In a move that should receive accolades from the tax justice community, New Jersey Governor Chris Christie recently vetoed legislation that would have put into place a tax credit for homebuyers. The legislation would have allowed tax credits of up to $15,000, or 5 percent of the home purchase price (whichever is less) for buyers of new or existing homes. The tax credit would have been available to anyone buying a new or existing home and no income caps would have applied.

The Governor said he vetoed the legislation because "the state simply can't afford it." The credit would have cost the state an estimated $100 million. The Governor expects that the state has a long road ahead in terms of fiscal solvency, saying that the state will "face long-standing, structural difficulties in its finances that require continued fiscal restraint and additional reforms." In his veto message he said, "This legislation will only briefly and artificially inflate home sales and consequently does not merit a $100 million revenue loss to the general fund."

A homebuyer's tax credit is poor policy at the state level just as it is at the federal level. As Citizens for Tax Justice noted during the debate over the federal credit, one problem with a tax incentive of this sort is that it goes to people who would have engaged in whatever activity Congress is trying to encourage (in this case, home purchases) even if the tax incentive was not available. And even if the homebuyer tax credit does prod some people to buy homes who otherwise would not, why is that something Congress wants to encourage? Isn’t over-consumption of housing, and the hugely inflated housing prices that resulted, what caused the recession?

On Thursday, the New Jersey Senate voted 36-3 in favor of a deal between New Jersey Republican Governor Chris Christie and Democratic Senate President Stephen Sweeney to place a 2 percent cap on annual increases in property taxes. With Democratic Assembly Speaker Sheila Oliver signaling support and a vote set for Monday, the property tax cap will likely be signed into law shortly.

The passage of the property tax cap will systematically damage local governments' ability to provide basic public safety and education services. In testimony to the New Jersey Assembly, Rich Brown of the New Jersey Education Association noted that a hard cap would disproportionably harm poor and minority residents and would constitute a “racist cap.” Similarly, local fire fighter officials note that the property tax cap would certainly force layoffs and even cost lives.

The compromise is based on Christie’s proposal to put a constitutional amendment on the ballot which, if approved, would have placed a 2.5 percent cap on property tax increases. The measure allowed for increases beyond the 2.5 percent if the revenue went to debt service repayments or if the tax increase was approved by local referendum with a 60 percent majority vote.

As Citizens for Tax Justice has noted previously, Christie’s original proposal is as misguided as it is hypocritical. The proposal would not only harm local governments, but it comes on top of the $800 million in cuts in state aid to local governments. Had Christie truly wanted to provide property tax relief, he would not have cut off $635 million in property tax relief for 600,000 seniors and people with disabilities.

The Democratically controlled legislature countered Christie’s proposal with the passage of a statutory cap limiting property tax increases to 2.9 percent, but which left intact the wide range of existing exceptions.  

Although the Democrats' plan passed both chambers of the legislature, Christie signaled that he would veto the measure. Unfortunately, the Democratically controlled legislature was unable to override his veto and pass the Democratic plan. Similarly, Christie could not get the votes to support his plan for a constitutional amendment.

The impasse between the two sides was broken after days of tense negotiations, with both sides agreeing on the 2 percent cap with exceptions for rising health care costs, pension payments, debt service payments and capital expenditures, including new equipment and public works projects. The compromise also allows the cap to be overruled by a simple majority in a local referendum instead of the 60 percent Christie previously proposed. One final piece of the compromise is that local governments that raise taxes under the cap will be able to bank the difference for up to 3 years and then raise taxes higher in other years.

Even with the changes from Christie’s original plan, the new property tax cap will cripple local governments' ability to provide the basic services that residents require of them. Despite having significant majorities in the legislature, Democrats abandoned their much better property tax cap proposal in favor of a harmful compromise.

As five New Jersey mayors testified to the New Jersey Assembly, passing the tax cap before providing local officials the means to fix their fiscal problems is simply “putting the cart before the horse” and will place an unfair burden on local governments.

New Jersey Republican Governor Chris Christie’s proposed constitutional amendment capping property tax growth at 2.5% is as misguided as it is hypocritical.  The plan comes on the heels of Christie’s suspension of property tax relief for homeowners with incomes less than $70,000 and for 600,000 senior citizens. It also follows more than $800 million in cuts in state aid to local governments. The proposed property tax cap would do more damage to local governments’ ability to provide basic services like public safety and education.

The Governor's Proposed Cap on Property Tax Increases
    
While still in the process of wreaking havoc on the New Jersey budget, Christie is proposing a constitutional amendment that would create a 2.5% cap on the increase in the property tax levied by municipalities, school districts and counties, as well as a 2.5% cap on spending for state programs. After approval by the legislature, the proposal would have to be approved in a ballot referendum in November.

The proposal would allow an increase beyond the 2.5% cap only if the resulting revenue was used on debt service payments or approved by local referendum. Christie's proposed property tax cap would replace an existing 4% cap, which includes several additional exceptions.

If Christie’s goal was truly to hold down property taxes for typical New Jersey residents, he would not have vetoed the continuation of a 2% millionaire surtax. The revenue from that tax would have funded the restoration of $635 million in property tax rebates for more than 600,000 seniors and people with disabilities. The veto, which Democrats failed to override this week, suggests that Christie is more concerned with providing tax breaks for the wealthy than providing property tax relief for those who need it most.

Making matters worse, Christie's budget cuts over $800 million in state aid to local governments. The cuts will force local governments who depend primarily on property taxes to raise even more revenue to close the gap created by the cuts.

A Democratic Alternative
    
Signaling some willingness to compromise, Democratic Senate President Stephen Sweeney has proposed a 2.9% cap coupled with a continuation of existing exceptions to the cap. Defending his proposal, Sweeney points out that the existing 4% cap has already worked and has reduced average annual property tax increases from 7% to 3.3%.

Sweeney's measure is also different from the Governor's in that it would be a statute rather than a constitutional amendment, meaning the state legislature would decide on the policy change rather than voters this November.   

Bogus Research Fails to Make Poorly Targeted Tax Break Look Like Good Policy

Christie claims that the property tax cap will force local governments to become more efficient by consolidating and working out shared service agreements. This logic was bolstered by a Manhattan Institute report, which argued that the measure on which the New Jersey law is based was a success in Massachusetts.

The Center on Budget and Policy Priorities (CBPP) has since thoroughly debunked the Manhattan Institute report by outlining its many absurdities, like its implication educational spending and test score differences are explained by property tax caps and not just with specific state policies. Another recent report by CBPP explains that the Massachusetts tax reform model Christie is hoping to follow is already causing dramatic inequalities between districts, placing an unfair tax burden on low- and middle-income families, and debilitating local government services.

The inherent problem with hard property tax caps is that they have proven time and again to be poorly targeted and have severely limited the ability of local governments to meet the basic needs of local residents. If Christie’s goal is to force local governments to consolidate and become more efficient, he could work directly toward this goal rather than relying on rigid property tax caps to bankrupt localities into cooperation. In addition, if his goal is to provide property tax relief, he could provide more of precisely the targeted tax relief that his budget eliminates.

Some Bad Ideas Are Contagious

Unfortunately, New Jersey is not the only state debating a new property tax cap. New York Governor Patterson is also floating a property tax cap of his own, although it would exclude school property taxes.

The time for the New Jersey property tax cap debate is quickly ticking away as the measure must be approved by July 7th for it to be on to the ballot in November. Complicating matters further for Christie, the proposal must also garner the support of a significant number of Democrats as the measure requires a three fifths majority in the Democrat-dominated state legislature. With Democratic support leaning toward Sweeney’s proposal and Christie’s rejection of it, the debate over the proposal will certainly intensify. Hopefully, the Democratic majority will hold strong and block the Governor's proposal.

On Monday, New Jersey Democrats will attempt to override Governor Christie’s veto of a bill that would have temporarily restored New Jersey’s millionaire’s tax, an income tax surcharge on the state’s wealthiest residents who make up less than half of one percent of the state’s taxpayers. 

As promised, Governor Christie vetoed the millionaire’s tax moments after it was approved last month, sticking to his vow to veto any tax increase that was sent to his desk.  Supporters of the millionaire’s tax want to use the $637 million it would raise to fund property tax rebates for older adults and disabled residents that were cut from Christie’s $29.3 billion budget proposal.

The Democrats probably won't secure enough votes to override the veto, but a poll released this week from the Quinnipiac University Polling Institute shows their constituents have their backs.  According to the poll, 61 percent of New Jerseyans think Governor Christie should have approved the millionaire’s tax.

As we wrote earlier in the spring, there is glaring hypocrisy in Christie using his anti-tax pledge to justify his veto of the millionaire’s tax.  While Christie has no appetite for tax increases on the wealthiest New Jerseyans, he continues to support a reduction in the Earned Income Tax Credit (EITC) for hard-working low-income taxpayers (which amounts to a tax increase) and increases in fees in addition to his proposed suspension of property tax rebates for older adults and the disabled.  And, his more than $1.2 billion cuts in aid to local governments and school districts will more than likely force local leaders to increase property taxes — the very taxes he claims he wants to “control”.  

Assemblyman Gordon Johnson said it best recently: "New Jerseyans are going to need a thesaurus to decipher all the ways Governor Christie’s administration is trying to insist their budget plan doesn’t increase taxes on senior citizens and working-class New Jerseyans.  Call them what they may, this budget would mean this simple fact — senior citizens, the middle class and the poor are about to pay significantly more while the wealthy enjoy a nice tax cut."

Film tax credits have received a lot of attention in recent days.  Just as Virginia Governor Bob McDonnell was signing the state’s first film tax credit into law, stories out of Iowa and New Jersey, as well as a New York Times article about film credits in Michigan, Texas, Pennsylvania and Utah, provided quite a few good reasons to be skeptical of these credits.

On Monday, Virginia Gov. Bob McDonnell excitedly signed into law the state’s new film tax credit, with sitcom star Tim Reid (from “WKRP in Cincinnati,” “Sister Sister,” and “That 70’s Show”) there to celebrate.  In order to justify enacting this giveaway for the film industry while Virginians are having to make due with reduced state services, Gov. McDonnell made the asinine claim the credit would produce a 1400% return on investment.  Economists everywhere have no doubt been laughing ever since.

Meanwhile, in New Jersey, fellow 2009 gubernatorial election winner Chris Christie took exactly the opposite approach in vowing to eliminate the state’s film credit in order to help balance the state’s budget.  While Christie clearly had his priorities dead wrong in choosing not to extend the state’s income tax surcharge on millionaires (61% of voters favor the surcharge), he has certainly hit the nail on the head when it comes to this wasteful giveaway.  Not even the cast of “Law and Order: Special Victims Unit” appears to have been able to sway him.

Stories this week from the Des Moines Register and New York Times provide some very timely evidence regarding the wisdom of Christie’s approach, as well as the folly of McDonnell’s.  In Iowa, the Register reports that new criminal charges have been filed in the state’s ongoing film tax credit scandal.  Specifically, three moviemakers have been charged with inflating the value of their expenses in order to increase their take from the state’s film credit program.  A $225 broom, $900 stepladder, and 16,000% markup on lighting equipment are among the bogus expenses claimed by the filmmakers. 

The steady drumbeat of discouraging news surrounding Iowa’s film tax credit makes clear that Virginia is facing an uphill battle when it comes to policing this program.

The New York Times this week explored a more specific attribute of state film tax credits: the steps states are taking to prevent movies they dislike from receiving taxpayer dollars.  In Michigan, a sequel to a cannibalism-themed horror movie that was supported by state film tax credits was rejected for subsidy this time around because the state’s film commissioner determined that “this film is unlikely to promote tourism in Michigan or to present or reflect Michigan in a positive light.”  Michigan is by no means alone in enforcing this standard.  Films made in Pennsylvania can be denied tax credits if the movie in question does not “tend to foster a positive image” of the state. 

Texas possesses a similar requirement, which apparently was used to prevent the makers of a film about the Waco raid from even applying for film tax credits. 

And in Utah, the state’s Film Commission director admitted to withholding credits from films that he wouldn’t feel comfortable taking the governor to see. Whether or not this rule of thumb varies with the theatrical tastes of the governor in office at the time remains to be seen.  Upon reading the Times story, one blogger with the Baltimore Sun went so far as to argue that these provisions show that “states want propaganda from filmmakers.”  They certainly beg the question: If state taxpayers subsidize the film industry, is it inevitable that state governments will censor movies before they're made?

The budget proposal made by newly elected New Jersey Governor Chris Christie this past Tuesday is full of painful cuts, terrible ideas, and glaring hypocrisy.  Christie has promised to veto any attempted extension of New Jersey’s income tax increases on high-income earners, and has instead put forth a plan that would that would balance the state’s budget on the backs of lower- and middle-income families.

Painful Cuts

The New York Times reports that Governor Christie’s budget would lay off 1,300 state workers, cut public school aid by over $800 million, and reduce aid to towns and cities by nearly $500 million.  Christie’s plan would also close multiple state psychiatric facilities, eliminate cash welfare assistance for the able-bodied, increase the costs of participating in the state’s prescription-drug program for the elderly and disabled, and cut state-financed school breakfasts and rental assistance programs.  Absent any significant revenue-raisers, serious cuts of this type will be required.

Terrible Ideas

On top of the immediate cuts Christie is proposing for the short-term, the Governor is also seeking — in at least two ways — to permanently hinder New Jersey’s ability to finance vital public services.  First, the Governor this week expressed his support for enshrining a property tax cap in the state’s constitution.  While the details of the cap are still a mystery, it would reportedly be modeled after Massachusetts’ ill-advised Proposition 2 ½.  Christie’s preferred cap, like Massachusetts’, would limit increases in property tax growth to 2.5 percent per year.

Governor Christie is seeking to constitutionally limit the power of New Jerseyans’ elected representatives in another way, by capping increases in state spending on “direct state services” by more than 2.5% per year.  Again, while the precise details of this plan have yet to be revealed, the indication seems to be that Christie would like to move New Jersey closer to a Colorado-style TABOR regime (which has devastated that state’s public services).

Glaring Hypocrisy

In addition to the massive spending cuts and tax/spending caps that Governor Christie proudly champions, the Governor’s budget also includes a variety of less-publicized components that may surprise you given the rhetoric Christie has used in recent days.  Specifically, Governor Christie this week proudly declared that “I was not sent here to approve tax increases; I was sent here to veto them … And mark my words, if a tax increase is sent to my desk, I will veto it.”  Elaborating upon these remarks, Christie explained his belief that any tax increase would “kill a job market already on life support.”

But despite the unwavering nature of Christie’s rhetoric, his actual budget raises taxes in a number of ways.  Low-income families would be the first target of Christie’s tax hikes, as the Governor has proposed slashing the state’s EITC by $45 million.  This proposal is particularly surprising given the EITC’s reputation as one of the best work-incentives on the books.  President Ronald Reagan went so far as to refer to the federal EITC program as “the best job creation measure to come out of Congress.”  For a Governor who claims to be so concerned about the “job killing” aspects of tax increases, an EITC cut is a very strange proposal to make.

While Christie’s proposed cut to the EITC may represent the most glaring inconsistency between the Governor’s anti-tax rhetoric and his actual proposals, it is not the only example.  Christie has also proposed raising taxes on hospitals and ambulatory care facilities by some $45 million.  Moreover, property taxes would rise under Governor Christie’s plan as a result of his proposed suspension of the state’s property tax rebate program — a proposal the New York Times has described as being in violation of his own campaign promises.  And finally, the Governor’s decision to cut local aid by nearly a half billion dollars should be seen for what it is — a decision to shift the onus for raising taxes to the local level.  Local governments will, very predictably, be forced to compensate for at least part of these cuts by raising taxes on New Jersey residents.  Christie will undoubtedly try hard to distance himself from these hikes, but they will ultimately be an unsurprising, and necessary, consequence of Christie’s own proposals.

In January, New Jersey took an important step forward by enacting legislation that required it to finally join the vast majority of other states already producing “tax expenditure reports.”  These reports catalogue and measure the plethora of special tax breaks offered in a particular state, thereby providing policymakers with an invaluable tool for understanding the complex workings of their state’s tax code.  New Jersey’s first such report was issued earlier this month, and was advertised in Governor Christie’s budget as evidence of the Governor’s “commitment to transparency.”  Unfortunately, the report is a significant disappointment, and fails to even come close to living up to the basic legal minimum requirements established in the legislation the state enacted just two months earlier.

In some ways, the shortcomings of the state’s first tax expenditure report are unsurprising, and even forgivable.  As we pointed out when we first discussed the state’s new reporting requirement this past January, the legal requirements created for this report are quite daunting.  And with only two months to create the report, the state’s Department of Taxation can be forgiven for not being able to meet the full range of requirements.

What is less excusable, however, is the complete absence from the report of any indication regarding what information or other resources the Department would need to meet the state’s legal requirements, and what steps the Department plans to take to continue moving toward fulfilling these requirements in the future.  As things currently stand, the reader is left only to hope and wonder whether or not the Department possesses an interest, and capacity, for improving upon its current “bare bones” report in the years to come.

Looking specifically at the legal requirements, the report itself confesses that it fails to meet four of the seven requirements articulated in the law passed earlier this year.  Those four requirements are that the report:

(1) describe the objective of each State tax expenditure,

(2) determine whether each State tax expenditure has been effective in achieving the purpose for which the tax expenditure was enacted and currently serves, including an analysis of the persons, including corporations, individuals or other entities, benefitted by the expenditure,

(3) the effect of each State tax expenditure on the fairness and equity of the distribution of the tax burden, and

(4) the public and private costs of administering the State tax expenditures.

Presumably, the Department has at its disposable much of the information needed to produce the kinds of distributional analyses required by the third criterion above.  Adding these analyses to next year’s report would be the easiest way to maintain the state’s momentum toward greater transparency that was generated by the state’s new law.

The second criterion, by contrast, may be the hardest for the Department to fulfill.  Washington State is the only state that currently reviews the effectiveness of its tax expenditures on a systematic basis — and its experience makes clear that doing such reviews well requires a significant amount of effort.  New Jersey legislators should have done a better job outlining the types of criteria they would like to see used in conducting these evaluations, and should have provided the Department with the additional resources it will likely need to execute those reviews.  Clearly, the Department of Taxation and New Jersey’s elected officials have much work to do before the state’s tax expenditure report can be expected to live up to the requirements contained in state law.

Until this week, New Jersey was one of just nine states refusing to publish a tax expenditure report – i.e. a listing and measurement of the special tax breaks offered in the state.  Such reports greatly enhance the transparency of state budgets by allowing policymakers and the public to see how the tax system is being used to accomplish various policy objectives. 

Now, with Governor Jon Corzine’s signing of A. 2139 this past Tuesday, New Jersey will finally begin to make use of this extremely valuable tool.  Beginning with Governor-elect Chris Christie’s FY2011 budget, to be released in March, the New Jersey Governor’s budget proposal now must include a tax expenditure report.  The report must be updated each year, and is required to include quite a few very useful pieces of information.

The report must, among other things:

(1) List each state tax expenditure and its objective;
(2) Estimate the revenue lost as a result of the expenditure (for the previous, current, and upcoming fiscal years);
(3) Analyze the groups of persons, corporations, and other entities benefiting from the expenditure;
(4) Evaluate the effect of the expenditure on tax fairness;
(5) Discuss the associated administrative costs;
(6) Determine whether each tax expenditure has been effective in achieving its purpose.

The last criterion listed above is of particular importance.  Evaluations of tax expenditure effectiveness are extremely valuable since these programs so often escape scrutiny in the ordinary budgeting and policy processes.  Such evaluation can be quite daunting, however, and the Governor’s upcoming tax expenditure report should be carefully scrutinized in order to ensure that these evaluations are sufficiently rigorous.  One example of the types of criteria that could be used in a rigorous tax expenditure evaluation can be found in the study mandated by the “tax extenders” package that recently passed the U.S. House of Representatives.  For more on the importance of tax expenditure evaluations, and the components of a useful evaluation, see CTJ’s November 2009 report, Judging Tax Expenditures.

Ultimately, New Jersey’s addition to the list of states releasing tax expenditure reports means that only eight states now fail to produce such a report.  Those states are: Alabama, Alaska, Georgia, Indiana, Nevada, New Mexico, South Dakota, and Wyoming.  Each of these states should follow New Jersey’s lead.

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.

New Jersey gubernatorial hopeful Chris Christie has promised the following if elected: property tax cuts, across-the-board income tax cuts, corporate tax cuts, and tax cuts for small businesses.  Like a true politician, Christie has chosen to avoid upsetting any specific voters by refusing to outline the unavoidably severe cuts in state services that would be required to finance his tax-cutting spree.  Instead, he has simply stated that everything, aside from police funding, should be on the table.  Like most states, New Jersey will be staring down a large budget gap for the foreseeable future (projected at about $6 billion or more for FY11).  Closing this gap alone (without raising taxes) would require a 20% cut in the state budget.  Piling Christie’s tax cuts on top of that gap would raise that percentage significantly.

Somewhat encouragingly, voters are beginning to question Christie’s ability to deliver tax cuts during these dire budgetary times.  In an attempt to side-step these growing questions at a recent gubernatorial debate, Christie compared his current situation to the one he faced as a U.S. attorney:  “When I said I was going to combat public corruption, no one asked me exactly how [I was] going to do it … They said, ‘Do it. Let’s see if you can.’”  But you can’t blame the voters for being just a bit skeptical.  The fact is, if Christie explained “how” he was going to do it, he’d probably lose more than a few votes.

In addition to the general fund fantasies Christie seems to be concocting, he also has some interesting ideas regarding transportation funding.  In discussing the state’s deteriorating transportation infrastructure, Independent candidate Christopher Daggett admitted that gas tax increases or toll increases will be needed.  When Christie attempted to bash this idea, Daggett fired back, “It’s easy to criticize when you have no plan of your own. The tooth fairy’s not going to solve this problem.”

In addition to taking a realistic position on transportation, Daggett should also be commended for his willingness to offer specifics regarding his property tax plan.  In order to pay for a 25% cut in property taxes, Daggett has proposed expanding the state’s sales tax to include services.  Such a move would modernize an outdated tax, and would ensure the sales tax’s long-run sustainability.

Finally, while incumbent Jon Corzine has been relatively tight-lipped regarding his future plans for the state’s tax system, he has shown some real leadership by refusing to take the childish no-tax pledge that many observers have been attempting to force onto him.  Moreover, it’s important not to forget that Corzine has already shown an ability to make the tough choices in his decision to take a balanced approach (both raising taxes and cutting spending) during the most recent round of budget negotiations.

With the start of fiscal year 2010 generally only a little more than a month away and with the overall fiscal picture continuing to look rather bleak, two more states have gotten serious about using progressive income tax increases to generate much needed revenue. In Oregon this past week, Democratic legislators -- who control both chambers of the statehouse -- unveiled a plan to raise $800 million over the FY09-11 biennium. One of the principal features of the plan is the creation of two new income tax brackets -- one for couples with incomes over $250,000 (or for single filers with incomes above $125,000) and another for filers with incomes greater than $500,000. The rates for these brackets would be 10.8 percent and 11 percent respectively. (At present, the top rate in Oregon is 9 percent). Similarly, in New Jersey, Governor Jon Corzine, in the wake of particularly poor April revenue collections, has revised his earlier budget plan. He now proposes to raise the tax rate for millionaires to 9.47 percent and to create an additional bracket for filers with incomes between $400,000 and $500,000. While the income tax aspects of the Governor's proposal have won support from progressives, his recommendation that the state suspend its current property tax rebates for everyone except the elderly and the disabled has been less favorably received.

In the wake of the worst fiscal crisis in decades, several states -- most notably, New York and Hawaii -- have recently adopted income tax increases targeted at upper-income individuals and families. As the Center on Budget and Policy Priorities has documented, they may well be joined by several other states in the coming months as more lawmakers realize that this is the most responsible way to address budget shortfalls.

Critics of progressive income tax increases like to suggest that such changes will only spur the wealthy to pack up and head to more tax-friendly climes like, say, Wyoming or South Dakota. Yet, as ITEP observed earlier this week, at least three of the states that turned to income tax increases during the last fiscal crisis (New York, New Jersey, and Connecticut) saw an upturn in the number of affluent taxpayers over the ten year period from 1997 to 2006. Guess it's hard to find the equivalent of Per Se or Le Bernardin in Sioux Falls!

The Center on Budget and Policy Priorities recently released a very useful report summarizing tax expenditure reporting practices in the states, as well as methods for improving a typical state's tax expenditure report. For those unfamiliar with the term, a "tax expenditure" is essentially a special tax break designed to encourage a particular activity or reward a particular group of taxpayers. Although tax expenditures can in some cases be an effective means of accomplishing worthwhile goals, they are also frequently enacted only to satisfy a particular political constituency, or to allow policymakers to "take action" on an issue while simultaneously being able to reap the political benefits associated with cutting taxes.

Tax expenditure reports are the primary means by which states (and the federal government) keep track of these provisions. Unfortunately, most if not all of these reports are plagued by a variety of inadequacies, such as failing to consider entire groups of tax expenditures, or not providing frequent and accurate revenue estimates for these often costly provisions. Shockingly, the CBPP found that nine states publish no tax expenditure report at all. Those nine states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming, undoubtedly have the most work to do on this issue. All states, however, have substantial room for improvement in their tax expenditure reporting practices.

For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.

In continuing our effort to highlight states where progressive revenue-raising options are gaining support, this week the attention shifts to New Jersey where the Governor has proposed a budget that wisely relies on revenues from wealthier taxpayers who are most able to afford to pay during these difficult times.

Rather than only slashing services, the Governor has proposed a temporary income tax rate increase on earnings over $500,000, a suspension of the property tax deduction for better-off New Jersey residents, and the extension of a temporary surcharge on corporations. Like many proposals circulating in states across the country, the Governor's budget also includes increases in alcohol and cigarette taxes.

Overall, it's encouraging that yet another state appears ready to acknowledge that taxes on high-income earners are among the least harmful ways to escape current state budgetary nightmares. See past stories from Iowa, Missouri, Alabama, New York, and Wisconsin for more examples.

Last week New Jersey residents got word that current fiscal year tax collections are down and the state budget shortfall may reach $1.2 billion. The future doesn't look much brighter, as the shortfall for fiscal year 2010 is expected to more than quadruple to an astonishing $5 billion.

Late last month, we discussed Governor Jon Corzine's rather unimpressive stimulus package. It includes proposals like the introduction of the "single sales factor" and eliminating the state's "throw out rule." Together, these proposals could allow many large New Jersey companies that do business across several states to avoid tax liability.

To be fair, other components of Corzine's stimulus package, like giving more money to food banks and increasing aid to residents in need of heating assistance, would help those hardest hit by these tough economic times. But the Governor did little to distinguish between helping people and boosting corporate profits when he said, during a recent briefing, "Everything that we talked about in the stimulus program I think is more important today than it was before."

For some more commonsense, responsible policy alternatives, read Mary Forsberg's report from New Jersey Policy Perspective, What's the Rush? Costly Tax Changes Need More Deliberation. We second Mary's suggestions about the need to carefully consider a variety of reform options including combined reporting, corporate disclosure, and publishing a tax expenditure report. We urge the Governor and others to follow Mary's advice before quickly and perhaps carelessly pushing through the aspects of the Governor's stimulus that amount to poorly targeted tax cuts.