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.

Last week was a rough one for tax justice advocates in many states, but especially those working in Missouri. The House Committee on Tax Reform heard not one, but two bills attempting to eliminate to state's corporate income, individual income, and estate taxes. The revenue loss from eliminating these taxes would supposedly be raised from eliminating all sales tax deductions and exemptions. These bills were based largely on the propaganda of Americans for Fair Taxation, a group which supports the elimination of all taxes based on income.

The group's slogan for promoting these types of tax changes is "Freedom. Fairness. Savings," words which have nothing to do with the policies they promote. Relying more on consumption taxes rather than income taxes only ensures that poor families pay more in taxes as a share of their income than do wealthy families. The only people who save under these "fair tax" proposals are wealthy folks. The Missouri Budget Project was one of many groups who testified against these unfair and expensive proposals, arguing "that these bills undermine the principles of fairness and equity that should be the basis of our tax system."

The poorly named Tax Payer Bill of Rights (TABOR) is a cap on allowable spending enacted in Colorado in 1992. Since then, it has become clear that the measure demolished the state's ability to fund higher education, infrastructure and health care. Despite voters approving a ballot measure to suspend Colorado's TABOR for five years, the concept of a spending limit is still rearing its ugly head in both Maine and Missouri.

In Maine, the Heritage Policy Center has a revised TABOR proposal (a previous proposal was defeated by a vote of the people two years ago), which promises to combat the state's "overspending" problem while making it quite difficult for taxes to be raised. This November, Mainers will be asked to vote once again on the TABOR. Read the Maine Center for Economic Policy's report about the many serious problems with this proposal.

Meanwhile, a proposal to cap spending is making its way through the Missouri House of Representatives, which will serve as another test for the pro-TABOR forces. Read the Missouri Budget Project's warning about TABOR's impact on the state.

We've recently highlighted a variety of progressive revenue raising options gaining serious attention in New York and Wisconsin. This week we bring you yet another idea that's recently been the subject of debate, though this one applies to fewer states. Those seven states still offering income tax deductions for federal taxes paid (i.e. Alabama, Iowa, Missouri, Montana, North Dakota, Louisiana, and Oregon), should immediately repeal, or at the very least dramatically scale back, that deduction.

The federal income tax deduction takes what is perhaps the best attribute of the federal income tax -- its progressivity -- and uses it to stifle that very attribute at the state level. Since wealthy taxpayers generally pay more in federal taxes than their less well-off counterparts, allowing taxpayers to deduct those taxes from their income for state income tax purposes is a gift to precisely those folks who need it least. And since most state income tax systems possess a degree of progressivity, those better-off taxpayers who face higher marginal tax rates are benefited even more by being able to shield their income from tax via this deduction.

Iowa Governor Chet Culver most recently drew attention to this problem while urging lawmakers this week to end the deduction. The idea has also recently garnered attention in Missouri, where ITEP recently testified on a bill that would, among other changes, eliminate the deduction. Finally, another bill making its way through the Alabama legislature seeks to end the deduction for upper-income Alabamians.

With three of the seven states that still offer this deduction considering its elimination, this is definitely one progressive policy change to keep an eye on.

If state tax budget shortfalls and regressive tax structures were a popularity contest, Missouri would be considered one of the cool kids. Like most states, Missouri has both an enormous shortfall and a regressive tax structure to contend with. The discussions in Missouri about ways to solve the state's fiscal mess (as in many other states) have mostly focused on program cuts.

But this week advocates from the Tax Justice for a Healthy Missouri Coalition bucked the status quo. A hearing was held by the House Tax Reform Committee on a bill, supported by the coalition, that would broaden Missouri's tax brackets, add new top tax rates, eliminate the state's deduction for federal income taxes paid and introduce a refundable credit targeted toward low- and middle-income folks.

The bill would also raise over a billion dollars. For a cash-strapped state that hasn't seen its top bracket change since 1931, this bill offers a chance to modernize the income tax, increase revenue, and make the tax structure fairer overall. It's rare that one piece of legislation has the ability to do so much good. For ITEP's testimony on this important legislation, click here.

Last week Missouri lawmakers joined Tax Justice for a Healthy Missouri and the newly formed Long Spoons Coalition to hold a press conference promoting HB 567, a bill that would modernize Missouri's outdated income tax structure (the top $9,000 bracket hasn't changed since 1931) and produce needed revenue while cutting taxes on average for the bottom 60% of Missourians. It's fine time that this sweeping legislation receives attention from policymakers and the press.

A progressive tax reform proposal is also in the news in Kentucky, where some lawmakers want to balance their state budget in a progressive way, combining revenue-raising options with tax cuts for low- and middle-income folks. The Kentucky reform plan includes an Earned Income Tax Credit, new top rates and brackets, and broadening the sales tax base. The bill's sponsor will be meeting with Kentucky Governor Steve Beshear about the bill's merits -- a meeting we hope goes well.