Last week we wrote about Governor Cuomo’s ill-conceived Tax-Free NY initiative.  We reserve judgment as to whether it’s politically motivated ( a New York Post column called him “Gov $uck-up”, for instance, and this column also questions the motivation) but we can be pretty sure it will cost more than it will benefit the people of New York, because this is what business tax credits do.

Still, since that post, the Governor has continued his promotional tour of New York campuses, so we spent some time digging into how actual businesses would fare under his plan. As it turns out, the Governor’s focus on rewarding new investment could end up arbitrarily discriminating against existing small businesses (and their employees) who are already doing the same things Cuomo’s plan will reward others to start doing.

Capraro Technologies, Inc. (CTI), for example, has been based in Utica (home to SUNY Institute of Technology) for almost two decades. The company shares the SUNY-IT mission of advancing the field of information technology through research and innovation, and appears to be a model of the kind of business the Governor hopes to attract. But CTI would be ineligible for any benefits under Tax-Free NY, and the company could find itself at a disadvantage relative to other firms who do qualify for the tax-free treatment.

To gain eligibility, CTI would need to “expand its New York operations while maintaining its existing jobs.” But such an expansion would need to take place within one mile from the SUNY-IT campus. Unless CTI were able to obtain a special waiver, this would mean having to open a new office about two miles down the road from its current location; hardly an example of economic efficiency.

CTI is only one of many existing companies throughout the state that could be placed at a disadvantage relative to new competitors. BlueRock Energy, a Syracuse-based company that helps customers lower their energy costs and environmental footprint and would be ineligible for Tax-Free NY benefits if it expanded at its current lots, is another case-in-point. Located about 2.5 miles away from the SUNY College of Environmental Science and Forestry, BlueRock Energy shares a common mission with SUNY-ESF.

And the list goes on. From mobile app creator miSoft Studios near SUNY Binghamton to software developer Wetstone Technologies near SUNY Cortland, existing local businesses across the state will all reap zero rewards for having already done exactly what the Governor will allegedly incentivize other businesses to do in the future.

And of course, you are not only out of luck if you started your business at the wrong time, but place matters, too. State tax expert David Brunori at Tax Analysts summed up one of Tax-Free NY’s absurdities by highlighting, “if you are in the community you don’t pay taxes. If you are outside, even by six inches, you do.”

Existing small businesses are not the only losers because the plan extends to employees, too. Professor John Yinger, an expert in fiscal policy from Syracuse University, says the Governor’s plan “means some businesses are getting lower taxes than others and in this case it means some people are getting much lower taxes than others, those are new sources of inequities.”

There are so many problems with Governor Cuomo’s idea for tax-free zones, it’s hard to know where to begin. But the Institute on Taxation and Economic Policy’s (ITEP) policy briefs library is a good place to look, and we invite the Governor to consider this guidance (all links are PDF’s).

Taxes and Economic Development 101: “Lawmakers are under intense pressure to create a healthy climate for investment. But the simplistic view that tax cuts are the best medicine can result in unintentionally making this climate worse. Unaffordable tax cuts shift the cost of funding public services onto every business that isn’t lucky enough to receive these tax breaks—and makes it harder to fund the public investments on which all businesses rely.”

Accountable Economic Development Strategies: “Some lawmakers are wising up to the idea that subsidies don’t work. But for policymakers who insist on offering incentives, there are some important, simple, and concrete steps that can be taken to ensure that subsidies aren’t allowed to go unchecked.”

Tax Principles: The principle of neutrality (sometimes called “efficiency”) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment.”

First it was the ill-advised TV campaign to lure new business to his state by bragging about tax cuts, and now New York  Governor Andrew Cuomo has launched his “Tax-Free NY” initiative which would turn many of the state’s public universities, private universities, and community colleges into tax-free havens. Providing a full complement of tax breaks, the Governor’s plan would exempt qualified businesses from paying any sales, property, and corporate taxes for a decade, and would exempt employees of those businesses from the personal income tax.

These no-tax zones include all state university campuses outside of New York City, some private colleges, up to 200,000 square feet in certain campus-adjacent zones, and 20 undisclosed “strategically located” state-owned properties. The Governor’s plan vaguely defines eligible businesses as companies with a relationship to the academic mission of the university and then includes: new businesses, out-of-state businesses that relocate to New York, and existing businesses that expand their New York operations.

Touting the plan as a way to revitalize the upstate economy, the Governor claims the free pass on taxes would “attract start-ups, venture capital, new business, and investments from across the world.” However, economists from across the political spectrum have their doubts (and so do we).

Professor John Yinger of Syracuse University said in response to Cuomo’s plan that: “In New York we have a dizzying array of tax breaks with no evidence they help, and now here’s a new version. You’d do much better improving our schools and infrastructure than giving tax breaks to businesses who would be in the state anyway.”

Others, such as Danny Donohue of the Civil Service Employees Association, argue the plan is another tax giveaway to businesses at the expense of local communities and the middle-class. Donohue says: “The governor doesn’t get the fact that more corporate welfare is no answer to New York’s economic challenges… it’s outrageous that the governor and legislative leaders think we can give away even more to businesses without any guarantee of benefit to taxpayers.”

In addition to creating little if any economic growth, the plan is likely to worsen the state’s already precarious fiscal situation. With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible.

To move the plan forward, the Governor will need legislative approval before the state’s legislative session ends on June 20^th. Quick – someone get this policy brief (PDF) up to Albany!

There’s been a lot of good research these past few years debunking claims that state taxes – particularly income taxes on the rich – send wealthy taxpayers fleeing from “unfriendly” states.  CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP), took a lead role in disproving those claims in Maryland (PDF), New York, and Oregon (PDF), for example. CTJ has also been covering the controversy in several states and in the media.

Some particularly thorough research on this topic has come out of New Jersey, where researchers at Princeton and Stanford Universities were granted access to actual tax return data, which is not available to the public, in order to investigate the issue in more detail. The resulting paper (PDF) found a “negligible” impact of higher taxes on the migration patterns of the wealthy.

And now, for the further benefit of lawmakers seeking to become better informed about tax policy, those same Princeton and Stanford researchers were recently granted access to similar confidential taxpayer data in California. Unsurprisingly, the findings of their newest paper (PDF) were similar to those out of New Jersey: “the highest-income Californians were less likely to leave the state after the [2005] millionaire tax was passed… [and] the 1996 tax cuts on high incomes … had no consistent effect on migration.”

That’s right.  California millionaires actually became less interested in leaving the state after the tax rate on incomes over $1 million rose by one percentage point starting in 2005.

Another important finding: migration is only a very small piece of what determines the size of a state’s millionaire population.  “At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population,” they explain.  The other 98.8 percent is due to yearly fluctuations in rich taxpayers’ income that moves them above or below the $1 million mark.  

This finding (which is not entirely new) defeats the very logic that anti-tax activists use to argue their “millionaire migration” case. Here’s more from the researchers:

“Most people who earn $1 million or more are having an unusually good year. Income for these individuals was notably lower in years past, and will decline in future years as well. A representative “millionaire” will only have a handful of years in the $1 million + tax bracket. The somewhat temporary nature of very-high earnings is one reason why the tax changes examined here generate no observable tax flight. It is difficult to migrate away from an unusually good year of income.”

But for every new piece of serious research on this issue, there are just as many bogus studies purporting to show the opposite.  Of particular note is a September “study” from the Manhattan Institute, recently torn apart by Sacramento Bee columnist Dan Walters.

Somewhat surprisingly for a right-wing organization’s study of this topic, the Manhattan Institute report actually concedes that other variables, things like population density, economic cycles, housing prices and even inadequate government spending on transportation, can motivate people to leave one state for another.  But while the Institute doesn’t claim that every ex-Californian left because of taxes, regulations, and unions, it does, predictably, assign these factors an outsized role. But their “analysis” of the impact of taxes spans just six paragraphs and is, in essence, nothing more than an evidence-free assertion that low taxes are the reason some former Californians favor states like Texas, Nevada, Arizona – even, oddly, Oregon, where income tax rates are similar to California’s.

Obviously, the guys looking at the actual tax returns have a better idea of what’s actually going on, and state lawmakers need to listen.

To celebrate the five year anniversary of the first “Rich States, Poor States,” an Arthur Laffer/ALEC publication that ranks states based on how closely their tax and budget policies adhere to conservative economic principles, the Iowa Policy Project put it to the retrospect test and found it lacking.  They write, “The ALEC Outlook Ranking fails to predict economic performance. In fact, the less a state followed ALEC’s prescriptions, the better it did in terms of job growth, and the better it did on change in poverty rate and median income.”

New York just decided to throw even more taxpayer money at filmmakers, despite ample evidence that these giveaways don’t do much for long-term job growth or economic performance.

This Topeka Capital-Journal letter-to-the-editor from a registered Republican laments that the tax plan signed into law by Governor Brownback “will increase Kansas income tax on the poor and reduce taxes predominately for the wealthy.”

On Tuesday, Tennessee Governor Bill Haslam told the House Judiciary Committee that states need to be able to collect sales taxes on internet purchases. He said plainly, “This discussion isn’t about raising taxes or adding new taxes.” Instead it’s about “collecting taxes already owed.” We couldn’t agree more.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

While the sale of online coupons for local merchants boomed in 2011 – Living Social sold $750 million and Groupon sold an astounding $1.62 billion in online coupons last year – state governments are still trying to play catch up and figure out how to ensure these sales are taxed fairly.

The central question facing the states is whether a state or local sales tax should be applied on the cost of the online coupon, or on the face value of the coupon, meaning the list price of the product for which the coupon is being redeemed. For example, if you were to buy a Groupon for $25 that allows you to purchase $50 worth of books at a local bookstore, the question is whether sales tax should be assessed on $25 (the cost of the coupon) or $50 (the face value of the coupon). Whatever the amount, the tax could be collected either at the time of coupon purchase or product purchase.

As Forbes’ Janet Novack reports, right now states are treating online coupons for sales tax purposes differently, or in many cases don’t even have a definitive answer to this question. For example, New York requires that sales tax be collected by retailers on the full face value of the items purchased with coupons, but only in the case where the coupons are for a specific dollar amount of spending. California, by contrast, only applies the sales tax to the price paid for the coupon itself in any case.

So why isn’t Groupon itself collecting sales tax on the original coupon purchase, rather than having the tax collected by the merchant?  After all, it’s reasonable to compare their service to the one provided by  Expedia, Orbitz, Priceline and other travel sites who sell discount hotel rooms, as should be done in our view. The difference is that online coupon sites consider what they do to be advertising and, in fact, it’s part of Groupon’s contract with merchants that merchants handle all the taxes. Discount travel sites are more properly reselling those hotel rooms.

A promising development is that 24 states who collaborate in the Streamlined Sales and Use Tax Agreement, which grapples with state sales tax issues, are moving to tackle the coupon question head on by surveying member states and putting out model policy for all states, possibly as soon as May. The Streamlined Sales Tax Governing Board, of course, faces a difficult task because it’s a brave new world of e-commerce.  While there is more than one good way to solve the problem – as states like New York and California have shown – states need to act sooner rather than later.

Photo of Movie Ticket Groupon via Groupon Creative Commons Attribution License 2.0

Naughty

Michigan’s legislature and Governor Snyder top the naughty list by giving away more than $1.6 billion in tax cuts for business and paying for it with tax increases on low-and middle-income working and retired families.

Florida continued to dole out more corporate pork this year, including a property tax break that happens to benefit huge commercial land owners, like Disney World and Florida Power and Light, and other corporations (that also happen to be major donors to the state’s Republican governor and legislative majority party).

Minnesota’s legislature missed an opportunity to do the right thing when it rejected a tax increase on the state’s wealthiest residents. The plan was proposed by Governor Dayton and supported by 63 percent of Minnesotans over the alternative, which was cuts to spending on education, health care and other vital public services.

Anti-tax activists in Missouri were hard at work again. This year they were collecting signatures for a ballot initiative that would eliminate the state’s personal income tax and replace it with a broadened and increased sales tax.

Nice

Connecticut’s Governor Malloy and the legislature adopted a $1.4 billion tax increase that improved tax fairness in the state and protected public investments like education and health care.  Most notably, the state added an Earned Income Tax Credit, a significant tax break for low-income working families.

District of Columbia lawmakers greatly reduced the ability of corporations to dodge their fair share of taxes by adopting combined reporting (which makes it harder to hide profits in other states) and a higher corporate minimum tax. The Council also temporarily increased taxes for individuals making more than $350,000 a year and limited itemized deductions, which are most often taken by high income filers.

Hawaii lawmakers also limited upside-down tax giveaways (itemized deductions) for their state’s richest residents and passed other tax changes to raise much needed revenue.

A Little Bit Naughty and Nice

New York’s Governor Andrew Cuomo reversed his campaign vow not to raise taxes and supported a tax increase on residents earning more than $2 million a year.   The plan, passed by the legislature, also included a tax break for those with income under $300,000.

However, New York lawmakers passed the governor’s cap on property taxes this summer, which is predictably creating crises and forcing dramatic cuts in local education, medical, and public safety services.

Illinois raised significant revenue earlier in the year through temporary personal and corporate income tax rate increases, all designed to stave off harsh spending cuts, but then turned right around and gave away hundreds of millions of dollars to Sears and CME, allegedly to keep them in the state.

After long opposing the extension of a tax on millionaires supported by 72 percent of New Yorkers, Democratic Governor Andrew Cuomo partially reversed himself and proposed a plan that would raise more revenue from the very wealthy and make the state’s tax system less regressive.

On Wednesday and Thursday, the New York Senate and General Assembly approved Cuomo’s plan to raise taxes on joint filers making more than $2 million, while cutting them for those making under $300,000.

The move by Cuomo represented a stunning reversal of his pledge to oppose any tax increases, which he backed up in March by effectively killing the extension of New York’s popular millionaire’s surcharge.

For his part, Cuomo explains his reversal by noting that the state faces a $3.5 billion deficit and that as a result “there is not an intelligent or productive way to close the current gap without generating revenue.” The new tax plan will raise $1.9 billion, of which $1.5 billion is slated to go directly to deficit reduction.

Cuomo’s decision also comes after months of increasing pressure to extend the temporary millionaires’ tax from the New York Democratic Party establishment, Occupy Wall Street protestors, and overwhelming majorities of New Yorkers generally.

Compared to the tax rates that would be in effect if New York simply allowed the millionaires’ surcharge to expire, the tax deal reduces taxes for joint filers making under $300,000, keeps them the same for joint filers making between $300,000 and $2 million dollars, and increases the rate by almost 2 percent on joint filers making more than $2 million dollars. However, supporters of the millionaires’ surcharge point out that a straight extension of that provision would have raised more than twice as much revenue from the wealthy.

In any case, Cuomo’s tax plan should be applauded and will definitely benefit a wide-swath of New Yorkers. We only wish that anti-tax New Jersey Governor Chris Christie would follow suit and reinstate a millionaires’ tax in his state.

Photo of Governor Andrew Cuomo via Gov Andrew Cuomo Creative Commons Attribution License 2.0

Last week, Republican New Jersey Governor Chris Christie and Democratic New York Governor Andrew Cuomo together approved a substantial increase in the toll rate paid to cross bridges and tunnels between New York and New Jersey.  The increase of $1.50 on EZ pass users (or $2 for cash payers) will go into effect next month.  This will be followed by four consecutive increases of 75 cents each annually from 2012 through 2015, for a total hike of at least $4.50 over five years.

Both governors supported the toll increases, saying that the dire fiscal situation facing the Port Authority, which is reliant on toll revenue, means that the “increase cannot be avoided.” The governors’ willingness to shore up revenue for the Port Authority through toll increases stands in sharp contrast to their reputations as “anti-tax” governors who have relentlessly refused to increase any taxes to deal with their states’ current fiscal disparities.

As the Institute on Taxation and Economic Policy explains, increases in tolls or other “user fees” are often used by politicians to increase revenue while avoiding having to enact anything that could be called a “tax increase.”

Josh McMahon, writing for the New Jersey News Room, argues that Christie is just playing “a game of semantics” so that he can continue the “charade that he’s not raising any taxes.”

The move by the governors is proving relatively unpopular with New Jersey voters, 54% of whom oppose the increases, according to a recent poll.

In contrast, 72% of New Jersey voters and 64% of New York voters support ‘millionaires tax’ proposals, which would help counterbalance some of the regressive features of both the New Jersey and New York tax systems. Both Cuomo and Christie went out of their way to torpedo these proposals in recent months.

Voters in both states can’t be blamed for wondering whose interests their governors are protecting.

Photos via Gisele 13 Creative Commons Attribution License 2.0

As predicted, the bad news about Democratic Governor Andrew Cuomo’s infamous property tax cap is already starting to roll in as local governments begin to grapple with the law’s implications.

In the Town of Southhampton, for instance, the local comptroller told the town board that on top of several years of tough austerity measures, the cap will likely force another $5 million in cuts. Southhampton Councilwoman Bridget Fleming was so frustrated by the cuts that she accused the area’s state assemblyman of “essentially crippling” the town’s ability to provide services.

Over in Canadaigua, New York, school officials are worried that the cap may “severely  limit” their options in putting together next year’s budget. The Superintendent of Canandaigua Schools expressed his own frustration with the cap saying that it addresses “only a symptom” of the state’s fiscal challenges as it does not address decreasing state aid or the increasing costs of mandates coming from the state level.

Looking statewide, a recent report by the credit-rating agency Moody’s noted that the property tax cap could endanger local governments and school districts by putting “additional pressure on local government financial operations already strained by declining state aid, weakened tax revenue, high fixed expenditures and state-mandated services.” The report even pointed to the specific examples of the Town of Fishkill and Monroe and Rockland counties as the governments most in peril from the cap.

To avoid these eventualities, the Wall Street Journal reports that many local governments are devising ways to “stretch” loopholes to increase the amount of money they can raise. Peekskill city for instance is hoping to use two exemptions -- one for pension costs and another for debt service -- to  raise property taxes as much as 5.9%. The Cuomo administration, however, has disputed interpretations of the cap law that would allow for such extensive exemptions and argues that localities should focus more on cutting spending.

Meantime, the New York based advocacy group Community Voices Heard (CVH) has it right: they say that the best thing the state government could do to improve schools and other public services would be to extend the millionaire’s tax, a move Cuomo opposes.

The Institute on Taxation and Economic Policy concurs with CVH in its own report on how to fix New York’s education funding system, noting that a policy like extending the millionaire’s tax would not only make the state’s tax system more fair, but it could go a long way towards improving fiscal sustainability at the state and local level.

Last Friday night (6/24/11), New York Governor Andrew Cuomo signed into law the state’s first ever property tax cap, one of the biggest legislative priorities of his administration. As Citizens for Tax Justice noted even before its final passage, however, the new property cap is one of the most extreme in the nation and widely viewed as ill-advised.

The cap limits annual growth in property tax revenues to 2 percent or the inflation rate, whichever is lower, with comparatively strict limits on exceptions to the cap: chiefly, state pension system increases above 2 percent of payroll. Voters in a given locality could also override the cap by a 60 percent vote.

Considering that property taxes are rising at about 5 percent annually, the cap will force dramatic cuts in local education, medical, and public safety services.

Many advocates argue that the enactment of a similar property tax cap in Massachusetts proves that it will not hurt the quality of education or local services, but the Center on Budget and Policy Priorities has thoroughly debunked this claim, showing how the cap has been disastrous in Massachusetts.

Compounding this, according to the Fiscal Policy Institute (FPI), New York’s cap is actually much worse than the one in Massachusetts considering that it’s 60 percent stricter in terms of reducing revenues, and, is not coupled with significant additional state funding to local governments.

Even if Cuomo’s goal is just to help low and middle income families with relief from rising property taxes, the FPI explains that a much more effective and less costly approach would be to enhance the state’s property tax circuit breaker.

Calling the tax cap “a cap on student achievement, especially for the poorest school districts” Karen Scharff, the Executive Director of Citizen Action New York points out that in reality the property tax cap is just “one more fake Albany quick fix.”

Last week, New York Governor Andrew Cuomo announced a deal with state lawmakers over pending legislation to enact a property tax cap in the state.

If the deal passes, the cap would be one of the strictest in the nation, capping annual growth in property tax revenues at 2 percent or the inflation rate, whichever is lower. The proposed cap would allow exceptions in limited circumstances, such as public pension shortfalls. Voters in a given locality could also override the cap by a 60 percent vote.

Even with the exceptions, the 2 percent cap is guaranteed to have a deleterious effect on New York local governments' ability to provide core services.  Funding for schools, which depends heavily on property tax revenues, will bear the brunt of the tax cap.

According to Gov. Cuomo’s own numbers, property taxes have had to rise well above 5 percent each year to keep up with demand for critical services, so the 2 percent cap would inevitably force harsh cuts.

According to Richard C. Iannuzzi, president of New York State United Teachers, the state’s education system will be “devastated” by the cap just as it’s already suffered three years of the “toughest cuts” to education.”

Democratic lawmakers had attempted to stop some of these cuts by extending a popular surcharge on upper-income taxpayers, but Gov. Cuomo favored cuts to education instead and stopped the effort in its tracks.

The New York Times lashed out at Gov. Cuomo, arguing that the “tax cap is nothing more than a political crutch for politicians who don’t have the courage to argue the case for more taxes or for spending cuts.”

The Wall Street Journal, on the other hand, has trotted out its usual misinformation campaign in support of the cap, claiming that high property tax rates are causing New Yorkers to move out of the state.

In the same editorial, the Wall Street Journal also claimed that the tax cap in Massachusetts should be a model for New York, a notion that the Center on Budget and Policy Priorities thoroughly deconstructed a few years ago.

“Tax caps are not a novel or new approach. They are a tired gimmick with a history of failure,” writes Kevin Hart for the National Education Association, pointing to the devastating effect similar caps have had Massachusetts, Illinois, California and Colorado.

None of this is to say that New York’s property tax and education funding mechanisms are not in need of change. In fact, the Institute on Taxation and Economic Policy (ITEP) has documented in detail the ways in which New York should pursue systematic reform to improve the fairness and adequacy of its revenue system.

Even if Gov. Cuomo’s goal was simply to provide New York residents with a property tax break rather than enact fundamental reform, ITEP points out that property tax "circuit breakers", rather than property tax caps, provide the most effective and well-targeted relief to those most in need, without damaging education funding overall.

Advocates in New York are also making the case for a property tax circuit breaker as a more targeted alternative.  At a press conference this week, school board members, county and local government officials and advocacy organizations joined with some Assembly members to speak out against the tax cap, calling it a "punitive, misguided approach to public concerns about property taxes."

Expedia, Orbitz, and Priceline are exploiting a major sales tax loophole, and in some states are possibly breaking the law in doing so.  Last week, the Center on Budget and Policy Priorities (CBPP) released a report explaining how this loophole works, and pegging its aggregate size at somewhere in the neighborhood of $400 million per year.  The report urges states and localities to pursue legal action, legislative action, or both in order to remedy this situation.

In the vast majority of cases, online travel companies (OTCs) like Expedia and Priceline currently remit sales and lodging taxes only on the “wholesale” room rate they pay to hotels — not the “retail” room rate they actually charge travelers.  In doing so, the OTCs claim that the difference between the retail and wholesale price is simply a “facilitation fee” that should not be subject to sales taxes.  But as CBPP rightly points out:

“The OTCs are providing the same kinds of marketing and room booking services that the hotels themselves engage in.  If the hotels may not deduct a pro-rated amount of their advertising and website operation expenses from the retail room charge prior to calculating applicable hotel taxes when they incur such expenses directly, there is no possible justification for compelling such a deduction when hotels pay an OTC to provide the same services.”

CBPP recommends that states and localities either sue to recoup the taxes owed by OTCs, or if current statutes are sufficiently unclear with respect to the taxes owed by OTCs, enact new legislation clarifying that taxes should be paid based on the full retail price of the room.  New York City and Washington DC have both taken this latter course of action, while a half dozen states and numerous localities have chosen to pursue legal action.

Read the CBPP report for more detail, including state-by-state revenue estimates, an explanation of why this reform won’t harm tourism, and a closer look at what states and localities must do to close this inequitable and costly tax loophole.

In just the last few weeks, Arkansas and Illinois joined New York, North Carolina, and Rhode Island in enacting legislation requiring some online retailers, like Amazon.com, to collect sales taxes on purchases made by their state’s residents.  At least a dozen other states are considering enacting similar policies, and the list of states with a serious interest in this issue seems to be growing by the week.  In a new brief, ITEP explains the basics of so-called "Amazon taxes," and discusses the actions that Amazon, Wal-Mart, Home Depot, and other retailers have taken during this new surge of interest in sales tax reform.

Read the ITEP brief.

State lawmakers across the country have heard again and again that wealthy taxpayers will pull up stakes and move in response to just about any progressive state tax increase. This couldn't be further from the truth.

Read the full ITEP article in the Huffington Post

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.

New York Governor Andrew Cuomo is at odds with his fellow Democrats, who control the state's Assembly, over tax policy.

The focal point of this conflict is a proposed extension of the temporary income tax surcharge on individuals with taxable incomes over $200,000 (or $300,000 from joint filers), known as the ‘millionaires’ tax because most of it is paid by millionaires. If extended, the measure would raise $1 billion dollars over the next year.     

There is no doubt that New York’s fiscal situation is dire. But the governor’s budget relies almost entirely on dramatic spending cuts, including cuts to K-12 education aid to the state’s poorest children.

Some of the opposition to the ‘millionaires tax’ has been driven by initial reporting that such taxation drives wealthy individuals out of the state, though this claim has since been thoroughly discredited.

In January, Gov. Cuomo explained his personal opposition to extending the millionaires' tax, saying absurdly that “the working families of New York cannot afford tax increases.”  

Frank Mauro, Executive Director of the Fiscal Policy Institute, responded, “It is unfathomable that those who have profited so tremendously from New York’s economic growth over the past two decades are not in a position to aid poor and working New Yorkers in this time of need.”
    
Gov. Cuomo is united with New York's Senate Republicans in opposing extending the tax, but is facing increasingly vocal protests and polls showing that nearly two thirds of New Yorkers are in favor of extending it.

CTJ’s critique of claims that wealthy New Yorkers are fleeing the state’s so-called “millionaires’ tax” was publicized by two media outlets this week.  Similar claims being made in Connecticut and Rhode Island were also shot down in the media.

In last week’s Digest, CTJ pointed out numerous distortions in the Partnership for New York’s claims that wealthy New Yorkers were fleeing as a result of a recent tax increase on high-income earners.  (The Fiscal Policy Institute also issued a detailed rebuttal). 

For starters, the Partnership erroneously claimed that a “9.4 percent decrease in the state's taxpayers who earn $1 million or more” occurred between 2007 and 2009.  But the data it used (but failed to cite) actually show a 9.4% drop in New Yorkers with wealth exceeding $1 million.  Since New York’s income tax obviously applies to income — not wealth — this is an important distinction. 

The Partnership has since revised its report to correct this mistake, but it continues to ignore a much more important one: according to the same dataset, every state in the country saw its number of wealthy taxpayers decline between 2007 and 2009 (due to the recession) and 43 states experienced declines exceeding New York’s 9.4% drop.  In fact, Phoenix International – the firm that released the data – made very clear in its 2009 press release that the U.S. as a whole saw its millionaire population decline by nearly 14%.  So it’s a little odd, to say the least, that the Partnership would interpret New York’s 9.4% rate of decline as providing any evidence that could be useful in its crusade against taxing high-income earners.

Fortunately, Robert Frank at the Wall Street Journal’s Wealth Report quickly publicized CTJ’s analysis, and labeled the Partnership’s migration claims a “myth.”  Frank also followed up with the Partnership’s CEO, who when confronted with the data problems described above retreated by saying: “It’s a very difficult thing to measure… We get a lot of it anecdotally.”

Crain’s New York Business similarly picked up on the CTJ analysis, ultimately declaring that “the nationwide decline suggests that New York lost millionaires primarily because New Yorkers made less money and saw their property values drop during the recession, not because they moved to other states.” 

Crain’s does err, however, in claiming that the data might partially reflect the fact that “New Yorkers could have left the state in mid-2009 and filed 2009 tax returns as residents of their new states.”  The 2009 data in question was actually released in early July 2009, and was left unchanged in the September 2010 update.  It is exceedingly unlikely that a dataset released just two months after the May 2009 enactment of New York’s “millionaires’ tax” could have captured the effects of any tax-induced wealth flight.

In addition to beating back ridiculous claims in New York, the WSJ’s Wealth Report also recently debunked similar claims being made in Connecticut by the Connecticut Policy Institute.  The story is a familiar one:

“How do we know why or even if high-earners moved out? It is possible that some previously high earners simply fell below the $1 million-dollar-a-year mark because their incomes fluctuated. In the land of hedge funds, this seems to be just as likely as people moving to Florida. It also is unclear whether the population of high-earners in Connecticut is aging and simply moved to warmer, more golf-friendly climes...The report doesn’t break down the destinations. Still, it says many go to Florida and New York. Florida, of course, has no state income tax. But New York state has a top tax rate of 8.97% and New York City’s top rate is 3.876%. Combined that is nearly twice as high as Connecticut’s tax. If the rich decide where to live based on taxes, why would they be moving to a higher-tax city? Perhaps because the quality of their life matters as much or more than the quantity of their taxes—up to a point, of course.”

Finally, Rhode Island claims of wealth flight ran into similar resistance in the media when Politifact took a lengthy look at the Ocean State Policy Research Institute’s (OSPRI) migration claims, and ultimately found them to be “false.” 

OSPRI’s report attempts to show that “the most significant driver of out-migration [from Rhode Island] is the estate tax.”  But as Politifact notes, “IRS data cited by OSPRI shows that Florida was increasingly attractive to Rhode Island taxpayers in the years when it had an estate tax. The flow slacked off significantly when the [Florida estate] tax was eliminated. That runs contrary to the trend OSPRI claims to have proven.” 

Moreover, Politifact points out that even the conservative Tax Foundation — hardly a big fan of the estate tax — hasn’t jumped onto the migration bandwagon: “Kail Padquitt, staff economist for The Tax Foundation … said he hasn’t seen any proof that the prospect of paying estate taxes drives people to move.”  We certainly haven’t either.

In the past year, we've documented ad nauseum the lengths that anti-tax advocates will go to in order to convince lawmakers that the so-called "millionaire's tax" is prompting wealthy taxpayers to move to other states. In Maryland, New Jersey and Oregon, these groups have selectively presented data in order to "show" that resident millionaires are packing up their Lear Jets and moving to Florida. And in each case, we've shown that when the data are presented honestly and fully, there's simply no evidence that millionaires are voting with their feet.

But the latest such effort, by the Partnership for New York City, breaks new ground by simply making data up. For example, the report says that "Since the imposition of New York's surcharge in 2009, there has been a 9.4 percent decrease in the state's taxpayers who earn $1 million or more, decreasing from 381,786 in 2007 to 345,892 in 2009." Take a minute and read that quote again. What the Partnership is implying is that millionaires had the magical ability to see into the future and start moving out of New York in 2007 and 2008 as a result of a tax increase that hadn’t even happened yet.

Next, it’s worth taking a closer look at that 381,786 figure, the supposed amount of millionaires in New York in 2007. Interestingly enough there is state-by-state data available from the IRS which shows that there were actually only 375,265 returns with federal adjusted gross income over $200,000 in 2007. Of course, not all 375,265 returns were all millionaires. So the 381,786 figure sited by the Partnership is troubling to say the least.

What is even more troubling is that there isn’t actual data available (from New York or the federal government) for 2009 showing the number of tax returns by income group. Which leaves us with a very troubling question — where does the Partnerships earlier figure of 345,892 millionaires in 2009 actually come from?

The answer: they're using a forecast of the number of households in each state with wealth, not income, of $1 million or more. See the data. Released last September by a marketing firm, these estimates tell us a few interesting things. One is that between 2007 and 2009, the nation as a whole lost 13.9 percent of its net-worth "millionaires" between 2007 and 2009, which makes the 9.4 percent loss for New York seem not that impressive. Another is that 43 of the 50 states lost proportionally more of their net-worth "millionaires" over this period than did New York. So, leaving aside the minor detail that income taxes are based on income rather than wealth, which makes these marketing data utterly irrelevant to the point the Partnership is trying to make, any objective look at this data would suggest that New York is doing better than most other states.

For more on the many flaws of the Partnership’s paper, read this brief from the Fiscal Policy Institute. Suffice to say, the theory that New York millionaires are moving because of a targeted tax increase is based on deeply flawed (and perhaps even made up) data.

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.

In some states, huge budget gaps are making it somewhat difficult to enact the types of large, immediate tax cuts that many lawmakers promised during their political campaigns last year.  Partially as a result, anti-tax lawmakers are increasingly looking toward the longer-term with proposals to cap state spending, cap property tax growth, and mandate a supermajority legislative vote in order to raise taxes.  Four states in particular generated headlines for proposals of this sort over the past week: New York, Wisconsin, Virginia, and North Dakota.

As we mentioned two weeks ago, New York’s Republican-led Senate has already passed constitutional amendments that would impose a TABOR-style spending cap, and a supermajority requirement for raising taxes.  This week, the Senate added to that list by enthusiastically passing Governor Andrew Cuomo’s property tax cap, which would limit property tax growth to 2 percent per year.  As the New York Times pointed out, property tax caps in general are extremely blunt instruments, and this one is particularly worrisome given the lack of exemptions for things like health care, pensions, debt service, or increased enrollment.  Fortunately, all three of these proposals will be less welcome in the state Assembly, though the Assembly’s speaker has expressed an interest in coming to a “common ground with the governor and the Senate on an appropriate property tax cap.”

In Wisconsin, the state’s newly elected Republican governor and Republican legislators have enacted relatively minor business tax cuts that some lawmakers have described as merely symbolic.  Not content with these small victories, Republican lawmakers are now turning to the slightly longer-term, as the state Assembly last week passed a bill that would require a supermajority vote in order to raise taxes during the next two years.  Of much more concern, however, is a proposed constitutional amendment that would permanently impose the same restriction on Wisconsin residents’ elected representatives. That amendment has yet to come up for a vote.

In Virginia, two troubling constitutional amendments made it out of committee last week. One would mandate a supermajority vote to raise taxes and another would impose a TABOR spending cap equal to inflation plus population growth.  Both are being pushed by Del. Mark Cole, and both were the subject of a highly critical editorial in the Roanoke Times this week.

Finally, in North Dakota, a proposal to cap property tax revenue growth at 3 percent per year received a committee hearing this week and will eventually move to the full House for a vote.  Similar proposals have been rejected in each of the last two sessions, though the fate of this one remains unclear.

Hopefully, lawmakers in each of these states will eventually decide against reducing their ability to deal with the difficult and often unforeseen challenges that state and local governments must inevitably confront.

It looks very likely that the question of whether or not to extend a temporary income tax surcharge on New York’s wealthiest households will be a contentious issue as the budget process moves forward in the state.

New York Governor Andrew Cuomo released his budget plan this week.  Sticking to his “no tax increase” campaign promise, Cuomo did not include any significant revenue-raisers and instead chose to close a $10 billion budget gap primarily with massive cuts to education and Medicaid spending.

As a New York Times editorial stated, “without additional revenue… the state’s most vulnerable citizens — the poor, the sick, the elderly and schoolchildren — will inevitably bear the largest burden.”  The editorial endorsed extending the temporary personal income tax surcharge on the state’s wealthiest households, a move also supported by Democratic Assembly members and many advocacy groups who want to lessen the magnitude of proposed spending cuts.  

The temporary high-income tax surcharge was enacted in 2009 to help address New York’s budget crisis at the time and is set to expire at the end of 2011.  But, clearly, the budget crisis is not behind the state and the $2 billion the temporary tax would raise for the coming fiscal year and $4 billion in the following year could go a long way to protecting core state services.  The surcharge applies only to married couples with taxable incomes over $300,000 a year ($200,000 for single taxpayers).  These very same taxpayers will receive a significant federal benefit from the extension of the Bush tax cuts. 

For the sake of ensuring all New Yorkers have access to affordable health care, quality education, and safe communities, let’s hope the state’s lawmakers can agree that their wealthiest residents can afford to pay a little more this year.

Some Americans respond positively to the anti-tax message of the Tea Party, but is anyone willing to accept the cuts in public services that must logically follow? The Tea Party has been specific about cutting taxes but vague about what programs must be slashed in order to balance the government's books. So what will happen if the Tea Party takes power? The recent experience of Nassau County, New York, shows us that the result will be a disaster.

When Tea Party-backed Edward Mangano won his election for the Nassau County Executive as a member of the Tax Revolt Party, it was on a platform of vague promises to cut spending and to repeal a $40 million dollar energy tax.

The voters of Nassau County got what they asked for. Mangano immediately repealed the energy tax, but failed to actually pass any of the substantial spending cuts that he had promised. In doing so, he may have stayed true to his Tea Party roots, but he also drove the second richest county in the nation into fiscal disaster.

With a $175 million dollar gap in the $2.6 billion budget plan, the Nassau County Interim Finance Authority (NIFA), a New York State oversight board, was forced to take control of the county’s finances. NIFA is tasked with stepping in to correct the county’s finances whenever there is a gap of larger than 1 percent, which the current gap dwarfs by almost 7 times.

The situation is so dire that Moody’s is putting the county’s municipal securities on watch for a downgrade, a move that portfolio managers said is rare considering how safe these investments are usually considered.

Despite this, Mangano has refused to yield and in recent days filed suit to stop the takeover, citing his worries that NIFA may force him to raise taxes.

The consensus against Mangano even transcends normal ideological lines, with the New York Times and New York Post editorial pages finding themselves in rare agreement over the irresponsibility of his actions.

In a comprehensive special report, Reuter’s called Nassau County’s experience a “cautionary tale,” saying that the fiscal collapse in Nassau and the subsequent takeover represents a “black eye for the Tea Party.”

As one observer put it, "A lot of people who got elected on this type of anti-tax platform are running into the brick wall of fiscal reality."

Republican lawmakers in four states — Wisconsin, Maine, New York, and Hawaii — are seeking to amend their state constitutions to require a two-thirds supermajority vote in each legislative chamber in order to raise taxes.  Each of these proposals would reduce the ability of these states to provide an adequate level of public services, and would make it significantly more difficult to enact real tax reform that wipes out wasteful tax deductions, exemptions, and credits.

These supermajority requirements would mean that even if state lawmakers representing 65 percent of a state's residents in both chambers, and the governor, all support a revenue increase, it still would not become law.

Besides being blatantly anti-democratic, the supermajority requirement to raise taxes would be particularly damaging during difficult economic times.  State revenues inevitably decline when the economy weakens, and dealing effectively with the resulting revenue shortfall requires a balanced approach relying on both higher taxes and cuts in state services.  A supermajority requirement would make striking this balance far more difficult.

Less obvious is the impact that supermajority requirements have on states’ abilities to reform their tax systems.  As CTJ has explained in the past, state supermajority requirements are one of the most important factors in biasing lawmakers toward pursuing their favorite policy goals via the tax code.  Supermajority requirements make it impossible for a simple majority of legislators to close a tax loophole unless they enlarge another loophole or lower tax rates in order to offset the resulting revenue gain. 

State lawmakers are well aware of the bias that already exists in favor of continuing tax breaks, and have begun crafting their favorite initiatives (e.g. energy subsidies, job-creation incentives, etc.) in the form of tax breaks in order to take advantage of this fact.  The result is the overly complicated, inefficient, and pork-laden tax codes you see in almost every state today.

Maine and Wisconsin are the only two states in the country that flipped from entirely Democratic control to entirely Republican control in last November’s election.  It’s no coincidence that these are also the two states most seriously considering a supermajority requirement.  In both cases, it took almost no time at all for Republicans to realize that a constitutional amendment of this type could allow them to continue implementing their anti-tax agendas long after they’ve been voted out of office.

In New York, a supermajority amendment has already passed the state Senate (along with an extremely ill-advised cap on state spending), though it’s likely to be greeted much less enthusiastically in the Democrat-led Assembly.  The proposal would also have to pass in the next legislature (which convenes two years from now), and be approved by voters before it would become a part of the state’s constitution.

Of the four states where supermajority amendments are being debated, Hawaii’s is by far the least likely to gain traction.  The Hawaii House’s 8 Republican legislators (out of a 51 person chamber) have floated the idea and encouraged the majority Democrats to fold it into their platform.  In a great example of Aloha Spirit, the Republicans have even been nice enough to insist that “Our caucus isn’t saying we need the credit.  What we’re saying is, we need the result.”  Hopefully, Hawaii Democrats — like the lawmakers in the other three states considering these amendments — will politely brush this proposal aside.

Some politicians in state capitals across the U.S. seem convinced that tax cuts for businesses and the wealthy are the best way to accelerate economic recovery. In two states, governors are proposing instead to cut taxes on groceries, which is a more effective, though not exactly flawless, way to help ordinary families. The tradeoff to any tax cut, of course, is unaffordable cuts to essential services including education, public safety, and health care.

In Wisconsin, state lawmakers agreed on a business tax cut that would add about $50 million to the budget deficit.  The Republican controlled legislature and newly elected Governor Scott Walker believe that the tax cuts will leave everybody with more money and leave the state with an improved economy.  Incredibly, Walker’s proposal rests on the assumption that the tax cuts will lure businesses away from Illinois, which recently saw an increase in its income tax, rather than fostering young, developing businesses. 

In Iowa, where a similar $300 million business tax cut is being discussed, critics of Governor Terry Branstad point out that essential social services are being axed in favor of pro-business policies.

In Arizona, Governor Jan Brewer is proposing to cut taxes on high-wage industries while further reducing funding for Medicaid, universities, community colleges, and K-12 education.  

Similar tax cuts are being proposed in New York, Washington, Michigan, Minnesota, and South Carolina. All of these plans prioritize tax breaks for business over providing essential services to those most affected by the economic downturn.  

The Governors of West Virginia and Arkansas have arrived at an entirely different tax-cutting proposal: reducing the sales tax on groceries.  Like lawmakers who support business tax cuts, Governors Tomblin and Beebe believe their brand of tax cuts will circulate quickly throughout the economy, providing necessary relief to the taxpaying public while stimulating the economy. 

Governor Mike Beebe of Arkansas wants to cut the sales tax on groceries by a half-cent and has said it is the only tax cut he will consider this year.  In West Virginia, Governor Earl Ray Tomblin wants to reduce the grocery sales tax from 3 to 2 cents and would ultimately like to see it eliminated entirely.

While the proposals to cut the sales tax on groceries are a welcome development compared to proposed tax cuts for businesses and the wealthy, there are still two problems with them. 

First and foremost, states are in dire need of revenue this year as they face the most significant budget challenge yet since the start of the recession.  Every dollar lost to a tax cut will have to be made up by an even deeper cut in spending. 

Second, reducing the sales tax on groceries is not the most targeted approach available to state leaders looking to support working families.  The poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries. 

Enacting or increasing a refundable state Earned Income Tax Credit (EITC) or other low-income refundable credit would be a more affordable and better targeted alternative to ensure that tax cuts reach low- and middle-income working families.  Tax cuts that directly benefit low-wage workers are especially beneficial to the general economy because low-wage workers immediately spend their refunds out of necessity.  By pumping the money back into the economy, the tax cut goes further in stimulating the economy than tax cuts for the wealthy or businesses.

Instead of pursuing tax cuts for businesses and wealthy individuals, state lawmakers should be working to alleviate hardship on the most vulnerable.  Indeed, the governors in West Virginia and Arkansas may end up being much more efficient at helping their state economies rebound than the “business friendly" governors in Wisconsin and Iowa.

Over the last few weeks, New York Governor-elect Andrew Cuomo has been pushing legislative and union leaders to support his proposal to cap local property tax increases at 2% per year.  The New York Times has described the proposed cap as “tougher than the tax cap efforts in some other states,” and Governor Cuomo’s campaign literature has promised only “narrow, limited exemptions” to the cap.

A spokesman for the Governor-elect said that Cuomo will “move aggressively” to see that this “centerpiece” of his agenda is enacted.  Similar caps have been sought by past Governors in New York, but the Times thinks that “Mr. Cuomo may be facing a more favorable political climate for a cap” than have his predecessors.

In addition to potentially gutting school districts’ most important revenue source, a cap of this sort will also solidify existing inequities between districts.  As Frank Mauro of the Fiscal Policy Institute explains, "when you apply a percentage cap to change, you institutionalize the disparities and you make them worse." Moreover, for fixed-income home-owners and renters who are already facing unaffordable property taxes, capping increases does nothing to remedy the underlying problem.

Instead, as Mauro and others have pointed out many times, a significant enhancement to New York’s circuit-breaker program could assist those New Yorkers most affected by the property tax, without drastically reducing local revenues.

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

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

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

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

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

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

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

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

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

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

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

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

On Tuesday, voters in 37 states went to the polls to vote for Governor. The results of nine gubernatorial races provide a small glimmer of hope for sensible, balanced, and progressive approaches to addressing the next round of state budget shortfalls.  Two candidates campaigned on raising taxes, four incumbents were re-elected after implementing new taxes to close previous budget gaps, and three governors-elect won races against opponents who sought to dismantle progressive tax structures.

As for those governors-elect who have rejected revenue increases, the next four years will be quite a challenge. In Texas, Governor Rick Perry will face a projected two-year $21 billion budget shortfall.  Likewise in Pennsylvania, Governor-elect Tom Corbett is staring at a $5 billion budget deficit next year.  Faced with these problems, this new crop of state executives can take either a dogmatic cuts-only approach or they can opt for a more flexible approach that allows for raising new revenue by closing tax loopholes or implementing other reforms.

Candidates Who Campaigned on Raising Taxes

In Minnesota, Mark Dayton ran for governor on a progressive tax platform, calling taxes “the lubricant for the machinery of our democracy." He has proposed increasing taxes on the wealthiest 5 percent of Minnesotans to raise revenue to address the state’s continuing budget woes and to improve tax fairness.  Although the Minnesota gubernatorial race remains undecided and Dayton may face a recount, Dayton’s small lead demonstrates the support he has received for purposing such a beneficial progressive tax plan.

In Rhode Island, Lincoln Chafee won a three-way race against Republican John Robitaille and Democrat Frank Caprio.  Like Dayton, Chafee championed tax increases aimed at refilling the state’s depleted coffers.  During the campaign Chafee, whose father lost a Rhode Island gubernatorial race 42 years ago after supporting a state income tax, proposed a one percent sales tax on previously exempted items.  Though more likely to adversely affect low-income families than Dayton’s plan, Chafee deserves credit for supporting a moderate tax plan in this cycle of anti-government sentiment.

Candidates Who Defeated Opponents Targeting Progressive Tax Structures

Besides Dayton and Chafee, three other winners on Tuesday night defeated opponents who sought to drastically cut taxes and reduce spending and government services.  In California, Jerry Brown defeated Meg Whitman, who supported a regressive tax cut that would only benefit taxpayers who claim capital gains income. 

In New York, Andrew Cuomo defeated Carl Paladino, who promised to cut taxes by 10 percent and spending by 20 percent in his first year.  Unfortunately, however, Andrew Cuomo has not fully distanced himself from Paladino’s vilification of taxes.  Instead, Cuomo, along with eleven newly elected Republican Governors, has pledged to freeze taxes, vetoing any hike that comes his way.  This absolutist approach does nothing to alleviate the enormous deficit problems faced by each of these states.

In Colorado, Democrat John Hickenlooper defeated Republican Dan Maes and Independent Tom Tancredo.  Maes, who lost voter support after the Republican primary, promised to lower income taxes and cut spending.  As Maes’ popularity decreased, Tom Tancredo began to gain steam, eventually garnering around 37% of the vote.  In their final debate Tancredo proposed removal of “any tax rebates or incentives.”  For his own part, Hickenlooper never committed to raising or lowering taxes, but did call for a "voluntary" tax on the oil and gas industry to fund higher education.

Incumbents Re-elected After Raising Taxes

The Governors of Maryland, Illinois, Arkansas, and Massachusetts pulled off victories after enacting or supporting new taxes during their previous terms. 

In Maryland, Martin O’Malley, who defeated former Governor Robert Ehrlich, oversaw tax increases in his first term to fix a $1.7 billion deficit.  O’Malley’s plan relied in part on progressive tax increases, including a temporary increase in the income tax rate paid by millionaires. While Republicans criticized the tax increases, the citizens of Maryland approved enough to re-elect O’Malley with over 55% of the vote.

In Illinois, Governor Pat Quinn is the likely winner of a tight race against Republican challenger Bill Brady.  Since becoming Governor in the wake of former Governor Blagojevich’s scandal, Pat Quinn has repeatedly proposed to raise income tax rates to fill budget holes.  Quinn would use the revenue raised to fund education.  Meanwhile Brady, Quinn’s opponent, championed tax cuts that included repealing the sales tax on gasoline and eliminating the inheritance tax.

In Arkansas, Republican Jim Keet was soundly defeated by Governor Mike Beebe in his re-election bid.  During his first term, Beebe implemented a significant hike in tobacco sales taxes, raising the tax on a pack of cigarettes by 56 cents.  The increase was designed to increase revenues by $86 million to fund statewide trauma systems and expanded health care coverage for children.

In Massachusetts, Deval Patrick was re-elected Governor after signing last year’s budget that included an increase in the sales tax rate. Patrick also showed interest in improving fairness in Massachusetts’ tax code. Bay State voters rewarded Patrick for his tough decisions by handily re-electing him.

New York’s GOP gubernatorial candidate, Carl Paladino, has spent the past month pledging to cut taxes by 10 percent and slash state spending by 20 percent to address the state’s looming budget shortfall. The details of his tax cuts have been sparse, though in campaign stops he has referred to cutting personal income tax rates, reducing corporate minimum taxes, and eliminating the corporate franchise tax for manufacturers.

Most recently, Paladino has admitted that his plan to reduce spending by 20 percent in one year is “unrealistic” because “closing state agencies, cutting the workforce and trimming Medicaid takes time.”

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.

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.

Nearly breaking the record for delay, the New York Senate passed the final piece of its budget on Tuesday night. The most significant components of the $1 billion-plus revenue measure are the elimination of the sales tax exemption on clothing and footwear below $110 and a temporary reduction in the itemized charitable contribution deduction for households with incomes above $10 million. The bill however did not include a measure which had been considered to change the taxation of out-of-state hedge fund managers.

The legislation, which passed 32 to 28 on party lines, also includes a series of smaller measures such as expanded tax breaks for film production, an increase in the taxation of video gambling, new rules allowing casinos to stay open later, and laws forcing online travel companies to collect sales taxes on hotel rooms. The measure did not, however, include a provision allowing State of New York University schools to raise tuition rates.

The change in the itemized charitable deduction would raise $100 million in revenue by reducing the deduction from 50% to 25% for households with incomes above $10 million for three years including 2010. This builds on a change enacted last year which completely eliminated the use of itemized deductions for households with incomes over $1 million except for allowing them to deduct a maximum of 50 percent of their charitable contributions.

The failure to keep the $50 million tax change affecting out-of-state hedge fund managers represents a “rare concession” (in the words of The Wall Street Journal) by the New York Legislature to the wealthiest income earners. The measure would have changed the law to tax the carried interest of out-of-state hedge fund managers at ordinary income rates rather than the lower capital gains rates. It ran into controversy as the managers met with Connecticut officials to show their alleged willingness to take their businesses out of New York.

Besides the larger budget passage, the New York Senate also approved two other bills with important budgetary impacts. The first would allow for across-the-board cuts in spending if federal Medicaid and education funding is not approved by Congress (which seemed more in doubt before the Senate approved it Thursday). More problematically, the Senate passed a 4% property tax cap, which, although relatively loose compared to the one passed in New Jersey, still represents bad policy. If passed by the New York Assembly, this measure would only provide poorly targeted tax cuts while restricting the flexibility of local government to raise the revenue needed to provide basic services.

With less than two weeks to go before setting the record for lateness in completing its budget, Democratic Governor David Paterson called the New York state legislature into special session on Wednesday in order to close the remaining $1.5 billion budget deficit.

The New York legislature has struggled for months to close the $9.2 billion budget gap, working well past the initial budget deadline of April 1st. In order to finish the budget and push his own initiatives, Gov. Paterson has vowed to continue to keep up the special sessions until the budget is done, even if it means pursuing court orders to enforce participation.

The Governor is pushing for a new tax on sugary drinks, tuition increases for state colleges, allowing grocery stores to sell wine, and property tax caps that have already been rejected by the Assembly.

On July 1, 2010, the New York State Assembly passed an alternative revenue measure to close the budget gap. The bill raises revenue primarily through suspending the sales tax exemption on clothes and footwear under $110 from October to March, deferring business tax credits, reducing itemized deductions for those with an adjusted gross income above $10 million, and by limiting the STAR property tax exemption program to those with incomes under $500,000.

The Senate, on the other hand, left for the July 4th holiday weekend without having passed the revenue part of the budget. The roadblock stopping the passage of the bill is two Democratic lawmakers who oppose the effort to allow state colleges to adjust their tuition. With the legislature back in session, Gov. Paterson is hoping the Senate will take a second look at proposals that have failed so far in the Assembly, using the divide to create a competing revenue proposal in the Senate that is closer to his plan. On Thursday, Gov. Paterson met with lawmakers to come up with a compromise on the issue of state college tuition in hopes of finally finishing the budget. 

New York is not the only state stuck in budget gridlock. In California, legislators are going into their fifth week of the new fiscal year without a spending plan.

The organization New Yorkers for Fiscal Fairness has put out a useful outline of the measures that the New York legislature should consider in dealing with the current budget gap and in making future budgets.

The New York Fiscal Policy Institute (FPI) released its twentieth annual budget briefing last week, including, among other things, a list of criticisms of Governor Paterson’s proposed property tax circuit breaker program.  This list serves as a useful checklist for good circuit breaker policy across the country.

Among the FPI’s criticisms of the Governor’s plan are that it:

- Excludes county and municipal property taxes, instead applying only to school property taxes;
- Attempts to provide some relief to a large group of taxpayers, rather than targeting meaningful benefits more toward households struggling to make ends meet;
- Excludes renters;
- Utilizes different income brackets for different regions of the state, thereby creating complications and inequities;
- Reduces the size of the tax credit for taxpayers in districts where the school tax levy has grown faster than inflation, while increasing it for those taxpayers whose levy has grown more slowly.

When property values inevitably rebound from the recent bursting of the housing bubble, property taxes will almost certainly become a hot button issue in the states once again.  Enacting a circuit breaker (or strengthening an existing one) is the best possible route for states to take when this occurs.  For more on circuit breakers, be sure to read ITEP’s policy brief.

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.