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

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

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

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

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

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

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

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

Read the full report.

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

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

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

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

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

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

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

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

Read the full report.

Tax credit reform has been a hot topic in Missouri for a few years now – and for good reason.  To be blunt, the state has been dishing out enormous, and growing, sums of money via tax credits with little oversight or control.  For example, when your state accidentally spends $1 billion more on tax credits than it intended, there's clearly a problem.

But despite the immensity (and obviousness) or Missouri's tax credit problem, the legislature has proven itself incapable of enacting meaningful reform.  Proposals from the Governor and prominent legislators to cap, scale back, consolidate, or sunset tax credits have received considerable media attention, but have consistently fallen short of being enacted into law.  Most legislators, it seems, are happy to ignore the rampant inefficiency of Missouri's tax credits (and muddle through the state's ongoing budgetary debacle without addressing them), just so long as they don't have to risk upsetting the multitude of lobbyists working to preserve these special tax giveaways.

In order to grease the wheels for reform in 2011, Missouri Governor Jay Nixon has taken the unoriginal step of creating a “Tax Credit Review Commission” to provide recommendations for making each of the state's 61 tax credit programs more efficient.  The Commission's work will almost certainly generate additional discussion and interest in tax credit reform, and hopefully will provide some useful data and analysis as well.  But simply creating this Commission does not constitute reform.

While tax credit reviews (or tax expenditure reviews more broadly) do have their place, they should be conducted on an ongoing basis more akin to the kind of regular scrutiny directed toward ordinary spending programs.  Moreover, if such reviews are conducted, appointing a semi-random collection of 25 businessmen, education officials, labor representatives, and lawmakers to spearhead the effort is hardly ideal.

It's unclear, for example, why prominent employees of Enterprise Rent-A-Car and Hallmark Cards, Inc. are the best candidates to conduct “critical analyses” of Missouri's tax law.  Or even more strangely, why one of the Commission's co-chairs should be part of a group of developers that has directly benefited from Missouri's tax credits (as reported by State Tax Notes, subscription required).  Talk about a conflict of interest.

To be fair, the Commission's membership does include some tax credit “skeptics” as well.  Republican State Sen. Matt Bartle, for example, recently admitted that “it’s no secret that I have come to believe that many, many tax credits do not yield the benefit that was promised.”  But including voices from “both sides” doesn't mean the Commission's structure makes sense.  Real reform will require either forcing the legislature itself to regularly review these programs (such as by making use of sunset provisions, as is done in Oregon), or by handing responsibility for such reviews over to impartial, expert government analysts (as is done in Washington State).

If all goes well, the Commission's work will hopefully spur reform not only of specific tax credit programs, but also of the broader systems in which lawmakers deal with these programs on an ongoing basis.  And if the latter type of reform is implemented well, the need for band-aids like the “Tax Credit Review Commissions” should be greatly reduced in the future.

Despite continued fiscal woes that have forced states to cut billions of dollars in spending on education, health care, transportation, and public safety, North Carolina and Missouri became the latest states to pass expensive tax breaks in the hopes of luring, or retaining, business. 

Unfortunately, there is no evidence that these unaffordable tax breaks will lead to economic recovery and job creation.  The University of North Carolina’s Center for Competitive Economies recently surveyed companies to determine the importance and effectiveness of economic development incentives on their location decisions. Availability of a skilled workforce, quality infrastructure, and presence of community colleges and universities ranked much higher than special tax breaks (13th on the list).  Time and time again, research has shown that the most effective growth strategy for states is investing in education and public infrastructure, not special tax breaks for corporations.

During the final hours of North Carolina’s legislative session last week, state lawmakers passed a pair of bills that extended, expanded and created new incentives for specified industries and companies at a cost of more than $275 million over the next 5 years.  The most costly change was an expansion of the state’s refundable film production tax credit which raised the maximum amount of the credit that can be taken from $7.5 million to $20 million.  New credits were created for video game developers and businesses who locate in eco-friendly industrial parks.  Lawmakers also extended a tax credit program known as Article 3J that legislative staff and University of North Carolina researchers have found to be ineffective at job creation, and as recently as this spring they recommended it should be eliminated altogether.
 
The second bill was developed with specific corporations in mind (although they were not named in the legislation and have still not been publicly disclosed). Commerce officials say these corporations are considering North Carolina as a finalist for their new facilities and incentives were needed to “clinch the deal”.  The legislation grants special sales tax exemptions on electricity and machinery to two data centers, a turbine manufacturing facility, and a paper mill.  Recent news reports suggest such “struggling” corporations as Microsoft (working under the code name “Project Deacon”) and Fidelity are likely to be the parties to benefit from the special rules for the new data centers. 

Proponents of the tax breaks suggested they were needed for North Carolina to remain competitive and to spur economic recovery and job creation.  Yet, no industry listed in the second package will be required to meet a targeted employment level.  

Earlier this week in a special session called by Governor Nixon, Missouri lawmakers passed a $150 million incentives package for Ford Motor Company and its suppliers.  Without the incentives, lawmakers claimed Ford would close its assembly plant in Claycomo and 4,000 jobs would be lost.  But, there’s no guarantee that Ford will stay even with the special treatment and attention it received from Missouri lawmakers.  The special tax break was paid for by cutting pensions for newly hired state employees.

A recent report from the Missouri State Auditor’s Office reveals that the actual amount spent by Missouri on tax credit programs far exceeds the amount that policymakers, relying on official fiscal notes, expected to spend.  By comparing the original fiscal notes of 15 of Missouri’s largest tax credit programs to their actual costs, the State Auditor discovered that during the fiscal year 2005 through 2009 period, over $1.1 billion was spent on these credits beyond what had been projected. 

This was made possible, of course, by the fact that many of Missouri’s tax credits are essentially open-ended entitlement programs.  This is in sharp contrast to most other types of spending in the state, which are prohibited from exceeding the amount specified during the appropriations process.

The table on page 8 of the State Auditor’s study provides the gory details on how this over-spending occurred.  For example, while the fiscal note attached to the Historic Preservation credit led policymakers to believe that the state would devote roughly $71 million in state resources to this cause over the 2005-2009 period, the actual cost came in closer to $637 million — nearly 800% more than expected. 

To take another example, the state’s Brownfield Remediation/Demolition credit came it at over 2500% over budget (no, that’s not a typo) — costing a full $93 million, rather than the measly $3.5 million that was projected in the state fiscal note.

To be clear, these discrepancies are not so much a criticism of the accuracy of Missouri’s fiscal notes as they are an indictment of the budgetary mechanisms in place for dealing with such estimation errors.  Creating a new program from scratch will always bring with it enormous uncertainties; the responsibility of those who govern is to ensure that they have the tools in place for dealing with these uncertainties. 

As the State Auditor’s Office notes in its report, greater use of annual caps on tax credits, cumulative caps on credits, sunset provisions, and improvements in existing procedures for analyzing the benefits of tax credits could all greatly enhance the state’s ability to finally bring this unpredictable (and massive) spending back under control.

In addition to the report’s recommendations and its evaluation of the actual vs. projected size of tax credits, its discussion of a few tax credits that are already subjected to the appropriations process provides reason for hope among those who would like to see tax expenditures and direct expenditures put on a more even footing (pp. 10). 

Furthermore, another table in the report interestingly reveals that the vast majority of tax credits are not in fact administered by the Department of Revenue (pp. 6).  This information certainly bolsters the case of those in Missouri who would argue that many of these programs are little more than undercover spending disguised as “tax cuts.”

Since advocates of a national sales tax first unveiled their "Fair Tax" plan more than a decade ago, the most durable (and unfortunate) feature of this debate has been that its advocates have persisted in using misleading estimates of what the sales tax rate would have to be under their regressive scheme. The bill's authors routinely describe it as a 23 percent tax, but ITEP's widely-cited analysis has shown that, in fact, the national sales tax rate would almost certainly have to be somewhere north of 40 or even 50 percent.
 
Now this debate is playing out again at the state level, where the Missouri House has shown more than a polite interest in a plan that would repeal the state's personal and corporate income taxes and state sales tax, and create a new sales tax on virtually everything individuals buy, from new homes to your monthly rent to health care to day care. The plan's sponsors claim that it would raise enough revenue to pay for a gigantic sales tax rebate designed to offset the sales tax on spending up to the federal poverty line, while leaving the total revenue collected unchanged. According to the bill's sponsors, this could all be accomplished at the low, low sales tax rate of 5.1 percent.
 
House members liked this idea enough last year to actually pass a similar bill – even though the official fiscal note indicated that the numbers just didn't add up. Cooler heads ultimately prevailed in the Senate.

Now the idea is back, and its sponsors still insist that a 5.1 percent universal consumption tax can pay for a rebate and repeal of the personal and corporate income taxes.

But a new ITEP analysis shows that, in fact, the state sales tax would have to be more than 11 percent in order to make such a plan revenue-neutral – and the result would be a disaster for tax fairness.

ITEP's analysis, submitted as testimony before a House committee on Wednesday, shows that the poorest ninety-five percent of the income distribution would see a tax increase under this plan, while the very best-off five percent of Missourians would see a substantial tax cut. For more on this issue, visit the Missouri Budget Project.

Just last year we brought you news of the misguided proposal that would have eliminated Missouri's personal and corporate income taxes and replace that revenue with an expanded sales tax. The proposal, called by some the "Fair Tax," would create a mega sales tax that would supposedly have a lower rate, but would be levied on everything from rent to child care and even food (which is currently not taxed through the state sales tax).

Last year, the plan passed the House of Representatives, but failed in the Senate, which was a really good thing given ITEP's findings that the legislation would have meant a net tax increase for all income groups except the richest 5 percent. We also found that if the proposal was really going to be revenue-neutral (as proponents claim) while also providing a rebate to Missourians (which they also promise), the new average state and local sales tax rate would have to be 12.5 percent. That's nearly double the 5.11 percent proponents of the bill claim, and it's at least a third more than the sales tax rates of neighboring states.

Despite damning evidence from both ITEP and the Missouri Budget Project, proponents of the "Fair Tax" are at it again. This week both opponents and proponents of the legislation testified in the Missouri Senate, including Dr. Arthur Laffer, a rabid anti-taxer, who reportedly said, "I mean, all taxes are bad." Keep your eyes peeled on this state tax battle, which is likely to receive a lot of attention nationally.

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.

When someone demands that Congress abolish the federal income tax, we typically consider that a fairly extreme position. But then again, we don't run in the same circles as Georgia gubernatorial candidate John Oxendine, who feels that his peers in the anti-tax community are too wishy-washy if they don't also call for a repeal of state income taxes. 

He recently said, "I think it's very hypocritical for state officials to be running around bad mouthing the federal government for having an income tax when the state of Georgia does the same [thing]. As governor, I want to get rid of the state income tax." Oxendine thinks that states like Georgia must lead the way and eliminate their state income taxes.

In Georgia, inadequate tax revenue is a threat to justice -- quite literally, in the sense that the state is not able to carry out the basic administration of justice through its court system. As the Wall Street Journal reports, "the wheels of justice in Georgia are grinding more slowly each day" because "Cuts in spending for the state court system have led to fewer court dates available for hearings and trials, creating a growing backlog of cases."

Now, just three months into the state's fiscal year, already under-funded state agencies are being asked to cut another 5 percent from their 2010 budget. Now is likely not the time to eliminate the state's largest source of revenue.

Former Ohio Congressman John Kasich is running for Ohio Governor and is also promising to repeal the state's income tax. However, the severity of Ohio's budget situation has apparently provoked some caution. The Columbus Dispatch recently reported "Kasich also said that the state's dire budget situation would make it difficult to begin phasing out the state income tax in his first term." He apparently assumes that the state's current budget crisis is the last the state will ever face, freeing it to abolish a major source of revenue in the future.

Of course, abolishing a state's income tax is a terrible idea even in times of surplus because income taxes are fairer than any other type of revenue source. A recent ITEP report makes this point in analyzing a recent proposal in Missouri to eliminate corporate and individual income taxes and replace the revenue with an enormously expanded sales tax. The Missouri proposal (which was not enacted) would have effectively slashed state taxes for wealthy residents while sending the bill to working families who spend most of their income purchasing necessities.  

This weekend thousands of advocates for the wildly misnamed "Fair Tax" are expected to descend on Columbia, Missouri and hear from the likes of Neal Boortz and Joe Wurzelbacher, better known as "Joe the Plumber." We don't expect that this rally will inform Missourians that the proposal to eliminate corporate and individual income taxes and replace that revenue with sales taxes is likely to raise taxes on the poorest 95 percent of Missourians. Nor are attendees likely to learn that the sales tax rate necessary to make this a revenue neutral change isn't 5.11 percent (as often claimed), but a combined state and local tax rate of 12.5 percent.

Organizers of events like this have a difficult time acknowledging the real impact of the "Fair Tax" and instead focus on "simplicity" and the theoretical fairness of a sales tax. Luckily the press has delved a bit deeper into the issue and are pointing out the flaws in their proposal. For more on Missouri's so-called "Fair Tax" proposal, read ITEP's report.

It's safe to assume that there will be a special legislative session in Kentucky this summer. After all, the Blue Grass state is expected to face a billion dollar shortfall for the fiscal year starting July 1. Governor Beshear claims

he hasn't committed to calling back the legislature or decided what topic he would even select for a special session, but everyone knows a shortfall this large isn't going away without further action. So a flurry of proposals are being discussed from progressive income tax reform to increased gambling and even the so-called "fair tax."

The infamous "fair tax" legislation, which proponents are pushing all over the country, would eliminate corporate and individual income taxes, replace the lost revenue with increased sales taxes on a wide range of services, and eliminate most current sales tax exemptions. Before going too far down this path,

Kentucky legislators should take a moment to look at how that same proposal has faired in other states just this year.

Missouri, "fair tax" legislation passed the House of Representatives but went nowhere in the Senate. An ITEP analysis found that this proposal would raise taxes on middle-income Missourians and require a much higher sales tax rate than advertised.

A similar fate is expected in South Carolina where similar legislation has been introduced in the House. Advocates in South Carolina are hopeful that the legislation won't get very far.

Kentucky lawmakers should quickly jump off the failed "fair tax" bandwagon and instead look for ways to improve their state's tax structure while also increasing state revenue.

The So-Called "Fair Tax" Approved by Missouri House Would Raise Taxes for All Income Groups Except the Richest Five Percent

In the past month, the Missouri House of Representatives has acted like a spoiled child who really doesn't know what he wants. The esteemed body has voted to permanently reduce the state's income tax rates across the board by half of a percentage point (see ITEP's analysis of HCS for SB 71) and then separately voted to broaden the state's top income tax bracket and increase the costly and poorly targeted deduction for federal income taxes paid (see ITEP's analysis of HB 64).

Then, as if all that wasn't unfair or costly enough, the House decided to also approve the elimination of the individual and corporate income taxes altogether.

Yep, that's right, the full House of Representatives voted to simply eliminate a generator of roughly $5 billion and replace that revenue with a broad-based sales tax that exempts all business-to-business consumption.

Sound familiar? This legislation (HJR 36) is essentially the so-called "Fair Tax" proposal that anti-tax advocates have been pushing enthusiastically across the country. The Fair Tax proposal in Missouri, which would amend the state's constitution, would go before the voters if approved by the Senate.

Today ITEP joined in a release with the Missouri Budget Project highlighting analyses from both groups. ITEP's report concludes that HJR 36 would result in a net tax increase for all income groups except the richest 5 percent. It also finds that if the proposal is to be revenue-neutral (as proponents claim) and is to provide a rebate to Missourians (which they also promise), the new average state and local sales tax rate would have to be 12.5 percent. That's nearly double the 5.11 percent proponents of the bill claim, and it's at least a third more than the sales tax rates of neighboring states.

Missouri Budget Project's report finds that the additional sales taxes levied under HJR 36 would especially harm Missourians living on fixed incomes because they would apply to all services, including utilities, rent, medical care, food, prescription drugs, and child care -- most of which are things no other state makes subject to sales taxes.

This has been a tough couple of weeks for tax fairness advocates in the Show Me State. Yesterday, the Missouri House of Representatives passed House Bill 64, a regressive and costly piece of legislation that does three things. First, it raises the starting point for the 6 percent top income tax bracket from $9,000 to $50,000 of taxable income. Second, it raises the dependent exemption from $1,200 to $1,600. Third, HB 64 increases the deduction for federal income taxes paid from $10,000 for married couples ($5,000 for single filers) to $15,000 for married couples ($7,500 for singles).

See ITEP's fact sheet, which estimates that this legislation would cost $311 million in 2007 if it was in effect in that year. We expect the cost of the legislation to increase in future years as income grows.

Worse than the huge revenue loss is the regressive impact of the bill. About 88 percent of the benefits from these three tax changes would go to the wealthiest 40 percent of Missourians.

But this week was a demonstration of responsible lawmaking compared to what went on in the Missouri Capitol last week, when the notorious, so-called "fair" tax reared its ugly head and passed the House of Representatives. Advocates expect the bill will go before the Senate Ways and Means Committee next week. The ridiculously named legislation would replace the state's individual and corporate income taxes with sales tax revenue generated from a massive base expansion (including adding food and prescription drugs back to the sales tax base) in a supposedly revenue neutral way.

When advocating in favor of the bill, legislators pointed to Tennessee as an example of a state that reaps benefits from not having much of an income tax. Clearly lawmakers haven't investigated many quality of life indicators in the Volunteer State. For example, Tennessee ranks 6th in infant mortality rates, 9th in percent of children living in poverty, and 4th in percent of senior citizens living in poverty. It's pretty obvious that income tax elimination isn't guaranteed to create a high quality of life. The one thing that income tax elimination is guaranteed to create is a more regressive and unfair tax structure. To read more about this legislation, see the Missouri Budget Project's brief.

On April 9, Missourians lost a steadfast leader for tax justice, while advocates for progressive taxes across the country lost a colleague whose energy and devotion to her principles were second to none. Pat Martin founded and continued to lead Missourians for Tax Justice up until her death. She was active in economic and social justice issues for most of her life and was integral in the fight to remove food from the state sales tax base. Her resolve and dedication were often tested in Missouri's difficult political landscape, but Pat never let the situation get her down. Instead, she fought even harder and asked others to do the same. Pat expected much of those she worked with and even more of herself in the pursuit of justice. We will certainly miss working with her. It's been said of Pat's death that "Missourians have lost a bright light" and so have we. Read more about Pat's remarkable life here.

It's hard to believe, but there may actually be a trend in state tax policy more prominent than increasing cigarette taxes. Business tax credits aimed at spurring economic development have been among the most popular ideas in statehouses scrambling for ways to reduce unemployment. Just last week, we described a plan in Minnesota to boost investment tax credits and a budget in California containing a few credits of its own. This week, proposals to do the same in Iowa, Kentucky, and Missouri are under discussion.

In Iowa, Republican lawmakers have suggested paying (via tax credit) half the salary of each new job created by private businesses. Oddly, because this payment would be administered through the tax code rather than as a direct grant, the debate has become confused to the extent that this policy has been labeled as a way to return to a "market-based, capitalistic system".

An excellent op-ed out of Kentucky helps clear things up a bit, noting that Gov. Beshear's proposed expansion of business tax incentives would be a costly, nontransparent, and likely ineffective way of encouraging job growth. The op-ed goes on to argue that a "broader" approach, including better targeted and more closely scrutinized spending programs, could do far more good than creating more tax credits.

Finally, as an expansion in economic development tax credits works its way through Missouri's legislature, the admission of at least one legislator that he is a "recovering tax credit addict" helped to shine some light on the unfortunate politics behind these types of tax credits. These programs can cost a state enormously, and are rarely defensible on principled tax policy grounds. Instead, they constitute a type of spending done through the tax code -- commonly referred to as "tax expenditures" -- which add complexity, shrink the tax base, require higher marginal rates, and offer little if anything in terms of making the system more responsive to individuals' and businesses' ability to pay.