axe, despite the state's mammoth deficit. Meanwhile, Utah's Film Commission Director Marshall Moore recently leapt to the defense of his state's tax giveaway for movies and television.

Lawmakers in both states should think again. A new and detailed evaluation of Massachusetts' film tax credit should lead policymakers across the country to ask whether they are getting their money's worth from such incentives. Between 2006 and 2008, the Commonwealth paid out a total of $166 million in film tax credits. According to the report, the new revenue resulting from film production activity was just $26 million.

The report further notes that "feature films, television series, commercials, and documentaries produced in the Commonwealth" between 2006 and 2008 generated roughly 3,200 full time equivalent jobs. But approximately 60 percent of those jobs were held by non-residents, while over 80 percent of the wages paid on film productions accrued to employees living out of state. (The full report is available here.)

Connecticut Voices for Children highlights many of the same problems in its recent and valuable analysis of that state's film tax credit.

In an effort to stave off draconian cuts in vital public services in the face of plummeting revenues, the Massachusetts House of Representatives this past week passed a bill to increase the state's sales tax rate from 5.0 percent to 6.25 percent. If enacted into law, the bill is expected to generate some $900 million in additional revenue each year.

The bill's fate in the Senate is unclear at present, but what is clear is that the Senate should modify the bill to mitigate its impact on low-income individuals and families. For instance, the Senate could use some of the revenue that the rate increase would produce to enhance one of two features of the Massachusetts income tax designed to ease poorer families' tax responsibilities.

Like more than 20 other states, Massachusetts offers a refundable Earned Income Tax Credit (EITC). The BayState's EITC is set to 15 percent of the federal credit, which is now well below the level of the credit provided in several other Northeastern states. (Vermont's version of the credit is 32 percent of the federal, New York's is 30 percent, and New Jersey's is 25 percent.)

In addition, Massachusetts allows elderly taxpayers to claim a refundable "circuit-breaker" credit to ensure that the property taxes they pay do not exceed a given level of income. A number of states allow non-elderly taxpayers, as well as seniors, to partake of similar credits.

Expanding either one (or both!) of these credits would, in effect, help to keep an increase in the sales tax from imposing too great a tax responsibility on those Massachusettans struggling to make ends meet.

For more on Massachusetts' fiscal situation, visit the Massachusetts Budget and Policy Center's informative web site.

Despite their obvious unfairness, tax amnesties are a tool frequently used by states during tough budgetary times. By waiving late fees and sometimes reducing the interest rate charged on overdue taxes, state policymakers can provide their state with a quick band-aid fix without having to make the much harder choice of raising taxes or cutting valued services. But penalizing similar taxpayers at different rates dependent only upon whether they decide to pay up during an amnesty period is plainly unfair. The problems associated with amnesties become even worse, however, as soon as a state establishes a habit of repeatedly offering amnesties during tough economic times.

With the possibility of another amnesty always on the horizon, delinquent taxpayers will think twice before settling their debts with the state during normal times, and at normal penalty rates. Creating multiple sets of penalties (one for normal times, and one, lower penalty when budgets shortfalls are projected) therefore reduces fairness by penalizing similar taxpayers differently based only on the timing of their payment, and can also reduce the effectiveness of enforcement efforts and the tax system broadly. These effects can continue long after the most recent amnesty period ends. (Note that this is very similar to the argument against allowing corporations to "repatriate" their profits to the U.S. at a lower rate, a proposal which was recently rejected at the federal level).

Despite the obvious problems, Maryland and New Mexico are both considering legislation to once again provide temporary tax amnesty programs some time in the coming months. New Mexico last provided an amnesty less than a decade ago, while Maryland's last amnesty came in 2001. After that 2001 amnesty, the Maryland comptroller's office noted that "repeated use of amnesties is likely to create cynicism among law-abiding taxpayers, and lessen the need for voluntary compliance with state tax laws, which is vital for our system of taxation". Should another amnesty be offered less than a decade after the 2001 amnesty, growth in taxpayer cynicism seems unavoidable, especially in light of the fact that a similar program offered in 1987 in the state was billed as a "once-in-a-lifetime" opportunity for delinquent payers.

Without a doubt, the momentum in favor of such programs is strong. Alabama is already in the mist of an amnesty period (the state last offered an amnesty in 1984). Massachusetts is currently in the process of deciding upon a date for its amnesty program (Massachusetts last provided amnesty in 2003). Connecticut's program is already slated to take effect on May 1st (Connecticut's last amnesty took place in 2002). And Oklahoma just recently closed its most recent amnesty period, just seven years after its 2002 amnesty.

In this environment, it is extremely important for state policymakers to not only oppose more amnesties, but also to convincingly state that another amnesty will not be offered any time in the near future. For states looking to responsibly close their tax gaps, stepping-up enforcement spending is often a route that can produce sizeable returns, and is undoubtedly much more fair than trying to get something for nothing by arbitrarily waiving penalties in an effort to boost voluntary "compliance". For more specific alternatives to the tax amnesty approach, take a look at these recent enforcement recommendations from Oregon's Department of Revenue.

Even in the best circumstances, Massachusettsis likely to face a budget deficit of some $3.1 billion in the coming fiscal year, according to a new report issued this week by the Massachusetts Budget and Policy Center (MBPC). The report demonstrates that the expected shortfall is not simply the result of the current recession, but rather, is in part the extension of ongoing structural problems, with permanent revenues failing to meet necessary expenditures. A companion report by the MBPC explains that some of those long-term structural problems can be traced to affirmative changes in tax policy, such as reducing the overall income tax rate from 5.95 percent to 5.3 percent and dropping the tax rate on dividend and interest income from 12 percent to 5.3 percent. Other problems stem from failure to modernize the state's sales tax -- for instance, by broadening its base to include services. With Governor Deval Patrick set to announce his plans to cut spending in the current fiscal year by $1.1 billion, even before tackling the looming fiscal 2010 shortfall, the time has clearly come to reconsider the tax cuts that are at the root of Massachusetts fiscal woes.

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.

Repeating the familiar mantra that "now is not the time for tax increases", far too many state policymakers have completely dismissed the idea of raising additional revenue to fill their looming budget shortfalls. Other lawmakers, however, have at least left some modest revenue raising ideas on the table. In this piece, we highlight just a few of the ways to boost revenues that have sprung up in states such as Kansas, Oregon, and Massachusetts.

Kansas should be in a somewhat better position than many states, at least politically, when it comes to raising additional revenue. Before Kansas' budget fell into such disarray, legislators passed a variety of unwise business tax cuts that have yet to be completely phased in. Now, with the economy having made a turn for the worst, vulnerable Kansas families are in need of state assistance to weather the storm. At least one Kansas lawmaker has pointed to freezing the phase-in of these business tax cuts as one possibility for protecting state revenues and the families that rely on them. Other states in the process of phasing-in tax breaks may want to re-think their priorities before allowing the phase-in to occur.

Oregon's governor has taken things a step further by proposing three concrete, though not terribly progressive or innovative, ways to boost revenue during these desperate times. First, the Governor would like to raise the state's cigarette tax, a move that many other states have also identified as one of the most politically palatable options available (e.g. Arkansas, Florida, Georgia, Kentucky, Mississippi, South Carolina, Utah, and Virginia). We've written about the connection between the cigarette tax and budget shortfalls before here.

Second, the Governor is seeking some very minor increases in the gas tax, vehicle registration fees, and title fees in order to pay for transportation. Though the two cent gas tax increase he's pondering (and some hikes in various vehicle fees) won't fix Oregon's transportation woes, such a move is certainly preferable to pretending there isn't a need for additional revenue.

Finally, the Governor recommends increasing the state's corporate minimum tax. As was pointed out in the Governor's release, Oregon's corporate minimum tax has not been raised since 1929. As a result, the minimum tax has ceased to be an effective protection against companies who seek to manipulate the tax code to escape taxation. But while the Governor's increase in the minimum tax would generate approximately $40 million per year, this would ultimately be only a very minor step toward a better system of corporate taxation. Fortunately, the Oregon Center for Public Policy has played a leading role in advocating much more meaningful tax solutions in the state, especially in their recent report titled," Rolling Up Our Sleeves: Building an Oregon that Works for Working Families".

And lastly, a valuable reminder regarding the potential revenue to be had from taxing internet sales surfaced in Massachusetts this week, where the Governor proposed (and significant legislative support has formed around) an idea to tax companies that have agreed to participate in the streamlined sales tax initiative. Since participation is currently voluntary, such a move is estimated to produce only $15 million per year for the state -- not a huge sum, but it certainly doesn't hurt. Should a comprehensive internet sales tax plan be passed by the federal government, however, the state could enjoy as much as $545 million in additional annual revenue. Continuing the forward momentum of the streamlined sales tax initiative could ultimately prove quite valuable in enhancing the sustainability of state revenue systems

As we've argued in past Digest articles, there are good reasons for relying on gas tax revenues to fund transportation -- at least when an effort is made to offset the tax's stark regressivity. To the extent that the gas tax falls most heavily on those people who drive the furthest distances, or who drive the heaviest vehicles, there are certainly some advantages to the gas tax. But when the people driving the furthest distances are doing so because they can't afford to live near their places of work, for example, that advantage becomes much less appealing. In this light, recent news regarding the funding of transportation has been both good and bad. While states are seemingly beginning to come around to the idea that gas taxes will need to be raised to provide an adequate transportation infrastructure, interest in offsetting the tax's regressivity has yet to pick up steam.

Support for increasing the gas tax has gained some notable momentum in New Hampshire and Massachusetts as of late, and in Oregon, the Governor even included a small gas tax hike in his recent budget proposal. Utah has taken the idea to another level, as top officials are reportedly considering both increasing and restructuring the state's gas tax. In Vermont, however, while raising the gas tax has gotten some attention, the more prominent proposal has been to simply obtain permission from the federal government to continue using federal highway dollars without having to match that money with state funds (of which it has none). But while there are persuasive reasons for considering aid to the states as one form of stimulus for our troubled economy, one has to wonder why some Vermonters are apparently more averse than these other four states to the idea of paying for their own transportation network.

Unfortunately, while there has been an increasing acceptance of the fact that existing gas tax revenues are inadequate in many states, little notice has been given to the idea of offsetting the stark regressivity of gas tax hikes with low-income refundable credits. This idea was recently made a reality in Minnesota, and has been proposed by the Commonwealth Institute in Virginia as well. Notably, eight states already offer similar credits to offset the regressivity of the sales tax (usually designed specifically to offset the tax on groceries). Nineteen states and D.C. offer refundable EITC's, which while not designed specifically to offset regressive taxes, could perhaps be used in a similar matter. In states in need of additional transportation dollars, coupling any transportation related tax increases with the enactment of a low-income refundable credit, or the enhancement of an existing credit, should be a top priority.

Massachusetts, North Dakota, and Oregon residents rejected regressive and costly income tax cuts (or even outright repeals, in the case of Massachusetts) in each of their respective states this Tuesday. The results in every state were fairly lopsided, with between 60% and 70% of voters coming out in opposition. As we noted in earlier Digest articles, these victories for fair tax policy are partly the result of hard work by progressives and also partly the result of very broad (and sometimes unexpected) coalitions. This cooperation symbolized a growing recognition of the importance of taxes in paying for valued government services and generally improving Americans' quality of life.

The votes in these three states are especially important given the economic slowdown that is laying waste to state budgets across the country. Massachusetts is already projecting a mid-year budget deficit, while Oregon is projecting a deficit in the next fiscal year. North Dakota, though doing well relative to other states, is unlikely to escape the slowdown without similar budgetary wounds. Given such a difficult environment for state budget-makers, it's not at all hard to see that tax cuts are the exact opposite of what is needed -- especially if those cuts are targeted overwhelmingly to the rich.

Multiple stories and descriptions of each of these failed measures can be found in the Tax Justice Digest's Massachusetts, Oregon, and North Dakota archives.

Last week, we informed you about a couple of surprising allies in Massachusetts and Oregon in the fight against regressive and irresponsible ballot proposals. Since then, more valuable support in favor of reasoned tax policy has come from another surprising source: key business groups in Massachusetts and Colorado.

Ballot Proposal to Repeal Massachusetts Income Tax

In Massachusetts, that support (in opposition to the proposed repeal of the state's income tax) comes in the form of a 26 page report prepared by the Global Insight consulting firm on behalf of the Associated Industries of Massachusetts, Greater Boston Chamber of Commerce, Massachusetts Business Roundtable, and the Massachusetts Taxpayers Foundation. Among the report's criticisms is that the measure would slash funds so drastically that low- and middle-income residents would be effectively deprived of access to higher education. The report also places emphasis on the inevitable decline in the state's infrastructure (a key component of doing business) that would accompany the repeal. An apt summary of the report, in the words of the Greater Boston Chamber of Commerce, is that repealing the income tax would "devastate the state's economy".

Ballot Proposal to Undo Part of the So-Called "Taxpayer Bill of Rights" in Colorado

Equally influential business groups in Colorado have expressed a similar desire for sound tax policy. In Colorado, the debate is over a proposal to alter the requirement under the "TABOR" amendment, passed a decade ago, that requires surplus revenues to be used for rebate checks sent to households. The proposal on the ballot this year would redirect the automatic TABOR refunds into a special fund for education, which would help free the state from the unrealistic restraints on revenue imposed by TABOR. Among the business groups in support of the measure are the Associated General Contractors, Boulder Chamber of Commerce, Colorado Hotel and Lodging Association, Colorado Retail Council, Colorado Springs Chamber of Commerce, Denver Hispanic Chamber of Commerce, and the Denver Metro Chamber of Commerce. In the words of the Colorado Springs Chamber of Commerce, "this proposal will help Colorado get out of the bottom in funding", and is simply "smart business".

The broad coalitions forming in each of these states vividly demonstrate the importance of the coming vote on these proposals. And at least in Massachusetts, a recent poll indicates that this broad-base of opposition appears to be producing results. But in Colorado, unfortunately, the numbers are looking much less favorable, although the vote is still too close to call.

One does not have to be elected to Congress or hired to anchor a national news show to become addicted to supply-side economics. State government and local media are equally at risk. This November, voters in several states will decide on ballot questions that are being promoted with supply-side justifications.

A proposal to be voted on in Oregon seeks to allow taxpayers to deduct (in full) their income tax payments to the federal government for state income tax purposes. Currently, only the first $5,600 one pays to the federal government is allowed to be deducted on Oregon state income tax forms. This arrangement already has regressive results, and by uncapping the deduction limit completely, those wealthy individuals who owe the most in federal income taxes will be allowed to slash their Oregon tax payments substantially.

Though the workings of the Oregon proposal may seem a bit confusing, its results most certainly are not. The vast majority (78 percent) of Oregonian families will get nothing, the wealthiest 1 percent will enjoy a nearly $16,000 annual tax cut, and the government of Oregon will have to make due with between $500 million and $1 billion less in revenues each year. (Six other states, Alabama, Iowa, Louisiana, Missouri, Montana, and North Dakota, currently allow for some deduction of federal income taxes, and they should all end this regressive practice.)

So how are backers of the Oregon proposal justifying this giveaway to the rich? You guessed it. One news account informs us that "[Russ] Walker, Oregon director of the national fiscal conservative group FreedomWorks [and co-sponsor of Measure 59], says the tax reduction would produce a supply-side result of economic expansion with more income and more tax revenue to offset the cut." The argument is that the tax cut will at least increase revenue enough to pay for itself -- the most extreme form of supply-side thinking.

North Dakota voters will also be taking a look at their income tax this fall. Backers of an income tax rate cut are enthusiastically pushing a plan that offers an average tax cut of just $83 to the bottom 60 percent of taxpayers statewide. What's the big deal? The wealthiest 1 percent of North Dakotans would save an average of over $11,000 per year. And those numbers don't even include the corporate income tax cuts, which are sure to also disproportionately benefit the wealthy. And to make matters worse, the proposal would cost the state over $200 million annually.

And how do backers of this measure justify giving away revenue to the rich? Well, if a tax cut simply pays for itself through supply-side magic, backers hope that the practical, common sense folk of North Dakota won't ask such uncomfortable questions. As one news account explains, "Measure 2 proposes to cut income taxes 50 percent and corporate taxes 15 percent, said Duane Sand of the group Americans for Prosperity [the measure's principal backer]. Sand said the state's tax policies have forced young and old to leave the state. The OMB estimates Measure 2 would cut state revenue about $415 million for the next biennium. That money would be replaced by higher tax collections from increased economic activity, Sand said."

A proposal on the ballot in Massachusetts provides perhaps the most obvious example of the recklessness so often involved in anti-tax ballot initiatives. Massachusetts voters will once again have to decide this November on a proposal to constitutionally end the income tax -- a move that would reduce government revenues by a whopping 40 percent, and would undoubtedly have dire consequences in the form of reduced government services. But while all Massachusetts residents would have to share in the pain of a 40 percent reduction in their government's budget, the wealthy would be the primary beneficiaries of the tax cut, since the income tax is the only major progressive tax levied by the state. Even more alarming is the fact that over 45 percent of Massachusetts voters supported a similar measure in 2002.

Now, even supply-siders would have trouble arguing that reducing a tax to zero can result in increased revenues. (Except that apparently the Republicans in the U.S. House of Representative do believe that about the capital gains tax, as we said in a previous article in this Digest).

But backers of the Massachusetts measure do argue, using supply-side logic, that less taxes will result in so much economic growth that no one will feel the loss of public services that would inevitably result.

Carla Howell, chairperson of the group backing the measure (and Libertarian candidate for governor in 2002) says that "In addition to giving each worker an annual average of $3,700, it will take $12.5 billion out of the hands of Beacon Hill politicians -- and put it back into the hands of the men and women who earned it. Every year. In productive, private hands this $12.5 billion a year will create hundreds of thousands of jobs in Massachusetts."

Actually, this proposal to slash state government revenue by 40 percent is so extreme that even business groups cite a report showing just how devastated infrastructure, education and other services would be if this proposal is approved.

So it seems that many states are on the verge of ruining themselves with the narcotic of supply-side tax economics. If these states fail to resist, then what? Rehabilitation is possible, but it's a long and hard road. Colorado is trying to break free of the mess it created a decade ago when taxes and revenues were strictly suppressed by the so-called "Taxpayer Bill of Rights" (TABOR) that was approved by voters. TABOR poses a serious problem given that the cost of government services sometimes increases at a rate greater than general inflation. Also, another amendment to the state's constitution requires regular increases in education spending. Reconciling these two competing demands proved impossible, and in 2005 Colorado voters temporarily suspended a significant portion of the TABOR requirement.

This year, it appears many Coloradans have finally had enough with having to deal with inadequate government services under the unrealistic TABOR requirements. Voters will have the opportunity to decide on Amendment 59, which would end the automatic refunds to taxpayers used to suppress state revenues, in favor of diverting that money toward education. This effort gives hope to those who realize that public services like schools and roads are the building blocks of a state economy, and that to have these services we have to pay for them. It also should serve as a warning to people in other states where supply-siders are promising voters that they can have their cake and eat it too.

It's sometimes easy to forget that the Presidential race isn't the only battle over policy proposals going on right now. But Massachusetts and Oregon provide two examples of states where voters are about to make some very important decisions affecting the future of their tax systems.

There may be a silver-lining in the regressive and irresponsible nature of the proposals facing these two states. In both states, the anti-tax groups pushing these ridiculous proposals appear to have gone too far, causing groups traditionally supportive of tax cuts to fight these initiatives.

An Expensive and Unfair Tax Cut, Part 1: Massachusetts

The Massachusetts proposal is perhaps the worst tax-related question on any ballot in the nation. It would repeal the state's income tax. Aside from being the only major progressive tax levied by the state, the income tax is also a source of 40% of Massachusetts' revenue. The results of depriving the state of 40% of its funding are nearly unfathomable. So unfathomable, in fact, that the Massachusetts Taxpayers Foundation (MTF), a group that just last year opposed reforms to make Massachusetts' tax system more fair, recently released a report in opposition titled The Massive Consequences of Question 1.

The MTF report does not focus solely on the budgetary consequences of income tax repeal. Those consequences have already received tremendous publicity in recent months, especially given the state's already strained budgetary situation as documented in this brief from the Massachusetts Budget and Policy Center. Instead, what stands out about the MTF report is its examination of the distributional consequences of the tax cut. In contrast to the claims of those supporting the repeal, the vast majority of Massachusetts residents will not be receiving a $3,700 tax cut if the measure is approved. Instead, as the report indicates, that cut will be much smaller for those low-income residents most in need, and much, much larger for the most well-off taxpayers in the state.

An Expensive and Unfair Tax Cut, Part 2: Oregon

Oregon's proposal also seeks to reduce state revenues in a way that disproportionately benefits the wealthy, though on a much smaller scale than that proposed in Massachusetts. The proposal: allowing Oregonians to write off their federal income tax payments when determining their state income taxes. Since residents can already write off up to $5,600, this measure will only benefit the wealthiest 22% of households in the state who pay more than $5,600 in federal income taxes. As this report from the Oregon Center for Public Policy notes, 78% of Oregonians will see no benefit from this proposal. In fact, as another release explains, some 120,000 Oregonians -- most of them retirees -- would see their taxes rise if Measure 59 were made law, as the measure would prohibit Oregonians from deducting taxes paid on Social Security benefits or certain pensions, as they are allowed to do under current law.

Recent actions by a collection of Oregonian business groups demonstrate the degree of irresponsibility contained in the plan. The Associated Oregon Industries, Oregon Business Association, Oregon Business Council, and Portland Business Alliance recently came together to issue a joint statement against the proposal. These businesses worried the measure would "deeply hurt basic services, including those critical to our economy". And these groups are absolutely right: why throw money at those taxpayers already doing quite well, if it's going to result in a reduction in the education, healthcare, and safety protections that Oregon families and workers depend on?

Earlier this week, the Institute on Taxation and Economic Policy (ITEP) released a brief report using IRS data and revealing that the most unequal states in the country also happen to be states that lack the type of progressive tax provisions that could reduce this inequality and raise badly needed revenue. The most unequal states either don't have a personal income tax or have one in need of improvement. Consequently, these states are left with tax systems that, on the whole, are unsustainable, inadequate, and unfair over the long-run.

The IRS data show that, in 2006, ten states -- Wyoming, New York, Nevada, Connecticut, Florida, the District of Columbia, California, Massachusetts, Texas, and Illinois -- have greater concentrations of reported income among their very wealthiest residents than the country as a whole. Yet, the tax systems in these states generally ignore that very important reality. Of those ten states, four lack a broad-based personal income tax and three either impose a single, flat rate personal income tax or have a rate structure that all but functions in that manner. Three do use a graduated rate structure, but of these, two have cut income taxes for their most affluent residents substantially over the past two decades.

Given this mismatch, it should not be too surprising that over half of these states face severe or chronic budget shortfalls. After all, the lack of an income tax, the lack of a graduated rate structure, or moves to make the income tax less progressive all mean that a state's revenue system will not completely reflect the concentration of income among the very wealthy and therefore will not yield as much revenue.

Case in point: New York. As the Fiscal Policy Institute observes, over the last 30 years, the state has reduced its top income tax rate by more than 50 percent. Most recently, in 2005, it allowed to lapse a temporary top rate of 7 percent on taxpayers with incomes above $500,000 per year. Today, the state must confront a budget deficit of more than $6 billion for the coming year and more than $20 billion over the next three. New York residents seem to understand the disconnect between the enormous disparities of wealth in their state -- where the richest 1 percent of taxpayers account for 28.7 percent of reported income -- and the state's fiscal woes. A poll released this week shows that nearly 4 out of 5 people surveyed support increasing the state's income tax for millionaires. Hopefully, Governor David Paterson is listening. As it stands, he'd rather cap property taxes than ensure that millionaires pay taxes in accordance with their inordinate share of New York's economic resources.

As parents gear up to send children back to school this fall and economic uncertainty looms overhead, several states are reconsidering their August sales tax holidays. Despite their political appeal, back-to-school sales tax holidays are inherently flawed. Low-income taxpayers often do not have the luxury to time their purchases around these holidays. This is probably even more true during a period of higher gas prices, inflation and a faltering economy. States not only lose a great deal of income but must also work closely with retailers to ensure that the complicated provisions are carried out smoothly and correctly.

The Massachusetts legislature voted this week to continue the recent tradition of a back-to-school sales tax holiday for August 16th and 17th. Although initially reluctant to do so in the face of a faltering economy, lawmakers justified their approval of the holiday by continually calling it a "shot in the arm" for small business. But the fact is, a large majority of these purchases will be made regardless of the sales tax break. Back-to-school shopping occurs year in and year out; a weekend-long incentive is not going to change that nor is it going to stimulate the economy. And the cost to the state will amount to an estimated $16 million at a time when Massachusetts, like so many other states, faces a budget shortfall. A recent Boston Globe editorial blasted lawmakers for making such an irresponsble choice.

Floridamade a rare responsible policy decision in choosing not to have a sales tax holiday this year. State lawmakers acknowledged that because their tax system is in such sad shape, they cannot afford the annual back-to-school sales tax holiday and have decided not to enact it this year. Rep Keith Fitzgerald (D-Sarasota) explains that the "little holiday amounts to a significant amount of money" that is not available in the Sunshine state's already atrocious budget. Meanwhile, many retailers are competing to offer generous mark-downs, knowing that parents will go back-to-school shopping regardless of a tax break and that business will not be harmed by the scrapping of the holiday

It's that time again. Right-wing activists, unable to convince lawmakers to gut their tax systems, are asking voters to do it themselves through the ballot. This update explains that ballot initiatives to enact regressive tax policies died in Michigan and Montana, but survived to secure spots on the ballot in Arizona, Florida, Massachusetts and Oregon.

The Good News: Two Regressive Proposals Did Not Make It onto the Ballot

Michigan "Fair "Tax": The Michigan Fair Tax proposal, a highly regressive measure that was anything but fair, failed to make it onto the November ballot. The proposal would have eliminated both the Michigan Business Tax and the personal income tax, raised the state sales tax to 9.75% and expanded it to include services, food, prescription drugs and out-of-pocket health care expenses.

Montana Property Tax Limitations: CI-99, a measure that would have capped property tax increases at no more than 1.5% annually, fell short of landing a spot on the Montana ballot. In addition to the limits on tax hikes, the proposal would have ensured that homes can only be reappraised when sold (as opposed to every seven years). Sound familiar? It looks like, at least this year, Montana averted the disastrous path followed by California's Proposition 13.

The Bad News: Other Regressive Tax Proposals ARE on the Ballot in November

Arizona Sales Tax Hike: On June 27, the Digest described the Arizona sales tax initiative which will be on the ballot in November. The proposal would hike the sales tax by one cent. The increased revenues would be directed toward a faltering transportation system. Arizona already has sales taxes bordering on 10% and a nearly flat income tax. As a result, its tax policy is already highly regressive and this initiative would make it more so.

Florida Tax Swap: In November voters will decide on Amendment 5, a 25% property tax cut and a 1 cent sales tax hike. The property tax cut would hit Florida's schools, already in shambles, the hardest. The Amendment would come at a cost of $9 billion in lost revenue and the subsequent sales tax increase would only produce about $4 billion, plunging the Sunshine State even further into debt and shifting the tax burden to lower-income Floridians.

Abolishing Massachusetts' Income Tax: In Massachusetts, voters will have the opportunity to decide on an initiative that would eliminate the state's income tax. Such irresponsible policy would cost the state $12 billion in lost revenue -- a whopping 40% of its budget. The price would be paid with teacher layoffs, school closings, cuts to higher education, worker training programs and health care services, and delays of road and bridge repairs.

Cutting Oregon's Income Tax for the Rich: Oregon voters will have the opportunity to vote on a measure that would drastically cut income taxes for its wealthiest taxpayers. The proposal would create an unlimited deduction on the state income tax form for federal income taxes paid.The state's general fund would lose about $4 billion over four years from the proposal. The general fund is used primarily for education, public safety, the justice system, human services (including health care, care for seniors and child protective services) and state parks. Meanwhile, the average tax cut for the top one percent of Oregon earners would be about $15,000. Those who fall among the middle 20% of earners would receive about $1 on average.

Last week, Massachusetts became the twenty-second state, and the sixth in the last four years, to institute combined reporting, a vital reform that will help to prevent highly profitable businesses from shifting income out of the Commonwealth in order to avoid taxation. In addition, it ended its unique and deleterious "check the box" loophole, which allows corporations to elect a different entity classification for state tax purposes than for federal purposes. Together, these two changes will make the economic playing field in Massachusetts far more level and will ensure that businesses that profit from operating in the Commonwealth pay their fair share towards public services, just as private citizens do. More immediately, they will generate close to $300 million in revenue in FY 2009, thus reducing a budget deficit that, earlier this year, was expected to reach nearly $1.2 billion.

Unfortunately, the long-term contribution that these two changes will make to Massachusetts' fiscal health is mitigated by the fact that state policymakers also felt compelled to reduce the corporate rate from 8.75 percent to 8.0 percent between 2010 and 2012, and the rate paid by financial institutions from 10 percent to 9 percent over the same period. Because of these lower rates, many businesses will, in effect, be allowed to keep some or all of the tax breaks that they took for themselves through avoidance schemes like passive investment companies and captive REITs prior to the advent of combined reporting.

Bay State legislators didn't stop at the corporate income tax, though. They also raised cigarette taxes by $1 per pack, bringing the total excise to $2.51, the third highest in the country. While the change will yield an additional $170 million at a time when the Massachusetts budget is under significant stress, ITEP and others have detailed numerous flaws with tobacco taxes, particularly when they are used to finance on-going programs and services. This appears to be the case in Massachusetts, where the new cigarette tax revenue is expected to help defray the higher-than-anticipated costs of Massachusetts' mandatory health insurance plans.

For more details, be sure to read the Massachusetts Budget and Policy Center's recent publications on tax reform and the broader budget debate.

Even though Massachusetts' health insurance mandate has had success in reducing the number of uninsured, there continues to be a significant number of people who have not purchased coverage. Eighty-six thousand people, or 2.5% of Massachusetts' 3.34 million on-time tax-filers indicated they chose not to buy insurance and therefore did not receive the $219 personal exemption in 2007. Sixty-two thousand tax payers were deemed too poor to afford health insurance and were not penalized, while 200,000 others filed for extensions.

The mandate requires that all state residents who can afford to buy health insurance purchase an insurance policy and provide documentation with their tax returns or face tax penalties. Those who cannot afford one (classified as anyone making less than 300% of the federal poverty line) are given subsidies to buy their own plan. Employers must either provide their employees with a choice of plans, make a "fair and reasonable" contribution to their coverage, or face a fine of up to $295 per worker.

The tax penalty is slated to rise dramatically. On this year's tax returns, residents who choose to go all year without health insurance coverage will be required to pay up to $912. This increased penalty may compel the few remaining Bay Staters who can afford health coverage to buy it.

According to an analysis in Health Affairs, the mandate has so far reduced the uninsurance rate from 13% to 7% of state residents. An estimated 355,000 people gained insurance coverage in the state over the past year. But, as others have pointed out, providing health insurance is not the same thing as providing health care, and there are some questions about how useful the newly obtained insurance will be.

The cost of the mandate has turned out much higher than estimated as enrollment has exploded. The actual cost of the mandate has turned out much higher than estimated as enrollment has exploded. The state has budgeted about $869 million for the program this year, but actual costs are likely to be much higher. Given that Massachusetts now faces a budget deficit of $1.2 billion over the next fiscal year, it may need to go beyond the anticipated corporate income tax reforms to meet all of the unanticipated costs of the health insurance mandate.

The Minnesota legislature approved a property tax bill this week (discussed here by the Minnesota Budget Project) that should be studied very closely by New York, Massachusetts, and any other state looking to improve the fairness of its property tax. The Minnesota bill makes use of what is primarily a two-pronged approach to providing tax relief. However, one of those prongs, the property tax circuit-breaker, is noticeably more effective than the other.

The first prong of the Minnesota plan is an expansion of the state's property tax circuit-breaker credit that provides refunds to households who spend more than a given percentage of their income on property taxes (for information on the fairness gains to be had from circuit-breakers, refer to this ITEP Policy Brief). For other states interested in enacting or expanding similar programs, a recent report from the Massachusetts Budget and Policy Center proposes a variety of targeted expansions to the Massachusetts circuit-breaker (which, as in many states, is currently available only to low-income seniors) that would greatly improve the fairness of the property tax.

The second prong of Minnesota's approach to property tax relief was a late addition at the request of Governor Pawlenty: a 3.9% cap on increases in local property taxes. A Center on Budget and Policy Priorities report released this week explains why such caps are a bad idea. The most obvious problem is that caps constrain local government revenues without regard to the cost of providing public services. Tax caps also force localities to become more dependent on state aid, which becomes problematic during an economic downturn when that aid decreases but the cost of providing goods such as education and law enforcement remains the same or even increases. Fortunately, Minnesota's cap is slightly less stringent than some states. It has a higher ceiling on revenue increases, numerous conditions under which a locality can avoid the cap, and a provision to expire after three years.

This discussion is especially relevant in New York, where a state property tax panel is expected to propose both a circuit breaker and a cap on annual revenue increases sometime in the next two weeks. Thankfully, the influential Working Families Party in New York, as well as teachers' organizations and over thirty state legislators have voiced support for the circuit-breaker idea. The Working Families proposal would pay for this relief by raising income taxes on people earning more than $500,000 annually. Fortunately, the tax cap idea appears slightly less popular, though it is far too early too tell if that proposal will pick up steam as well. To keep up with the debate, which is sure to quickly gain steam, see the New York Fiscal Policy Institute.

The road to progress rarely travels in a straight line. Nowhere has that been more evident than in Massachusetts this month, as a major effort to combat corporate tax avoidance could end up being undermined by an eleventh-hour maneuver to permit businesses to continue to exploit weaknesses in the tax code.

About two weeks ago, the Massachusetts House of Representatives approved a bill that, among other things, would institute combined reporting of corporate income for tax purposes in the Commonwealth. Combined reporting is the single most important reform states can adopt to prevent corporations from using legal and accounting techniques to shift income from one state to another in order to avoid taxation. It is now used in 20 states. Should the House bill be made law, Massachusetts would become the third Northeastern state in as many years to embrace the change.

Yet, during its consideration of the measure, the House approved, with little open debate, a last-minute amendment that would seriously weaken the reform, to the likely benefit of such behemoths as Wal-Mart and McDonald's. The amendment would constrain the Commonwealth's ability to enforce combined reporting, would create new tax planning opportunities for companies with operations both in Massachusetts and overseas, and would compensate companies for accounting losses they might incur due to statutory changes intended to curb tax avoidance. Ultimately, the Massachusetts Department of Revenue indicates that the amendment could lead to annual revenue losses of "at least $100 million to $200 million" -- or about half of the corporate tax revenue the bill might otherwise be expected to generate! Importantly, that expected revenue yield is already diminished by the fact that the bill also would, over time, reduce the tax rate paid by corporations from 9.5 to 7.5 percent and by financial institutions from 10.5 to 9 percent.

Fortunately, as the Boston Globereports, the Massachusetts Senate may reconsider this particular amendment when it takes up the larger reform bill sometime next month. To learn more about the House bill and the impact that it would have, see this latest report from the Massachusetts Budget and Policy Center.

Conservative commentators frequently depict Hollywood as ridden with leftists, but the reality is that, when it comes to tax policy, the movie industry is no different from any other. Take recent legislative activity in Michigan and Georgia, for example. Michigan Governor Jennifer Granholm is on the verge of signing a bill that would, among other things, provide a refundable tax credit equal to 42 percent... 42 percent!... of a film production's costs. The Georgia Senate has adopted a measure - also expected to be signed into law - that will more than double that state's current film production credit.

Yet, as an important new report from the Massachusetts Department of Revenue (DoR) documents, states may receive precious little in return for these enormous investments. According to the report, Massachusetts will lose upwards of $140 million between 2006 and 2008 due to its film tax credit, but may receive only about $20 million in new revenue from the economic activity associated with the credit. What's more, as the report notes, "any estimate of the net economic and tax revenue impact of tax incentives needs to take into account the reduction in state government spending" associated with such credits. In such tight budgetary times, that "reduction in government spending" is sure to occur if policymakers keep trying to lure the latest blockbuster to their state.

In Massachusetts, there now appears to be a growing consensus that the state should put a stop to tax avoidance by highly profitable multi-state and multi-national corporations and adopt what is known as combined reporting. Earlier this year, the state's Study Commission on Corporate Taxation recommended moving towards combined reporting. Governor Deval Patrick included legislation to achieve that goal in his FY 2009 budget proposal, while Speaker of the House Sal DiMasi has also recently expressed support for the change.

There is far less agreement, however, about what to do with the nearly $500 million in additional revenue that combined reporting and other important tax reforms would ultimately yield. Governor Patrick would use a portion of that revenue to reduce Massachusetts' corporate income tax rate and Speaker DiMasi would use nearly all of it on such a rate cut. Yet, as ITEP's Jeff McLynch pointed out in testimony before the Massachusetts legislature earlier this week, lowering the corporate income tax rate would force the state to make larger spending cuts to close a $1.2 billion budget deficit and also preclude longer-term and far more economically productive investments in areas such as higher education, worker training, and public infrastructure. Just as importantly, lowering the corporate income tax rate in conjunction with a move to combined reporting would simply allow many businesses to keep the tax breaks that they took for themselves through avoidance schemes like passive investment companies and captive REITs.

The Massachusetts Budget and Policy Center has weighed in on this debate as well, issuing two new reports: one describing the state's tax system generally and another discussing the shortcomings of plans to reduce the corporate income tax rate.

Massachusetts' corporate taxation study commission this week released a set of interim findings that endorsed two key reforms to the Bay State's tax code. Appointed by Governor Deval Patrick and legislative leadership in April, the commission recommended that Massachusetts immediately enact changes in its corporate income tax - commonly referred to as "check the box" rules - that would prevent companies from exploiting differences in state and federal law that determine how they are classified for tax purposes and that allow them to avoid taxes in Massachusetts.

Forty-five other states already have these rules in place; instituting them in Massachusetts would generate an additional $100 million in FY 2008. The commission also expressed its support for combined reporting - a still more comprehensive reform that New York and West Virginia approved this year and that twenty states now employ - but will study implementation and design issues further in the coming months. Of note, the commission also found that the absence of such safeguards as effective "check the box" rules and combined reporting has allowed Massachusetts corporate income tax to fall from 11.5 percent of corporate profits in 1989 to 5.5 percent last year.

The commission also points out that "Insisting on greater shared responsibility for our Commonwealth's future, principally by asking a fairer share from larger, multi-state businesses, will not harm competitiveness and economic growth; influential economists cited to the Commission have concluded that, while taxes are one factor that businesses consider in deciding where to locate or expand, the predominance of other factors usually renders business taxation a much less significant consideration."

Massachusetts policymakers this week announced the formation of a fifteen-member commission to study the Commonwealth's corporate tax system. Massachusetts' corporate tax is certainly in need of an overhaul, as evidenced by its long-term erosion as a revenue source and by the broad-ranging reforms Governor Deval Patrick proposed earlier this year to address the issue.

Yet, in some respects, the formation of a commission may represent a step backwards. While a commission had been initially floated by the Governor in January, this particular panel was named only after the Massachusetts House of Representatives rejected the Governor's corporate tax reforms in its version of the FY 2008 budget. As Joan Vennochi of the Boston Globe has observed, the House's approach demonstrates that its leadership, in the person of Speaker Sal DiMasi, is "standing up for ... unfairness" and standing "with the coalition of the greedy at the Greater Boston Chamber of Commerce and other business-backed groups."

Indeed, the commission is heavy with members who hardly seem predisposed to support efforts to put an end to corporate tax avoidance. Upon being named to the commission, one member yawned, "Of all the priorities that the state faces, I would not put this near the top... The impetus for the commission really is a response to the governor's proposal rather than a crying need in itself." Another organization represented on the panel, the Associated Industries of Massachusetts (AIM), has boasted to its members that it has successfully "fought ... efforts to establish combined reporting" - the central element of the Governor's tax reform proposals.

For more on the need for combined reporting and other changes to the Massachusetts tax system, visit the Massachusetts Budget and Policy Center.

Just weeks after recommending the elimination of Connecticut's car tax, Governor Jodi Rell last Wednesday put forward a plan to limit property tax growth in the Nutmeg State to 3 percent per year. Among the myriad problems with such property tax limits is that they fail to help those individuals and families who are struggling the hardest to make ends meet, while leaving cities and towns more vulnerable to fluctuations in state aid.

Ironically, in offering her proposal, Governor Rell cited Massachusetts' experience with property tax limits as a positive example for her state to follow. Massachusetts was one of the first states in the nation to impose property tax caps, enacting Proposition 2 ½ more than 25 years ago. Yet, as the Boston Globe reports, cities and towns in Massachusetts continue to struggle with the constraints imposed by Prop 2 ½. In the wake of significant cuts in local aid during the early part of this decade, twenty- five cities and towns have already scheduled "Prop 2½ overrides" this year, so that they can raise the funds necessary to provide vital public services. With these votes, libraries, teachers, and policemen are all on the line ... the lasting legacy of an ill-advised approach to property tax reform.

Connecticut Voices for Children has some better ideas on how to improve Connecticut's tax system and how to help low- and moderate-income taxpayers.

As expected, Massachusetts Governor Deval Patrick this week joined the ranks of chief executives calling for the use of combined reporting of state corporate income taxes to combat tax avoidance by large and profitable companies. Like the Governors of New York, Pennsylvania, and Iowa, Governor Patrick, in his FY2008 budget plan, recommended adopting this approach to corporate taxation, which would require corporations operating in multiple states to report all of their income... including that attributable to subsidiaries. This would negate any tax benefit derived from accounting schemes designed to shift profits out-of-state. A fact sheet from the Massachusetts Budget and Policy Center explains how combined reporting works and why it's needed in the Bay State. While Martin O'Malley has not yet added his name to this growing gubernatorial roster, Maryland legislators this week considered a bill to institute combined reporting in their state. ITEP Executive Director Matt Gardner was among those who testified on the measure.

State corporate income tax reform is gathering momentum in 2007, as more and more states are considering adopting an important corporate tax reform: combined reporting. Governors in New York, Iowa and Pennsylvania have already proposed this important loophole-closing reform, and newly elected Massachusetts Governor Deval Patrick is sending signals that he may follow in their footsteps. Meanwhile, a new paper by the Center on Budget and Policy Priorities' Michael Mazerov gives the lowdown on an equally important corporate tax reform that could productively be adopted by every state with a corporate tax: company-specific disclosure of taxes paid (or not paid). Mazerov's paper includes model legislation for use in any state seeking to shed more light on corporate tax avoidance.