Dell’s decision to close its Winston-Salem North Carolina factory provides one of the most visible examples to date of the failure of state and local tax subsidies as a tool of economic growth.  The subsidy given to Dell to open this factory was valued at over $300 million, and was described by Good Jobs First's Greg LeRoy as one of the highest ratios of subsidy – to – private investment ever received.  Be sure to read this blog post from Good Jobs First for some insights on this important story.  This closure is sure to have a significant impact on the nationwide debate over economic development subsidies.

States policymakers across the country are looking to the future and anticipating another year of tough budget decisions about whether to cut services or increase taxes. Two recent pieces from research groups in Georgia and North Carolina make excellent points about the importance of considering tax increases and their impact on economic development.
 
Last week, the Macon Telegraph published an editorial by Alan Essig, Executive Director of the Georgia Budget and Policy Institute. Essig notes that there "is more to economic development policy than having the lowest tax rate. Economic development depends on, at the least, adequate public structures; without them, it is difficult to recruit and grow businesses in Georgia, no matter how low taxes are." Racing to the bottom in terms of tax rates is hardly the best economic development decision a state can make.
 
North Carolina legislators did take a balanced approach to filling their state's budget shortfall by passing both tax increases and budget cuts. Yet, this hasn't stopped anti-taxers from crying "job killing taxes." The North Carolina Budget and Policy Center recently released a report debunking the myth that state tax increases cause job losses. Read the Center's report, Wishful Thinking: Claims That State Tax Increases Cause Job Loss are Unfounded.

 

Governor Bev Perdue signed the budget passed by North Carolina's legislature last week. The compromise budget raises nearly $1 billion in needed revenue (about 23% of the state's budget shortfall for the fiscal year). While we can't describe all the revenue raisers as pleasingly progressive (the sales tax and various excise taxes were increased), legislators did opt for a progressive income tax surcharge targeted to upper income taxpayers instead of an across the board surcharge.

The North Carolina Budget and Tax Center identifies the silver lining of the budget agreement. First, new revenue was raised, and second, there is new momentum for comprehensive tax reform.

Read more about BTC's take on the compromise here.

A broad base is an essential element of a good tax system. Fulfilling the principles of "horizontal equity," and "economic neutrality," both depend upon the use of a broad tax base. Unfortunately, the temptation to carve out special tax breaks for politically popular causes, or for powerful constituencies, if often irresistible to lawmakers.

But efforts are currently underway in Michigan to undo some of these special tax breaks, and a tax reform commission in California is at least pretending to consider a reform that would help pave the way for a careful reconsideration of many of that state's tax breaks. Furthermore, policymakers in North Carolina have expressed a strong desire to return to the task of base-broadening this fall, even as efforts to include base-broadening revenue-raisers in this year's budget agreement seem to have failed.

Earlier this month, Michigan Governor Jennifer Granholm stated her desire to eliminate between $500 million and $1 billion in special tax breaks as a way to reduce the state's looming deficit. While accomplishing such a feat will inevitably involve an uphill political battle, Michiganders should be grateful that the Michigan League for Human Services (MLHS) is closely following the action. MLHS Chairman Lynn Jondahl hit the nail on the head when he urged lawmakers to ask themselves, in reference to the state's film tax credit, "Would you be willing to appropriate $6 million to MGM, say, to make this film in Michigan? We're paying you to do something in lieu of filling pot holes or funding mental health treatment. Which do we value more?"

In California, a tax reform commission that so far has shown interest mostly in cutting the progressive income tax is at least listening politely to a different idea. The so-called "blue proposal" currently before the commission, presented as a less regressive alternative to the much-ballyhooed flat-tax proposal supported by Governor Schwarzenegger, would require special tax breaks to be presented in the Governor's budget, saddled with a "sunset" provision, and evaluated based on their effectiveness in achieving their stated objectives. Of course, adopting this approach will amount to rearranging deck chairs on the Titanic if the commission acts on its apparent zeal for moving away from income taxes and towards regressive consumption taxes. And the "blue proposal" has its warts as well: provisions that would impose a spending cap and create a new "net receipts" tax in lieu of the current corporate income tax have progressives feeling, well, blue. But the tax-expenditure element of the "blue proposal" is a welcome dose of thoughtful policy at a time when California surely needs it.

Finally, in a recent development out of North Carolina, base-broadening appears to be off the agenda for the immediate future, though policymakers have expressed a strong interest in returning to the issue this fall. When they do return to the issue, they would be wise to review these recommendations, recently released from the North Carolina Budget and Tax Center, explaining how to broaden the state's tax base while simultaneously offsetting any potentially harmful effects on low- and moderate-income families.

Last week, we told you about North Carolina Governor Beverly Perdue becoming more realistic about the need for tax increases to balance her state's projected $4.5 billion shortfall. Earlier this year the state's Senate Finance Committee released their Tax Modernization and Simplification Plan that includes broadening the state's sales tax base, moving toward an adjusted gross income base for purposes of calculating state income taxes, and lowering the state's income tax rates. (For a complete analysis of the Senate proposal see this informative brief from the North Carolina Budget and Tax Center.)

Now there's more good news. This week the House Finance Committee passed their own proposal which included increasing sales and income taxes, and also broadening the sales tax base to include services. No doubt, North Carolina lawmakers are making difficult decisions about budget priorities, but having tax increases on the table makes their jobs much easier.

A new brief from the North Carolina Budget and Tax Center makes a strong case for increasing taxes to solve the state's budget crisis. The report rightly argues that economic times are so bad, resulting in such low revenue projections across the country, that policymakers aren't left with any other option but increasing taxes. In fact, the report finds that, "No state with a projected gap as large as North Carolina is attempting to balance its budget with spending cuts alone."

Apparently, Governor Beverly Perdue is coming around to this thinking too, saying that tax increases may be necessary to close the state's projected $4.5 billion shortfall which is equivalent to 20% of the state's budget. The outcome of the state's budget debate remains to be seen. But with Senate leaders and now apparently the Governor interested in raising taxes, perhaps it's not too much of a leap to predict that North Carolina will join with other states that have raised taxes to address dire shortfalls.

North Carolina Governor Beverly Perdue has presented a $21 billion budget proposal that would cut spending across the board and relies on regressive revenue-raisers to plug the state's budget shortfall. Governor Perdue is also proposing to cut spending by $1.3 billion in each of the next two years. On Tuesday she said, "The budget I'm releasing today, I believe, makes strategic investments that will create jobs and increase overall per-student spending, and is a balanced budget." But it's clear that the Governor is missing a real opportunity to be forward-thinking. She could have chosen to improve the state's tax structure through sales tax base expansion and increased progressivity of the income tax, which would offset the regressive effects of her proposed increases in the state's cigarette and alcohol taxes. Let's hope that the Governor's budget isn't the last word on how to fix the state's budget shortfall.

In recent weeks, North Carolina Governor Mike Easley signed into law the state's 2009 budget. Totaling around $21.3 billion, the legislation is supposed to respond to the current economic climate, but falls short.

Lawmakers had earlier proposed two new tax cuts, one regressive and one progressive. The regressive cut was a repeal of the state's gift tax. North Carolina is one of the last remaining states with a gift tax and, as CTJ has previously pointed out, the tax is absolutely necessary to ensure that the estate tax is collected. If a state does not tax large gifts, wealthy residents can avoid the state's estate tax by giving their assets to their children before they die.

The progressive cut proposed earlier was an increase in the state's earned income tax credit (EITC). The credit, which will increase from 3.5% to 5% of the federal EITC, will provide relief for the working poor.

Neither progressive advocates nor anti-tax advocates got everything they wanted in the budget deal that was approved. Both tax cuts were delayed until 2010. That means that wealthy North Carolinians will be able to avoid the estate tax if they wait until 2010 and then give their assets to their children. It also means that the needed help provided by a boost in the EITC will not yet be available at a time when prices are rising and increasingly burdening low-income North Carolinians.

The fact that these tax cuts were delayed is a result of the General Assembly's desire to balance the budget. But as CTJ has noted, even a 5% state EITC in North Carolina is not enough. In order to offset the burden of state and local taxes for a family of four, the EITC must be set at no less than 11% of the federal EITC. Next year, lawmakers should reject cuts in the gift tax that will result in reduced estate tax collections and instead focus on the needs of the working poor.

As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.

North Carolina is suffering from an increase in the cost of asphalt. Asphalt is made of petroleum derivatives, and its cost has increased 25% since the end of 2006. This is causing the state to cut back on road repaving projects which are likely to cost more money to accomplish the longer they go unrepaired.

In Missouri, the state has a projected $1 billion transportation fund deficit. It is only expected to be able to meet 40% of obligations starting July 2009. In spite of this, all three major candidates for Missouri Governor pledge not to raise the state motor fuels tax. The two Republican gubernatorial contenders, Sarah Steelman and Kenny Hulshof suggest dedicating general funds revenue to transportation and privatizing some state roadways respectively.

Virginia is currently confronting a "growing bridge and road maintenance shortfall" which is depriving money from road construction. Governor Tim Kaine has recently released a proposal to raise vehicle registration fees and sales taxes on vehicles, while keeping the state fuel tax unchanged.

These states have in common a tendency to tinker around the edges of transportation funding policy while failing to address the taboo topic of gas taxes. The root cause of these transportation troubles is that the gas tax has been kept too low to finance the transportation needs in all these states.

Most states have a "per gallon" gas tax that leaves them unable to cope with rising costs of transportation as inflation erodes the value of the tax collected on each gallon. North Carolina's gas tax has been capped at 29.9 cents since 2006 due to pressure from anti-tax activist Bill Graham, although it was formerly readjusted to reflect price changes twice a year. Missouri has not raised its gasoline tax since 1996 and Virginia's gasoline tax has stayed constant since 1992. None of these states index their gasoline tax either to transportation costs or the general inflation rate.

Sometimes even a major crisis is not enough to get politicians to consider gas tax adjustments. Due to Iowa's recent flooding, Iowa's legislature is likely to convene an emergency session to confront their newly pressing infrastructure needs and find sources of funds for disaster recovery. Legislators rejected efforts to raise the gasoline tax earlier in the year to fill the $200 million highway maintenance deficit, opting instead to tinker around the edges and simply raise vehicle registration fees. But even now, the Iowa House Majority Leader considers a hike in the gasoline tax "an absolute, absolute last resort," with gas selling for $4/gallon.

Even a spectacular tragedy is sometimes not enough to get politicians to wake up. Before the August 2007 Minnesota I-35W bridge collapse, Governor Tim Pawlenty vetoed a bill raising the gasoline tax 7.5 cents per gallon, calling it "an unnecessary and onerous burden" as consumers were paying $3 per gallon for gasoline in May 2007. This was in a state that hadn't adjusted its gasoline tax in 19 years. Not even a bridge collapse and transportation funding shortfall of nearly $2 billion were enough to change the governor's position that gas taxes are anathema. Needed road and bridge repairs were being neglected, with obviously dire consequences. Fortunately, Minnesota lawmakers were finally able to override Governor Pawlenty's veto in February, raising the gas tax by 8.5 cents.

For many, there will never be a "right time" to raise the gas tax. It wasn't the right time at $2 per gallon in 2005 when Gov. Pawlenty first vetoed a gas tax increase, nor at $3 per gallon in 2007, nor now at $4 per gallon. In fact, it's never the "right time" to raise any kind of tax... no one wants to pay more than they have to. But sometimes in order fund vital services policymakers need to come together and bite the bullet as they did in Minnesota, even if it is politically difficult.

Opponents have sometimes successfully argued that raising the gasoline tax would be regressive and particularly damaging to the economy in such a car-dependent nation. But gas tax increases can be done in conjunction with progressive measures, such as raising the Earned Income Tax Credit and creating a refundable gas tax credit as was done in Minnesota and proposed in Virginia.

The North Carolina House of Representatives this week approved and sent to the Senate a measure that would raise the state's earned income tax credit (EITC) from 3.5 percent to 5.0 percent of the federal EITC. The measure is bittersweet: assistance to the working poor but still not enough to lift families out of poverty and the grasps of regressive taxation.

A 10 percent state EITC in North Carolina would be more effective and would cost less than one percent of the current budget, according to estimates by the NC Justice Center. Research suggests that, among its many benefits, the EITC increases workforce participation and encourages asset building. Some surveys conclude that families invest their EITCs in education, savings accounts and transportation improvements, investments that, in turn, promote economic security among low-income workers.

At the state level, an EITC helps to offset the regressivity of the sales and property taxes, the burdens of which fall primarily on low-income earners. In North Carolina, the wealthiest one percent of families spend 6.1 percent of their incomes on state and local taxes. Compare that with the poorest fifth of families in the Tar Heel state, who devote 10.6 percent of their earnings to state and local taxes.

One in 5 North Carolinians benefit from the EITC. If the bill passes, under North Carolina's new EITC structure these residents would be able to receive from the state an additional credit equal to 5 percent of their federal EITC. Unfortunately, even with this boost from the state, low-income residents would still be subject to regressive sales taxes greater than this amount. A report by the NC Justice Center estimates that an 11 percent state EITC would be needed to offset the burden of state and local sales taxes on a family of four.

The North Carolina Senate seems to think that cutting taxes for the wealthy should be one of its top priorities. This week the Senate passed a bill which if approved by the House and Governor Mike Easley, would repeal the state gift tax.

In response, the North Carolina Budget and Tax Center released a brief discouraging the House and Governor from approving this bill as part of its overall budget. The brief explains that the gift tax is a progressive tax and that repealing it would negatively impact estate tax collections as more wealthy people convert their estates into gifts to reduce their taxable wealth. Estimates indicate that about $18 million would be lost each year if the gift tax were repealed, but as the North Carolina Budget and Tax Center points out, this number underestimates the true cost because it does not include revenue lost from increased estate tax avoidance. Repealing this tax would not only increase tax unfairness in North Carolina and harm state revenues, but would also send precisely the wrong message at a time of economic difficulty and ever increasing income inequality.

Instead of providing tax giveaways to those who need them the least, North Carolina could target its tax cuts more carefully by increasing the state Earned Income Tax Credit (EITC). The House appears set to approve precisely that, having proposed an increase in the EITC from 3.5% to 5% of the federal credit. Interestingly enough, the price tag of increasing the EITC is around $20 million -- roughly equal to the amount associated with the gift tax repeal. As the NC budget goes up for consideration, lawmakers should re-evaluate their priorities; the EITC rewards work rather than wealth by providing a tax credit to working low-income families. There is no better time than now to expand such a program. As Rep. William Wainwright points out, the "rise in gasoline prices, food prices, pharmacy prices, [and] trying to pay mortgages" provides excellent reason for "trying to find progressive ways to help [the working poor] make some household ends meet."

Just in time for tax day, recent reports from California, Connecticut, and North Carolina remind us that the overall distribution of taxes in most states is tilted heavily in favor of the wealthiest. Those least able to pay almost always pay a much larger share of their incomes towards taxes. For instance, California's tax system, despite featuring a highly progressive income tax, requires the poorest fifth of taxpayers to devote 11.7 percent of their incomes to taxes on average. At the same time, the richest one percent of Californians pays just 7.1 percent of their incomes in taxes.

Indeed, Meg Gray Wiehe of the North Carolina Budget and Tax Center could have been writing about almost any state when she recently opined that "when lawmakers consider any changes to North Carolina's current revenue system, they should account for the effect the change will have on low- and moderate-income taxpayers. If fairness is not at the center of every tax policy debate, reform efforts will fall short on achieving long-term adequacy. Focusing on fairness will help the state meet its needs without relying on those with the least to contribute." To read more about how states can make their tax systems more equitable, see ITEP's Guide to Fair State and Local Taxes.

North Carolina took a large step forward towards tax fairness this week when both houses passed a new budget that includes a state Earned Income Tax Credit, or EITC.North Carolina now joins 20 other states that offer an EITC.These credits receive broad bipartisan support in so many states because of their proven track record of success.The EITC works by rewarding work, making sure that working low-income families aren't taxed further into poverty.Since the measure is targeted only at these families, it provides much more benefit per dollar of state revenue than almost any other anti-poverty program.

Despite all this, however, some legislators in Michigan want to delay the introduction of that state's EITC.Last year, the state passed an EITC for the first time.Now, proponents of delaying the EITC argue that, given the state's current business and fiscal problems, the government simply can't afford the tax break.Of course, many of these senators are the same ones who have been advocating against any new business taxes in the state to replace revenue lost with the repeal of the Single Business Tax.It's true that the state is not in good fiscal condition, but during economic downturns anti-poverty measures become more important, not less.Michigan voters should urge their lawmakers to keep their promise to the working poor.For more information on state EITCs, try this helpful website.For more information on how EITCs work, read this ITEP policy brief.

North Carolina policymakers appear to be deeply divided over the state budget and much is at stake for low- and middle-income taxpayers. In one corner, the state House of Representatives and the Governor are advocating budget packages that include extensions of temporary tax rate hikes in both the income and sales tax. House leaders say this revenue is necessary to help pay for the growing needs of the state. An exciting development in the House budget is the North Carolina Rewarding Work Tax Credit (a state version of the Earned Income Tax Credit). In the other corner, the state Senate passed a budget which allows the temporary tax hikes to expire and there's no targeted tax credit included. Earlier this week the House voted to reject the Senate's budget, so now the real show down begins. Policymakers must work quickly if they hope to pass a two-year budget by July 1 when the fiscal year begins.