New Mexico News



Beware of the Tax Shift (Again)



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Note to Readers: This is the second of a five-part series on tax policy prospects in the states in 2014. Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on tax shift proposals.

The most radical and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate state income taxes and replace some or all of the lost revenue by expanding or increasing consumption taxes. These “tax swap” proposals appeared to gain momentum in a number of states last year, but ultimately proposals by the governors of Louisiana and Nebraska fell flat in 2013. Despite this, legislators in several states have reiterated their commitment to this flawed idea and may attempt to inflict it on taxpayers in 2014. Here’s a round-up of where we see tax shifts gaining momentum:

Arkansas - The Republican Party in Arkansas is so committed to a tax shift that they have included language in their platform vowing to “[r]eplace the state income tax with a more equitable method of taxation.” While the rules of Arkansas’ legislative process will prevent any movement on a tax shift this year, leading Republican gubernatorial candidate Asa Hutchinson has made income tax elimination a major theme of his campaign.  

Georgia - The threat of a radical tax shift proposal was so great in the Peach State that late last year the Georgia Budget and Policy Institute published this report (using ITEP data) showing that as many as four in five taxpayers would pay more in taxes if the state eliminated their income tax and replaced the revenue with sales taxes. This report seems to have slowed the momentum for the tax shift, but many lawmakers remain enthusiastic about this idea.

Kansas – In each of the last two years, Governor Sam Brownback has proposed and signed into law tax-cutting legislation designed to put the state on a “glide path” toward income tax elimination.  Whether or not the Governor will be able to continue to steer the state down this path in 2014 may largely depend on the state Supreme Court’s upcoming decision about increasing education funding.

New Mexico - During the 2013 legislative session a tax shift bill was introduced in Santa Fe that would have eliminated the state’s income tax, and reduced the state’s gross receipts tax rate to 2 percent (from 5.125 percent) while broadening the tax base to include salaries and wages. New Mexico Voices for Children released an analysis (PDF) of the legislation (citing ITEP figures on the already-regressive New Mexico tax structure) that rightly concludes, “[o]n the whole, HB-369/SB-368 would be a step in the direction of a more unfair tax system and should not be passed by the Legislature.” We expect the tax shift debate has only just started there.

North Carolina - North Carolina lawmakers spent a good part of their 2013 legislative session debating numerous tax “reform” packages including a tax shift that would have eliminated the state’s personal and corporate income taxes and replaced some of the revenue with a higher sales tax. Ultimately, they enacted a smaller-scale yet still disastrous package which cut taxes for the rich,hiked them for most everyone else, and drained state resources by more than $700 million a year. There is reason to believe that some North Carolina lawmakers will use any surplus revenue this year to push for more income tax cuts.  And, one of the chief architects of the income tax elimination plan from last year has made it known that he would like to use the 2015 session to continue pursuing this goal.

Ohio - Governor John Kasich has made no secret of his desire to eliminate the state’s income tax. When he ran for office in 2010 he promised to “[p]hase out the income tax. It's punishing on individuals. It's punishing on small business. To phase that out, it cannot be done in a day, but it's absolutely essential that we improve the tax environment in this state so that we no longer are an obstacle for people to locate here and that we can create a reason for people to stay here." He hasn't changed his tune: during a recent talk to chamber of commerce groups he urged them “to always be for tax cuts.”  

Wisconsin - Governor Scott Walker says he wants 2014 to be a year of discussion about the pros and cons of eliminating Wisconsin’s most progressive revenue sources—the corporate and personal income taxes. But the discussion is likely to be a short one when the public learns (as an ITEP analysis found) that a 13.5 percent sales tax rate would be necessary for the state to make up for the revenue lost from income tax elimination. 



In New Mexico, "Hold Harmless" Does Not Mean What You Think It Means



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When state governments force cuts in local tax collections, as New Mexico did almost a decade ago under Governor Bill Richardson, these cuts are often accompanied by a “hold harmless” promise, under which locals will (in theory) be reimbursed for the taxes they are no longer allowed to collect. But the hold harmless pledge often works out to be what Mary Poppins called a “pie crust promise”—easily made and easily broken. Just nine years after Governor Richardson burnished his tax-cutting credentials by exempting groceries from local (and state) gross receipts taxes—while simultaneously implementing a “hold harmless” provision so that locals wouldn’t feel the pain of losing such a large chunk of their tax base—a law is now in place that will completely phase out the hold-harmless aid to locals between 2015 and 2030.  A recent Santa Fe New Mexican editorial correctly rakes the legislature over the coals for its “fickle” attitude toward fiscally-strapped local governments.

The lesson for local policymakers facing the threat of state-mandated tax cuts? Hold-harmless provisions should be a basic component of any such cuts—but the state aid resulting from these provisions will be a all-too-tempting target for state lawmakers whenever the economy slows.



Business Tax Cuts Crammed Into Final Moments of New Mexico Session



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New Mexico lawmakers recently approved a cut in the corporate income tax rate and special tax breaks for manufacturers and filmmakers. State officials estimate that the bill will eventually cost (PDF) the state about $55 million in lost revenue per year, but they admit that they’re not especially confident in their estimates.  The Santa Fe New Mexican explains how the vote in the House literally came down to the final seconds of the legislative session, and says that House Speaker Kenny Martinez “acknowledged that some [House] members may not have been familiar with [the bill] at all.”

The largest single tax cut contained in the bill is a reduction in the corporate income tax rate from 7.6 to 5.9 percent, phased-in over five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recently found that the corporate income tax is one of New Mexico’s few progressive taxes in a tax system that is sharply regressive overall.  On top of this cut, lawmakers voted to give manufacturers the option to use a tax break known as single sales factor (PDF) that only benefits businesses selling most of their products out-of-state.  The package also expanded tax giveaways for filmmakers that are widely understood to offer little economic benefit.

To pay for a portion of the cost of these cuts, the bill raises sales taxes on manufacturers, cuts aid to local governments (though it lets them raise their own sales taxes), trims some existing tax credits, and limits the tax avoidance opportunities available to some “big box” retailers through the adoption of mandatory “combined reporting” (PDF) for those companies.

Overall, however, the corporate tax rate cut represents a case of misplaced priorities in a state whose tax system is fundamentally unfair and where funding for things like higher education has been slashed in recent years.

 



State News Quick Hits: Transparency in Texas, Too Many Tax Swaps and Asking "Who Pays?"



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Our partner organization, the Institute on Taxation and Economic Policy (ITEP) is continuing to generate a lot of publicity in the states for its recent Who Pays? report examining the fairness (or lack thereof) of every state’s tax system.  The Tennessean explains, for example, that: “Tennessee is often championed as a low-tax state. But for struggling families, it might not be among the fairest.”

In Pennsylvania, meanwhile, Sharon Ward of the Pennsylvania Budget and Policy Center explained ITEP’s report to CBS Philly by saying that: “We are in a club we don’t want to be in — one of the ‘Terrible Ten States’ that has the most regressive tax systems. And really, we got here for a very important reason: we have a flat income tax that fails to offset the more regressive taxes: sales and property taxes.”

And in Wyoming, the Equality State Policy Center (ESPC) is using ITEP’s new Who Pays? data to make the case for enacting a state Earned Income Tax Credit (EITC).  ESPC explains that the credit could make a long-overdue increase in the state’s gasoline tax much fairer by mitigating its impact on low-income families.

We recently profiled the four states looking most seriously at “tax swaps” that would offset big income tax cuts with a regressive sales tax hike -- Kansas, Louisiana, Nebraska, and North Carolina.  New Mexico can now be added to that list.  Two lawmakers there say they would like to expand the sales tax to apply to "virtually everything that happens" in the state and then repeal the personal and corporate income taxes.  But economists in New Mexico say that the plan is “pretty much guaranteed to be regressive and shift the tax burden.”

Bipartisan legislation in Texas would remedy the state’s “astounding deficit of knowledge when it comes to tax expenditures” -- or special tax breaks (PDF). The report proposes a number of smart reforms recommended by ITEP.  Those reforms include rigorous reviews aimed at determining whether tax breaks have fulfilled their goals, and “sunset provisions” designed to force a vote on special tax breaks that would otherwise continue on autopilot for years or decades on end.

 



Quick Hits in State News: The Avengers Movie Tax Subsidy, and More



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  • On the controversial film tax credit front, movie goers should be thanking New Mexico taxpayers who gave away $22 million in tax credits to the Avengers movie – which has earned over $1 billion so far. The state doled out a total of $96 million in film tax credits last year.
  • Stop the presses! There is public support for introducing corporate and personal income taxes in South Dakota. Read about it here.
  • The list of tax cuts being promised by Indiana Gubernatorial candidate John Gregg continues to grow.  In addition to his earlier plan ,Gregg now promises to eliminate the corporate income tax for any company headquartered in Indiana, and to offer a variety of new “job-creation” tax credits to certain businesses, and to pay for it by asking online retailers to collect a sales tax from Hoosiers (despite the current governor’s agreement with Amazon.com to postpone such a tax until 2014).
  • Yet another income tax cut proposal has been unveiled in Oklahoma, this time by Senate leadership.  In it, low-income families would fare poorly because it repeals the Earned Income Tax Credit and scales back the grocery sales tax credit.


Quick Hits in State News: Too Business-Friendly in Michigan & Florida, A Caution on Fracking, and More



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  • Florida Governor Rick Scott is attending grand openings of 7-Eleven® stores but a columnist at the Orlando Sentinel observes that “if incentives and low corporate tax rates were working, Florida wouldn't rank 43rd in employment.”  It’s a common sense column worth reading.
  • As another massive tax cut for Michigan businesses continues to make its way through the legislature, the Michigan League for Human Services chimes in with a report, blog post, and testimony on why localities can’t afford to foot the bill for state lawmakers’ tax-cutting addiction.
  • Bad tax ideas abound in Indianas gubernatorial race.  Democratic candidate John Gregg wants to blast a $540 million hole in the state sales tax base by exempting gasoline; he claims he can pay for it by cutting unspecified "waste" from the budget. And Gregg’s Republican opponent, Mike Pence, doesn’t seem to have any better ideas.  So far he’s only offered a "vague proposal" to cut state income, corporate, and estate taxes – without a way to pay for those cuts.
  • Kansas lawmakers are feverishly working to meld differing House and Senate tax plans into a single piece of legislation. Governor Sam Brownback has endorsed an initial compromise which includes dropping the top income tax rate and eliminating taxes on business profits. Earlier in the week the Legislative Research Department said the plan would cost $161 million in 2018 and new state estimates say the price tag is more like $700 million in 2018.  Senate leaders have said that they aren’t likely to approve a tax plan that creates a shortfall in the long term. Stay tuned....
  • Finally, a USA Today article should give pause to lawmakers hoping that drilling and fracking for natural gas leads to a budgetary bonanza.  It explains how the volatile price of natural gas is creating headaches in energy-producing states like New Mexico, Oklahoma, and Wyoming where a dollar drop in the commodity’s price means a budget hit of tens of millions.


Quick Hits In State News: A Good Bill With a Dim Future in New Mexico, and More



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Are Amazon.com's Sales Tax Avoidance Days Coming to an End?



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Last week Illinois joined New York, North Carolina, and Rhode Island by enacting legislation requiring Amazon.com and other online retailers working with in-state affiliates to collect sales taxes.  Arkansas’s Senate and Vermont’s House recently passed similar legislation, and Arizona, California, Connecticut, Hawaii, Minnesota, Mississippi, and New Mexico are considering doing the same.  Interestingly, lawmakers in each of these states are being spurred to do the right thing by major retailers like Wal-Mart, Sears, and Barnes & Noble.

In most states, Amazon and other online retailers are not currently required to collect sales taxes unless they have a “physical presence” in the state, though consumers are still required to remit the tax themselves.  Unfortunately, very few consumers actually pay the sales taxes they owe on online purchases — in California, for example, unpaid taxes on internet and catalog sales are estimated to cost the state as much as $1.15 billion per year.

The so-called “Amazon laws” recently adopted in Illinois, New York, North Carolina, and Rhode Island are all designed to limit this form of tax evasion by broadening the class of online retailers that must pay sales taxes.  Specifically, under these new laws, any retailer partnering with in-state affiliate merchants is required to pay sales taxes on purchases made by residents of that state.

Up until recently, the reaction to these laws has been mostly hostile.  Grover Norquist has branded them a (gasp) “tax increase,” despite the fact that they’re designed only to reduce illegal tax evasion.  More importantly, Amazon has challenged the New York law in court, and has ended relationships with affiliates in North Carolina and Rhode Island in order to avoid having to pay sales taxes on sales made within those states.  Amazon has also promised to severe ties with its Illinois affiliates, and has threatened to do the same in California if a similar law is adopted there.  These tactics mirror a recent decision by Amazon to shut down a Texas-based distribution center in order to avoid having to remit taxes in that state as well.

But Amazon may not be able to bully state lawmakers for much longer.  Since New York passed its so-called “Amazon law” in 2008, North Carolina, Rhode Island, and now Illinois have already followed suit despite all the threats.  And it appears that Arkansas and Vermont may very well do the same — as proposals to enact Amazon laws in each of those states have already made it through one legislative chamber.  In addition, at least seven other states (listed in the opening paragraph) have similar legislation pending.

According to State Tax Notes (subscription required), Wal-Mart, Sears, and Barnes & Noble are each attempting to partner with affiliate merchants recently dropped by Amazon.  Even more importantly, several of the large retail companies (like Wal-Mart, Target and Home Depot) are joining forces to lobby in favor of Amazon laws. These companies’ interest is in large part due to the fact that they already have to remit sales taxes in the vast majority of states because of the “physical presence” created by their large networks of “brick and mortar” stores.  If more traditional retailers begin to voice support for Amazon laws, the progress already being made on this issue is likely to accelerate.

For more background information on the Amazon.com tax controversy, check out this helpful report from the Center on Budget and Policy Priorities.



Super Bowl Ad about Taxes from Corporate Astroturf Group



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The last place you would ever expect a discussion of tax policy is in the sea of Super Bowl commercials about beer, cars, and Doritos, yet the organization Americans Against Food Taxes spent over $3 million to change that last Sunday.

The ad, called “Give Me a Break”, features a nice woman shopping in a grocery store,  explaining how she does not want the government interfering with her personal life by attempting to place taxes on soda, juice, or even flavored water. The goal of the ad is to portray objections to soda taxes as if they are grounded in the concerns of ordinary Americans.

But Americans Against Food Taxes is anything but a grassroots organization. Its funding comes from a coalition of corporate interests including Coca-Cola, McDonalds and the U.S. Chamber of Commerce.

It is easy to understand why these groups are concerned about soda taxes, which were once considered a way to help pay for health care reform. The entire purpose of these taxes is to discourage the consumption of their products. As the Center on Budget and Policy Priorities explains in making the case for a soda tax, such a tax could be used to dramatically reduce obesity and health care costs and produce better health outcomes across the nation. Adding to this, the revenue raised could be dedicated to funding health care programs, which could further improve the general welfare.

These taxes may spread, at least at the state level.  In its analysis of the ad, Politifact verifies the ad’s claim that politicians are planning to impose additional taxes on soda and other groceries, writing that “legislators have introduced bills to impose or raise the tax on sodas and/or snack foods in Arizona, Connecticut, Hawaii, Mississippi, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont and West Virginia.”

It's true that taxes on food generally are regressive, and taxes on sugary drinks are no exception according to a recent study. It's a bad idea to rely on this sort of tax purely to raise revenue, but if the goal of the tax is to change behavior for health reasons, then such a tax might be a reasonable tool for social policy. We have often said the same about cigarette taxes, which are a bad way to raise revenue but a reasonable way to discourage an unhealthy behavior.

With so many states considering soda taxes and the corporate interests revving up their own campaign, the “Give Me a Break” ad may just be the opening shot in the big food tax battles to come.



ITEP Releases New Report on Capital Gains Tax Breaks in the States



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Earlier this week ITEP released A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness. The report takes a hard look at the eight states that currently give special treatment to capital gains income including: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.

The report finds that the benefits of state capital gains tax breaks go almost exclusively to the very best off taxpayers. In fact, in the eight states highlighted, between 95 and 100 percent of the state tax cuts from these tax breaks goes to the richest 20 percent of taxpayers.

Capital gains tax breaks also come with a pretty large price tag.  In tax year 2010, these eight states will lose about $490 million due to these loopholes, with losses ranging from $14 million to $151 million per state. These revenue losses represent a substantial share of currently-forecast budget deficits in several of these states.

ITEP finds that these preferences are costly, inequitable, and ineffective, depriving states of millions of dollars in needed funds, benefitting almost exclusively the very wealthiest members of society, and failing to promote economic growth in the manner their proponents claim. State policymakers cannot afford to maintain these tax breaks any longer.

 



New Report from ITEP: The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes



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For a review of the most significant state tax actions across the country this year and a preview for what’s to come in 2011, check out ITEP’s new report, The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes.

"Good" actions include progressive or reform-minded changes taken to close large state budget gaps. Eliminating personal income tax giveaways, expanding low-income credits, reinstating the estate tax, broadening the sales tax base, and reforming tax credits are all discussed.  

Among the “bad” actions state lawmakers took this year, which either worsened states’ already bleak fiscal outlook or increased taxes on middle-income households, are the repeal of needed tax increases, expanded capital gains tax breaks, and the suspension of property tax relief programs.  

“Ugly” changes raised taxes on the low-income families most affected by the economic downturn, drastically reduced state revenues in a poorly targeted manner, or stifled the ability of states and localities to raise needed revenues in the future. Reductions to low-income credits, permanently narrowing the personal income tax base, and new restrictions on the property tax fall into this category.

The report also includes a look at the state tax policy changes — good, bad, and ugly — that did not happen in 2010.  Some of the actions not taken would have significantly improved the fairness and adequacy of state tax systems, while others would have decimated state budgets and/or made state tax systems more regressive.

2011 promises to be as difficult a year as 2010 for state tax policy as lawmakers continue to grapple with historic budget shortfalls due to lagging revenues and a high demand for public services.  The report ends with a highlight of the state tax policy debates that are likely to play out across the country in the coming year.



State Transparency Report Card and Other Resources Released



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Good Jobs First (GJF) released three new resources this week explaining how your state is doing when it comes to letting taxpayers know about the plethora of subsidies being given to private companies.  These resources couldn’t be more timely.  As GJF’s Executive Director Greg LeRoy explained, “with states being forced to make painful budget decisions, taxpayers expect economic development spending to be fair and transparent.”

The first of these three resources, Show Us The Subsidies, grades each state based on its subsidy disclosure practices.  GJF finds that while many states are making real improvements in subsidy disclosure, many others still lag far behind.  Illinois, Wisconsin, North Carolina, and Ohio did the best in the country according to GJF, while thirteen states plus DC lack any disclosure at all and therefore earned an “F.”  Eighteen additional states earned a “D” or “D-minus.”

While the study includes cash grants, worker training programs, and loan guarantees, much of its focus is on tax code spending, or “tax expenditures.”  Interestingly, disclosure of company-specific information appears to be quite common for state-level tax breaks.  Despite claims from business lobbyists that tax subsidies must be kept anonymous in order to protect trade secrets, GJF was able to find about 50 examples of tax credits, across about two dozen states, where company-specific information is released.  In response to the business lobby, GJF notes that “the sky has not fallen” in these states.

The second tool released by GJF this week, called Subsidy Tracker, is the first national search engine for state economic development subsidies.  By pulling together information from online sources, offline sources, and Freedom of Information Act requests, GJF has managed to create a searchable database covering more than 43,000 subsidy awards from 124 programs in 27 states.  Subsidy Tracker puts information that used to be difficult to find, nearly impossible to search through, or even previously unavailable, on the Internet all in one convenient location.  Tax credits, property tax abatements, cash grants, and numerous other types of subsidies are included in the Subsidy Tracker database.

Finally, GJF also released Accountable USA, a series of webpages for all 50 states, plus DC, that examines each state’s track record when it comes to subsidies.  Major “scams,” transparency ratings for key economic development programs, and profiles of a few significant economic development deals are included for each state.  Accountable USA also provides a detailed look at state-specific subsidies received by Wal-Mart.

These three resources from Good Jobs First will no doubt prove to be an invaluable resource for state lawmakers, advocates, media, and the general public as states continue their steady march toward improved subsidy disclosure.



State Tax Code Spending Under Fire



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For years, both state and federal lawmakers have opted to forgo the hassles of the appropriations process in favor of enacting tax breaks — or “tax expenditures” — aimed at exactly the same goals.  The result has been a steady rise in tax code spending, and a corresponding decline in transparency and fiscal responsibility.  Recent developments in Missouri, Georgia, New Mexico, and Maine, however, indicate that at least some lawmakers are interested in getting a grip on this type of out-of-control spending.

In Missouri, the Tax Credit Review Commission, created by Governor Jay Nixon in July, finally issued its recommendations this week.  In addition to recommending the elimination of 28 tax credits and the reform of 30 more, the Commission also took the commendable step of proposing some broader reforms to the way Missouri lawmakers deal with tax credits.  Most notably, the Commission suggested sunsetting every state tax credit in order to force their review, and even proposed a schedule for sunsetting them in waves two, four, and six years from now.  This proposal closely resembles a reform enacted by Oregon in 2009.

In addition to sunsets, the Missouri Commission also proposed capping tax credits in order to reverse the explosion in tax credit spending the state has experienced in recent years.  In support of this proposal, the Commission notes that “as State revenues have declined and spending for other programs has been reduced, spending on the State’s tax credit programs has continued to grow.”  Finally, the Commission also recommends eliminating and/or reducing the ability of businesses to carry-back their tax credits to prior years’ tax bills, and enacting additional “clawback” provisions to ensure that companies only benefit from tax credits if they consistently meet all of the eligibility requirements.

The Georgia Council on Tax Reform and Fairness seems to be contemplating a similar path.  While the group’s report won’t be out until early January, the chairman has suggested sunsetting most tax exemptions on a five year schedule.  Hopefully, the final report from the Council will include this recommendation and enhance it further by bringing all tax expenditures — not just tax exemptions — within its scope.  The Council would also be wise to offer some specific ideas for ensuring that the debate over expiring tax provisions is sufficiently rigorous (like by implementing a complementary tax expenditure review system).

In Maine, a working group comprising various state agency heads recently came out with recommendations that are quite similar to those being considered in Missouri and Georgia.  While not advocating the use of sunset provisions, the group has suggested the creation of a review system similar to the one that exists in Washington State.  Multiple lawmakers have voiced support for the idea, though Maine’s recent switch from all-Democratic to all-Republican control could complicate things.

Finally, in New Mexico, the drive to review state tax code spending is coming not from a commission or working group, but from lawmakers themselves.  Back in 2007, New Mexico lawmakers passed a bill enacting a tax expenditure reporting requirement, only to be thwarted by Gov. Richardson’s veto.  As a result, New Mexico is one of just seven states without a legal requirement that tax expenditure reports be released on a regular schedule.  Now, the Albuquerque Journal reports that some lawmakers — including the Governor-elect — are pushing for enhanced disclosure and review of the state’s film tax credit, among other tax expenditures.

Hopefully, the difficult budgetary situations confronting each of these states will spur lawmakers to do what’s long overdue: finally get a grip on out-of-control tax code spending.



Opposition to Closing Corporate Tax Loopholes Called "Defining Moment" in New Mexico's Gubernatorial Campaign



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In the days leading up to New Mexico’s gubernatorial election, Democratic candidate Diane Denish has called her GOP opponent Susana Martinez a “tool of corporate interests."

This claim is supported by Martinez’s opposition to long proposed state legislation to close corporate tax loopholes through enacting combined reporting. Martinez calls combined reporting a tax increase on business.  Denish sees it as a way to level the playing field between small businesses and multi-national corporations and would use the additional revenue to address New Mexico’s budget shortfall. 

When Martinez stated her opposition to combined reporting at a recent debate, Denish called her challenger’s response the “defining moment” of the campaign and said "she'll come down on the side of those big out-of-state corporations every single time. She won't close that tax loophole.”



New 50 State ITEP Report Released: State Tax Policies CAN Help Reduce Poverty



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ITEP’s new report, Credit Where Credit is (Over) Due, examines four proven state tax reforms that can assist families living in poverty. They include refundable state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits. The report also takes stock of current anti-poverty policies in each of the states and offers suggested policy reforms.

Earlier this month, the US Census Bureau released new data showing that the national poverty rate increased from 13.2 percent to 14.3 percent in 2009.  Faced with a slow and unresponsive economy, low-income families are finding it increasingly difficult to find decent jobs that can adequately provide for their families.

Most states have regressive tax systems which exacerbate this situation by imposing higher effective tax rates on low-income families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve economic security. Although state tax policy has so far created an uneven playing field for low-income families, state governments can respond to rising poverty by alleviating some of the economic hardship on low-income families through targeted anti-poverty tax reforms.

One important policy available to lawmakers is the Earned Income Tax Credit (EITC). The credit is widely recognized as an effective anti-poverty strategy, lifting roughly five million people each year above the federal poverty line.  Twenty-four states plus the District of Columbia provide state EITCs, modeled on the federal credit, which help to offset the impact of regressive state and local taxes.  The report recommends that states with EITCs consider expanding the credit and that other states consider introducing a refundable EITC to help alleviate poverty.

The second policy ITEP describes is property tax "circuit breakers." These programs offer tax credits to homeowners and renters who pay more than a certain percentage of their income in property tax.  But the credits are often only available to the elderly or disabled.  The report suggests expanding the availability of the credit to include all low-income families.

Next ITEP describes refundable low-income credits, which are a good compliment to state EITCs in part because the EITC is not adequate for older adults and adults without children.  Some states have structured their low-income credits to ensure income earners below a certain threshold do not owe income taxes. Other states have designed low-income tax credits to assist in offsetting the impact of general sales taxes or specifically the sales tax on food.  The report recommends that lawmakers expand (or create if they don’t already exist) refundable low-income tax credits.

The final anti-poverty strategy that ITEP discusses are child-related tax credits.  The new US Census numbers show that one in five children are currently living in poverty. The report recommends consideration of these tax credits, which can be used to offset child care and other expenses for parents.



New ITEP Report Examines Five Options for Reforming State Itemized Deductions



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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.



More States Join the Majority in Producing Tax Expenditure Reports -- Only Seven Holdouts Remain



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

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

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

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

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

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

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

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

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

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

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

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



Oklahoma Group Proposes Eliminating Ridiculous State Income Tax Deduction for State Income Taxes



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This week the Oklahoma Policy Institute released a report urging, among other things, that one of the state’s more ridiculous tax breaks be eliminated — specifically, the state income tax deduction for state income taxes.  This deduction was created not as a result of careful consideration and debate among Oklahoma policymakers, but rather as an accidental side-effect of the state’s “coupling” to federal income tax rules.  And as the New Mexico Legislative Finance Committee politely points out, while the deduction may make some sense at the federal level, the rationale for providing it at the state level is “less clear.”

Citing figures provided by ITEP, the Oklahoma Policy Institute notes that only one out of four Oklahomans would be affected by eliminating this deduction, and roughly 58% of the overall tax hike would be borne by those richest 5% of Oklahomans.  This is a predictable result of the deduction only being available to itemizers.  In total, the state could collect an additional $118 million in revenue each year by eliminating the deduction — revenue that could go a long way toward preserving important public services.

State income tax deductions for state income taxes have been receiving a growing amount of attention.  Last year, Vermont limited its deduction to a maximum of $5,000, while just last week New Mexico Governor Bill Richardson signed a budget eliminating his state’s deduction entirely.  The Georgia Budget and Policy Institute (GBPI) also highlighted the benefits of eliminating this deduction in a policy brief released just a few weeks ago.

In total, seven states currently offer this deduction: Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont.  Eliminating the deduction in each of these states is long overdue.



New Mexico Governor Uses Line-Item Veto to Remove Regressive Food Tax from State Budget



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A few weeks back, we wrote of the New Mexico legislature’s approval of $200 million in tax increases to help close the state’s $600 million budget gap.  While the plan included both progressive and regressive components, it was regressive overall.  Governor Richardson on Wednesday removed one of the most regressive components of the plan — a local sales tax on groceries — through the use of his line-item veto authority.

While the Governor’s veto does improve the state budget’s fairness overall, it also places New Mexico on less stable financial footing in the months ahead.  Furthermore, to make up for some of the revenue lost by repealing the tax on groceries, the Governor chose to eliminate a small low-income credit included in the legislature’s plan.  This development is very unfortunate, as the tax package still increases the rate of the state’s sales tax (known as the “Gross Receipts Tax” (GRT) in New Mexico) in a way that will result in substantially higher taxes for those families who would have benefited from the credit.

In a bit of good news, however, the Governor chose to leave intact the legislature’s repeal of the deduction for state income taxes.  This bizarre, circular deduction is now offered in only seven other states — Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont — and should be looked at by all of these states as a potential source of much-needed revenue.  The Georgia Budget and Policy Institute (GBPI) released a report earlier this month using ITEP data that explains why this tax break should be eliminated.



New Mexico Legislature Passes Tax Hike Package, Scales Back Regressivity of Earlier Proposals



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New Mexico's legislature held a short special session this week to deal with a $600 million budget deficit. On Wednesday, they sent Governor Bill Richardson a $200 million tax-increase package. About two-thirds of the tax hike consists of increases in the state's sales tax, known as the Gross Receipts Tax (GRT). The state GRT rate will increase by 1/8th of one cent from the current 5 percent, and local governments will be required to apply their sales taxes, which range as high as 2 percent, to groceries. The state will also boost GRT collections by $12 million by enforcing collection of the "use tax" on purchases from out-of-state vendors.

While each of these changes fall most heavily on low-income families, two other components of the revenue plan are progressive. First, the state will raise $60 million — about a third of the total package — by eliminating an unusual income tax break that bizarrely allows state itemizers to take their state income taxes as a deduction against their state income taxes. (Seven other states, including Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont, also allow this deduction, and could shore up their personal income tax by eliminating this tax break.) Second, lawmakers increased — by a modest $5 million — the value of an existing low-income refundable tax credit.

Even with these two progressive measures, the tax package overall will still make New Mexico’s tax system somewhat more regressive.  Thankfully, however, the plan represents an improvement over at least two of the earlier versions (the Senate plan, and the legislative leadership plan) that were found to be even more starkly regressive in ITEP analyses produced this week.



Legislators Promote Progressive Tax Proposal as Fix for New Mexico Budget Gap



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At a press conference late last week, a group of nearly twenty progressive New Mexico legislators released their budget balancing proposal.  Among the most notable components of the proposal is a roll-back in personal income tax cuts (including those for capital gains) that were enacted in 2003.  The group also proposed higher income taxes targeted specifically at upper-income New Mexicans (defined as earning roughly $150,000 - $200,000 or more) and enacting combined reporting.  The group is also pushing for the state to take steps to apply the sales tax to additional purchases made over the Internet.  Finally, the proposal included familiar calls for higher taxes on cigarettes and soft drinks.

While Governor Bill Richardson has laudably acknowledged that the state must raise taxes to close its budget shortfall, he has so far fought efforts to roll back the tax cuts he enacted in 2003. He has also opposed efforts to impose higher taxes on upper-income New Mexicans, or to take additional steps to tax purchases made over the Internet. 

But rather than put forth a plan of his own, the Governor has expressed an interest in letting the legislature work out the details of a potential increase in state taxes.  This fact should hearten those progressive lawmakers who have proposed exactly the type of bold, progressive reforms New Mexico needs to overcome its current budgetary shortfalls.  Ideas like those advocated by this group of legislators should not be kept off the table.



New Jersey Finally Joins Majority of States Producing Tax Expenditure Reports



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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.



Arizona & New Mexico: So Close, Yet So Far Apart



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Southwest neighbors Arizona and New Mexico may share a common border, but news reports from each state this week make them look worlds apart.  

In Arizona, after refusing for months to support Governor Jan Brewer’s call for a temporary increase in the state’s sales tax, leading Republicans have put forward a tax plan of their own.  Unfortunately, rather than raising the revenue necessary to address the state’s staggering budget deficit of $4.4 billion (over the next 18 months), their plan would dramatically reduce personal and corporate income taxes, as well as the property taxes paid by businesses.

The backers of the plan claim that it would not worsen the state’s fiscal outlook, as the reductions would be phased in over a number of years. But that is precisely the approach the state followed over the course of the 1990s – a course of action that has put the state in its current predicament.  Moreover, while the plan apparently would not take effect until July 2011, the Joint Legislative Budget Committee has indicated for quite a while that Arizona's revenues are unlikely to return to their pre-recession levels before that time.

Meanwhile, in New Mexico, Governor Bill Richardson recommended raising taxes by $200 million (on a temporary basis) to help close the state's budget gap.  However, he appears to have left the details of which taxes to increase to the legislature and the Budget Balancing Task Force he appointed late last year. 

While the Task Force has an array of options before it, the best approach – the repeal of New Mexico’s tax break for capital gains income – has already been ruled out by the Governor. (This is no surprise, since Richardson was the break’s chief advocate when it was put into law in 2003.) Still, as ITEP found in its March 2009 report, “A Capital Idea,” capital gains tax breaks “deprive states of millions of dollars in needed funds, benefit almost exclusively the very wealthiest members of society, and fail to promote economic growth in the manner their proponents claim.”

For more on the fiscal crises in Arizona and New Mexico, visit Children’s Action Alliance and New Mexico Voices for Children.



ITEP's "Who Pays?" Report Renews Focus on Tax Fairness Across the Nation



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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.



NM Governor: Let's Close Loopholes, But Not the Ones for the Rich



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It's a time-honored, if puzzling, tradition. Elected officials pledge to put everything on the table in a relentless quest for tax reform -- except for a handful of tax breaks that they personally hold near and dear. New Mexico Governor Bill Richardson is the latest leader to pull this disheartening stunt.

Earlier this week, with the state facing a $400 million deficit, Richardson expressed his willingness to repeal various tax loopholes to help balance the budget. Unfortunately, Richardson continues to oppose closing one of the most unfair tax giveaways in the state's tax code: a 50% exclusion for capital gains income that he pushed through in 2003. He also dismisses the idea of reforming the state's $80 million film production tax credit.

This guidance doesn't leave lawmakers with a lot of sensible options for reform. They should ignore their governor altogether and look for answers in a new report from New Mexico Voices for Children, which presents a more open-minded menu of revenue-raising options that could help make the state's tax system simpler and fairer. These options include repealing the capital gains break, enacting combined reporting for corporate income taxes, and repealing income tax rate cuts enacted in 2003.

When New Mexico lawmakers convene for a special budget-balancing session this fall, the Voices for Children report will serve as a much better template for solutions than Richardson's half-hearted gesture towards loophole-closing.



Happy Holidays? Reconsidering Sales Tax Holidays



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So-called sales tax holidays, normally two- or three-day events that encourage shoppers to purchase back-to-school items tax-free, are bad policy for a variety of reasons. The holidays are poorly targeted, costly, and lull legislators into thinking that they've done something substantial to help reduce the regressivity of sales taxes.

The bottom line is that given the choice between targeted sales tax reform that takes into account one's ability to pay and a three-day sales tax holiday, lawmakers should always opt for targeted reform.

Last weekend a handful of states from Alabama to New Mexico held their sales tax holidays. (The Federation of Tax Administrators keeps a complete list of holidays here.) But because of the recent economic downturn, some legislators and economists are questioning the wisdom of not collecting sales taxes a few days a year.

Former chairman of South Carolina's Board of Economic Advisors Harry Miley certainly has his doubts about the effectiveness of sales tax holidays. He says that shoppers don't need incentives to go back-to-school shopping, and the cost to the state is quite high. He says, "The idea of a tax holiday for essential items doesn’t make any sense to me." For more on why sales tax holidays aren't all they are cracked up to be, see ITEP's Policy Brief.



Transportation Funding in the News



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Last week brought with it a flurry of news stories discussing the issue of how to pay for transportation infrastructure. This topic is never too far from the agenda in statehouses across the country, in large part because most states fund their infrastructures primarily with a fixed-rate gasoline tax (levied as a specific number of cents per gallon) which inevitably becomes inadequate over time as inflation erodes the value of that tax rate. What's more, with fuel efficiency becoming an increasingly important criterion in Americans' car-buying decisions, drivers are able to travel the same distance while purchasing less gasoline, and paying less in gasoline taxes.

With all this in mind, Mississippi's top transportation official last week publicly stated that the state's lawmakers need to increase their flat 18.5 cent per gallon gas tax rate. As evidence of this need, the official also noted that 25% of the state's bridges are deficient.

In a similar vein, one recent op-ed in Michigan called for increasing the state's gas tax and restructuring it to prevent it from continually losing its value due to inflation. Another op-ed ran in the same paper that day, this one written by the President of the Michigan Petroleum Association, insisting that the state eliminate the gas tax altogether and pay for the lost revenue with increased sales taxes. The most obvious flaw with this plan is that it would shift the responsibility for paying taxes away from long-distance commuters and those owners of heavier (and generally less fuel-efficient) vehicles -- despite the fact that these are precisely the people who benefit most from the government's provision of roads.

More news coverage of the transportation issue came out of South Dakota last week, where a committee of legislators is currently in search of additional revenue to plug the hole created by predictably sluggish gas tax revenues. While some have expressed an interest in raising the gas tax, others have suggested replacing it entirely with hugely increased licensing fees. But licensing fees are not as capable as the gas tax in charging frequent and long-distance drivers for the roads they use.

The best way to ensure that those drivers pay for the roads they use, however, is to simply levy a tax on each mile they drive (known as a "vehicle miles traveled" tax, or VMT). While the idea has yet to be implemented in practice in the U.S., recent coverage of a pilot project involving 1,500 drivers in New Mexico shows that such a tax is a very real possibility in the future. Basically, a small computer is installed in each car which keeps track of the number of miles driven. That information is then reported to the tax collection agency, and the driver is sent a bill.

This method avoids the scenario in which drivers of vehicles of similar weights (which produce similar wear-and-tear on any given road) can end up with vastly different gas tax bills due differences in fuel efficiency. Interestingly, this new study is examining a system that would allow the computer to know which state somebody is driving in, so that the correct amount of tax can be paid to the correct state. Unsurprisingly, despite the public finance appeal of this method, privacy concerns remain a major obstacle to implementation.



CBPP Report on Tax Expenditure Reporting Encourages Smarter Thinking About Special Tax Breaks



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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.



New ITEP Report: States Can Raise Needed Revenue and Improve Tax Fairness by Repealing Capital Gains Tax Breaks



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As state policymakers craft their budgets for the upcoming fiscal year, they must confront a pair of daunting challenges, one fiscal, the other economic. The budget outlook for the states is, at present, the most dire in several decades. In this context, then, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families struggling to make ends meet nor additional distortions in the economy as a whole.

For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.

This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)

Read the report.



Tax Amnesty: States' Lack of Self-Control Diminishes Tax Fairness



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

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

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

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

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



Governor Richardson's Tax Cut



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This week New Mexico policymakers adjourned their special legislative session, which focused on tax breaks for low- and middle-income residents. The Land of Enchantment is one of a handful of states that is not experiencing budget shortfalls. The state is actually enjoying surplus revenues generated because of the state's ability to produce oil and gas. However, the tax relief package that was ultimately approved by legislators amounted to about half of what Governor Bill Richardson requested. Recent budget projections show that the state's windfall is expected to decline from about $400 million to $200 million.

In fact, the Governor asked for an enormous temporary tax rebate package that had a $120 million price tag. The rebate package that became law was about $56 million. The one-time rebate is targeted to New Mexicans with AGI of less than $70,000 and is scheduled to arrive in mail boxes by Thanksgiving. He also requested about $58 million for children's health care, but the final legislation included only about $20 million. A portion of revenues was also put aside for highways. Kudos to New Mexico lawmakers for adjusting the package when revenue projections changed and for making the bulk of the package temporary and targeted.



Gloom & Boom



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States' collective fiscal outlook appears to be quite dim and could get even darker in the months ahead according to a report released this week by the National Conference of State Legislators (NCSL). The report notes that, in the aggregate, states experienced a $40 billion budget gap for fiscal year 2009, a chasm that has been bridged largely through reductions in spending.

Not every state's budget is shrouded in gloom, however. Some states derive significant revenue from severance taxes (taxes imposed on the extraction of natural resources like oil and natural gas) and have economies closely tied to these industries. These states, Louisiana, North Dakota, and Wyoming for example, are enjoying substantial budget surpluses.

Given the volatility of energy markets, these surpluses are likely a temporary phenomenon, but that hasn't stopped states from considering and enacting tax cuts that would permanently reduce revenue. Earlier this year, Louisiana briefly weighed the idea of repealing its income tax altogether, only to settle on an oh-so-modest annual cut of $300 million. North Dakota has not only revived its property tax debate from a few years ago, but may also place on this November's ballot a measure that would slash the personal income tax by 50 percent and the corporate income tax by 15 percent. In this context, a plan backed by West Virginia Republicans to completely exempt groceries from the state sales tax appears far more reasonable in scope - and would certainly help to improve the progressivity of the state's tax system. However, it would still likely leave the Mountain State with inadequate revenues once oil and gas prices come back to earth.

Perhaps the most responsible - and fair - approach to surpluses generated by skyrocketing severance tax revenue comes from New Mexico, where Governor Bill Richardson this past week put forward a proposal to dedicate the majority of the state's projected $400 million surplus to one-time tax rebates and to highway construction. Richardson's proposal does contain some permanent changes in tax law, such as an expansion of the state's working families tax credit, but they appear to be targeted towards those low- and moderate-income taxpayers who are facing the greatest challenges from the nationwide foreclosure crisis and from rising fuel and food prices.



EITC Update: Victorious in New Mexico, Hopeful in Nebraska



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New Mexico Governor Bill Richardson signed into law an Earned Income Tax Credit equal to 8 percent of the federal EITC. New Mexico becomes the 21st state to offer an EITC. Congratulations to New Mexico Voices for Children and the New Mexico Fiscal Policy Project for making the creation of the Working Families Tax Credit a Legislative Priority.

In other EITC news, the Institute on Taxation and Economic Policy (working with Nebraska Voices for Children) submitted testimony to the Nebraska Legislature's Revenue Committee and submitted several letters to local newspapers in favor of Legislative Bill 683, which would expand the state's refundable EITC from 8 percent to 15 percent of the federal credit. Tax reform and budget negotiations are continuing in Lincoln and it's unclear whether the EITC will be expanded. For more on the value of the Earned Income Tax Credit read ITEP's policy brief.



EITC Expansion: A Good Idea in Every State



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In a welcome trend, lawmakers and advocates in Connecticut, New Jersey, North Carolina, Nebraska, New Mexico, Montana, Hawaii, Utah, Ohio, and Iowa are considering enacting Earned Income Tax Credits ... or expanding existing EITCs. The federal EITC has been hailed by policymakers of all stripes as an especially effective tool for lifting working families out of poverty. At the state level, the EITC offers the additional benefit of helping to offset the regressive sales and property taxes that hit low-income families hardest. To find out more about whether EITC legislation is active in your state, check out the Hatcher Group's State EITC Online Resource Center.



A Bad Idea in New Mexico is a Bad Idea in South Dakota



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This November, South Dakotans will vote on the latest too-good-to-be-true policy solution... Amendment D, a constitutional amendment that would change how property is assessed for tax purposes. In most states a property's taxable value depends on what its really worth. Amendment D would confuse matters by creating two different property tax systems. Property that is sold would be assessed based on its value at the time of the sale. Property that does not change hands would be assessed by rolling back its value to 2003 levels and then increasing growth by an arbitrary 3% or the rate of inflation.

The ideas driving Amendment D are nothing new. In fact, almost identical laws have passed in New Mexico, Florida and California. These laws created a situation where one home located next to an identical home could be assessed at twice the value of the adjacent home, merely because it was sold more recently. As this excellent letter to the editor points out, South Dakota currently has several measures in place to support homeowners when property taxes are due. An expansion of the current homestead credit or a property tax circuit breaker would help those most in need of assistance.

New Mexico Fiscal Policy Project Report: Undocumented Immigrants in New Mexico: State Tax Contributions and Fiscal Concerns

Contrary to popular belief, undocumented immigrants pay taxes and are not able to receive public benefits, except for K through 12 public education for their children and emergency health care.

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