While major tax swap proposals have collapsed this year in Louisiana, Nebraska and Ohio, plans to pay for personal and corporate income tax cuts with a greater reliance on a regressive sales tax are still very much alive in North Carolina. This week, North Carolina’s Senate President and Senate Finance chairs released the latest version of a tax swap for the Tarheel State which they named the Tax Fairness Act. They are billing it as the largest tax cut in the state’s history.

Details of the plan are lacking despite the unveiling of a flashy website showcasing a tax calculator and video of the Senate President pontificating about the “plan.”  Vaguely, we know the proponents intend to flatten the income tax, reduce taxes on businesses, eliminate the estate tax, and expand the sales tax base to most consumer services, food and prescription drugs.

It is clear that the result of the plan will be threefold: a significant tax hike on low- and middle-income families; a large tax cut for the state’s wealthiest households and profitable corporations; and a loss of more than $1 billion in revenue annually for vital public investments.

An editorial in Wednesday’s Raleigh News and Observer suggested the proposal should be renamed the “Let Working Families Pay More And The Rich Pay Less Act”.  Indeed. Here is more from the editorial, which does an excellent job explaining the problems with the State Senate tax swap proposal:

“What’s being sold is North Carolina’s future. Berger, Rucho and Rabon promise it will be a future in which tax cuts for the wealthy and corporations will bring a flowering of new jobs. That promise, so often tested and always found wanting, will fail again. Tax cuts don’t create jobs, and they aren’t a primary reason why businesses come to this or any state. What fuels an economy and fosters business growth are a strong infrastructure, a clean environment and good schools. Those things would be undermined by tax cuts that would reduce public spending in a growing state with growing needs.

"To Berger, the new arrangement would be fair because the sales tax would be applied more broadly, services would be taxed equally and everyone would pay according to what they consume. “The more you spend, the more you pay,” he said. “The less you spend, the less you pay.” Berger tries to sweeten the bitter realities of the plan by touting the reduction in tax revenue as “the largest tax cut in state history.” But that claim doesn’t define the effect by income. Senate Democratic leader Martin Nesbitt did. “This plan actually amounts to the largest tax increase in North Carolina history on the middle class and working families,” he said....

Lowering income taxes on the rich and expanding the sales tax paid by all doesn’t make taxation fairer, no matter what you call it.”

This week Missouri is offering a sales tax holiday on energy efficient appliances. Not only are these holidays costly for state budgets, they are poorly targeted. That is, it’s generally wealthier folks who have the cash flow flexibility to time their purchases to take advantage of these holidays, when it’s poorer residents who feel the brunt of sales taxes in the first place. To learn more about why these holidays aren’t worth celebrating, check out The Institute on Taxation and Economic Policy’s (ITEP) policy brief here (PDF).

Here’s a great investigative piece from the Columbus Post Dispatch about the nearly $8 billion in tax code entitlements (aka tax expenditures) Ohio currently offers. The state needs to closely study these tax expenditures and determine if they are actually producing the economic benefits promised. Before debating extreme income tax rate reductions, Ohio lawmakers should also take a look at this ITEP primer on what a thoughtful, productive discussion of state tax expenditures looks like.

In this Kansas City Star article, ITEP’s Executive Director, Matt Gardner, talks about the fate of many radical tax plans this year in the states. “The speed with which these plans have fallen apart is as remarkable a trend as the speed with which they emerged,” he says. Kansas and its budget crisis have become a cautionary tale for other states considering tax cuts, but even the latest plans passed by the Kansas House and Senate are radical and could eventually lead to the complete elimination of the personal income tax.

Criticism of the tax cuts enacted in Kansas last year continues to mount.  We already wrote about Indiana House Speaker Brian Bosma’s caution that his state might become another Kansas, but now a number of media outlets have picked up on the fact that both the Center on Budget and Policy Priorities and the Tax Foundation called that Kansas tax cuts the “worst” (ouch!) state tax changes enacted in 2012.

Watch out, North Carolinians! It appears that Americans for Prosperity (AFP) is coming to town to the tune of $500,000 to pay for town hall meetings, “grassroots” advocacy and advertising all to support the dismantling of the state’s tax structure. Let’s hope the facts can defeat AFP’s cash.

On April 15, the majority of Americans file their income taxes, federal and state. As CTJ and ITEP demonstrate in their annual Who Pays Taxes in America, state tax systems are overwhelmingly regressive and the federal system just barely makes up for that. Today we highlight some great, creative efforts in a few states promoting the importance of state tax fairness.

Michigan: The Michigan League for Public Policy organized a social media campaign and video called “Pay it Forward Michigan.” The League explains that “its aim is to remind us about the good things our tax dollars create or protect — clean water, parks, good schools, safe streets, good roads, protection for children, great universities, the arts, bike paths, pristine beaches and more.”

North Carolina: Russell the Public Investment Hound was back and starring in a new film, The Great Tax Shift.  Also, check out this tax day Fair Fight Luchadora (Mexican wrestling) showdown that was staged across the street from the North Carolina General Assembly building. From the press advisory: “Tax Day is a reminder that wealthy and powerful special interests aren’t made to pay their fair share because too few lawmakers in Raleigh and in D.C. care about being champions of the People who elected them. This year, working people will get to settle the score!” Spoiler alert: the people’s champ won!

Ohio: Amy Hanauer of Policy Matters Ohio writes in the Cleveland Plain-Dealer about why income tax cuts won’t help the state’s economy, and highlights research from ITEP to make her case.  She also shares a personal experience with a fire in the basement of her home just days before Tax Day in 2001. “The firefighters arrived in minutes and put out the still-tiny fire ... and I suddenly had a more vivid picture of what my un-mailed taxes would pay for. Twelve years later, I can thank countless teachers, crossing guards, snowplow drivers, police officers, water inspectors and others for helping keep my kids educated, protected, safe and happy in our community.”

Wisconsin: Ever wonder what Wisconsin income taxes help fund? Read all about it here and check out the gorgeous infographic showing how tax revenues are an economic investment.

Photo courtesy of FairFight North Carolina.

Note to Readers: This is the last in a six part series on tax reform in the states. Over the past several weeks CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) has highlighted tax reform proposals and looked at the policy trends that are gaining momentum in states across the country.

Lawmakers in at least six states have proposed effectively cutting taxes for moderate- and low-income working families through expanding, restoring or enacting new state Earned Income Tax Credits (EITC) (PDF). Unfortunately, state EITCs are also under attack in a handful of states where lawmakers are looking to reduce their benefit or even eliminate the credit altogether.

The federal EITC is widely recognized by experts and lawmakers across the political spectrum as an effective anti-poverty strategy. It was introduced in 1975 to provide targeted tax reductions to low-income workers and supplement low wages. Twenty-four states plus the District of Columbia provide EITCs modeled on the federal credit. At the state level, EITCs play an important role in offsetting the regressive effects of state and local tax systems.

Positive Developments

• Last week, the Iowa Senate Ways and Means Committee approved legislation to increase the state’s EITC from 7 to 20 percent. Committee Chairman Joe Bolkcom said, “This bill is what tax relief looks like. The tax relief is going to people who pay more than their fair share.”

• The Honolulu Star-Advertiser recently reported on the push to create an EITC and a poverty tax credit (PDF) in Hawaii. The story cites data from ITEP showing that Hawaii has the fourth highest taxes on the poor in the country and describes the work being done in support of low-income tax relief by the Hawaii Appleseed Center.  The poverty tax credit would help end Hawaii’s distinction as one of just 15 states that taxes its working poor deeper into poverty through the income tax.

• In Michigan, lawmakers are looking to reverse a recent 70 percent cut in the state’s EITC.  That change raised taxes on some 800,000 low-income families in order to pay for a package of business tax cuts.  Lawmakers have introduced legislation to restore the EITC to its previous value of 20 percent of the federal credit, and advocates are supporting the idea through the “Save Michigan’s Earned Income Tax Credit” campaign. 

• Pushing back against New Jersey Governor Christie’s reduction of the EITC from 25 to 20 percent, last month the Senate Budget and Appropriations Committee approved a bill to restore the credit to 25 percent. Senator Shirley Turner, the bill’s sponsor, said there was no reason to delay its passage as some have suggested because low-income New Jersey families need the credit now.  "People would put this money into their pockets immediately. I think they would be able to buy food, clothing and pay their rent and their utility bills. Those are the things people are struggling to do."

• Oregon’s EITC is set to expire at the end of this year, but Governor Kitzhaber views it as a way to help “working families keep more of what they earn and move up the income ladder” so his budget extends and increases the EITC by $22 million. Chuck Sheketoff with the Oregon Center for Public Policy argues in this op-ed, “[t]he Oregon Earned Income Tax credit is a small investment that can make a large difference in the lives of working families. These families have earned the credit through work. Lawmakers should renew and strengthen the credit now, not later.”

• In Utah, a legislator sponsored a bill to introduce a five percent EITC in the state. The bipartisan legislation is unlikely to pass because of funding concerns, but the fact that the EITC is on the radar there is a good development. Rep. Eric Hutchings said that offering a refundable credit to working families “sends the message that if you work and are trying to climb out of that hole, we will drop a ladder in."

Negative Developments

• Last week, North Carolina Governor McCrory signed legislation that reduces the state’s EITC to 4.5 percent. The future looks grim for even this scaled down credit, though, since it is allowed to sunset after 2013 and it’s unlikely the credit will be reintroduced. It’s worth noting that the state just reduced taxes on the wealthiest .2 percent of North Carolinians by eliminating the state’s estate tax, at a cost of more than $60 million a year. Additionally, by cutting the EITC the legislature recently increased taxes on low-income working families, saving a mere $11 million in revenues.

• Just two years after signing legislation introducing an EITC, Connecticut Governor Dannel Malloy is recommending it be temporarily reduced “from the current 30 percent of the federal EITC to 25 percent next year, 27.5 percent the year after that, and then restoring it to 30 percent in 2015.” In an op-ed published in the Hartford Courant, Jim Horan with the Connecticut Association for Human Services asks, “But do we really want to raise taxes on hard-working parents earning only $18,000 a year?”

• Last week in the Kansas Senate, a bill (PDF) was introduced to cut the state’s EITC from 17 to 9 percent of its federal counterpart. This would be on top of the radical changes signed into law last year by Governor Sam Brownback which eliminated two credits targeted to low-income families including the Food Sales Tax Rebate.

• Vermont Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs, a move described as taking from the poor to give to the poor. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute cites ITEP Who Pays data to make the case for maintaining the EITC.  Calling the Governor’s idea a “nonstarter,” House and Senate legislators are exploring their own ideas for funding mechanisms to pay for the EITC at its current level.

A new report from the Center on Budget and Policy Priorities (CBPP) outlines the anti-tax agenda of the American Legislative Exchange Council (ALEC) and ALEC scholar and economist, Arthur Laffer.  It explains the multitude of problems with their policy recommendations and the so-called research they produce to make the case for those recommendations.  The CBPP report builds on the Institute on Taxation and Economic Policy’s (ITEP) work debunking Arthur Laffer as it examines the “weak foundation of questionable economic and fiscal assumptions and faulty analysis promoted by ALEC and its allies.”

The DC Fiscal Policy Institute explains how closing corporate tax shelters has significantly improved the District of Columbia’s finances.  The city saw its strongest growth in corporate income tax collections in almost two decades, due in part to a reform called “combined reporting” (PDF) that makes it more difficult for companies to disguise their profits as being earned in other states, particularly those with low or no corporate income tax.

This Columbus Dispatch article cites academic research, policy experts and the Congressional Budget Office to examine Ohio Governor Kasich’s repeated assertion that tax cuts lead to jobs, including critiques that “when one dives deeper into the numbers, the correlation between income-tax cuts for small-business owners and more jobs is strained at best.”  The story also covers that larger supply-side economics debate, which the Institute on Taxation and Economic Policy (ITEP) has engaged with here and elsewhere.

Tax hikes on low- and moderate-income working families are under debate in both Vermont and North Carolina where lawmakers have proposed reducing the benefit of their states’ Earned Income Tax Credits (EITCs) (see this PDF on state EITC policy). Vermont’s Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs. In North Carolina, lawmakers are advancing a bill that would cut the EITC from 5 to 4.5 percent of the federal credit and potentially let it expire altogether – a rejection of Washington’s recent five-year extension of a more robust federal EITC. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute as well as a new brief from the North Carolina Budget and Tax Center both cite ITEP’s Who Pays data to make a case for why each state should maintain its EITC.

North Carolina’s newly-elected Governor, Pat McCrory, is keeping everyone guessing about his plans for tax reform in the Tarheel State.  During his state of the state address this week, McCrory said tax reform would be a priority of his administration but was short on specifics, saying only that he wants to lower rates, close loopholes and make North Carolina’s tax code more business friendly. The state’s Senate leadership has been touting a plan to eliminate the personal and corporate income taxes and replace the lost revenue with a higher sales tax and new business license fee.  It remains to be seen whether the Governor will follow the Senate’s lead or puts forth his own version of reform.

Lawmakers in North Carolina are looking seriously at repealing the state’s personal and corporate income taxes, and replacing them primarily with a larger sales tax.  As is often the case with plans to gut the income tax, the proposal is being sold as a way to “kick-start” the state’s economy.  In an attempt to bolster that argument, a conservative group in North Carolina called Civitas recently hired supply-side economist Arthur Laffer to write a report claiming that 378,000 new jobs and $25 billion in new income could be created through income tax repeal.  Our partner organization, the Institute on Taxation and Economic (ITEP) took a close look at the study and found that, as with Laffer’s previous work, the study is severely flawed to the point of making it entirely useless.  Among the study’s many flaws:

- Fails to control for a large range of important non-tax factors that affect state economic growth.
- Confuses cause and effect by assuming that recent declines in personal income were due to taxes rather than the Great Recession.
- Does not explain, or completely ignores, the economic impact of various tax changes it proposes to pay for income tax repeal.
- Cherry-picks blunt, aggregate economic measures in comparing state economies, and simply asserts that tax policy is the driving force behind these measures.
- Ignores the important role that public investments have to play in any successful state economy.

ITEP concludes that “In proposing a policy course that no state has ever taken—repealing the personal and corporate income taxes without a wealth of oil reserves to fall back on—ALME and the Civitas Institute have laid out an untested plan without any evidence that it will benefit the state’s economy.”

Read the full ITEP report

Note to Readers: This is the second of a six part series on tax reform in the states.  Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends  that are gaining momentum in states across the country. This post focuses on “tax swap” proposals.

The most extreme and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate one or more taxes and replace some or all of the lost revenue by expanding or increasing another tax.  We call such proposals “tax swaps.”  Lawmakers in Kansas, Louisiana, Nebraska and North Carolina have already put forth such proposals and it is likely that Arkansas, Missouri, Ohio and Virginia will join the list.

Most commonly, tax swaps shift a state’s reliance away from a progressive personal income tax to a regressive sales tax. The proposals in Kansas, Louisiana, Nebraska and North Carolina, for example, would entirely eliminate the personal and corporate income taxes and replace the lost revenue with a higher sales tax rate and an expanded sales tax base that would include services and other previously exempted items such as food.   

In the end, tax swap proposals hike taxes on the majority of taxpayers, especially low- and moderate-income families and give significant tax cuts to wealthy families and profitable corporations. For instance, according to an ITEP analysis of Louisiana Governor Bobby Jindal’s tax swap plan (eliminating the personal income tax and replacing the lost revenue through increased sales taxes) found that the bottom 80 percent of Louisianans would see their taxes increase. In fact, the poorest 20 percent of Louisianans, those with an average annual income of just $12,000, would see an average tax increase of $395, or 3.4 percent of their income. At the same time, the elimination of the income tax would mean a tax cut for Louisiana’s wealthiest, especially in the top 5 percent.  ITEP concluded that any low income tax credit designed to offset the hit Louisiana’s low income families would take would be so expensive that the whole plan could not come out “revenue neutral.” The income tax is that important a revenue source.

These proposals also threaten a state’s ability to provide essential services, now and over time. They start out with a goal of being revenue neutral, meaning that the state would raise close to the same amount under the new tax structure as it did from the old.  But, even if the intent is to make up lost revenue from cutting or eliminating one tax, these plans are at risk of losing substantial amounts of revenue due in large part to the political difficulty of raising any other taxes to pay for the cuts. Frankly, it’s taxpayers with the weakest voice in state capitals who end up shouldering the brunt of these tax hikes: low and middle income families.

Proponents of tax swap proposals claim that replacing income taxes with a broader and higher sales tax will make their state tax codes fairer, simpler and better positioned for economic growth, but the evidence is simply not on their side. ITEP has done a series of reports debunking these economic growth, supply-side myths. In fact, ITEP found (PDF) that residents of so-called “high tax” states are actually experiencing economic conditions as good and better than those living in states lacking a personal income tax. There is no reason for states to expect that reducing or repealing their income taxes will improve the performance of their economies; there is every reason to expect it will ultimately hobble consumer spending and economic activity.

Here’s a brief review of some of the tax swap proposals under consideration:

Last week Nebraska Governor Dave Heineman revealed two plans to eliminate or greatly reduce the state’s income taxes and replace the lost revenue by ending a wide variety of sales tax exemptions. ITEP will conduct a full analysis of both of his plans, though it’s likely that increasing dependence on regressive sales taxes while reducing or eliminating progressive income taxes will result in a tax structure that is more unfair overall.

If Kansas Governor Sam Brownback has his way he’ll pay for cutting personal income tax rates by eliminating the mortgage interest deduction and raising sales taxes. An ITEP analysis will be released soon showing the impact of these changes – made even more destructive because of the radical tax reductions Governor Brownback signed into law last year.

Details recently emerged about Louisiana Governor Bobby Jindal’s plan to eliminate nearly $3 billion in personal and corporate income taxes and replace the lost revenue with higher sales taxes. ITEP ran an analysis to determine just how that tax change would affect all Louisianans. ITEP found that the bottom 80 percent of Louisianans in the income distribution would see a tax increase. The middle 20 percent, those with an average income of $43,000, would see an average tax increase of $534, or 1.2 percent of their income. The largest beneficiaries of the tax proposal would be the top one percent, with an average income of well over $1 million, who'd see an average tax cut of $25,423. You can read the two-page analysis here.

North Carolina lawmakers are considering a proposal that would eliminate the state’s personal and corporate income taxes and replace the lost revenues with a broader and higher sales tax, a new business license fee, and a real estate transfer tax. The North Carolina Budget and Tax Center just released this report (using ITEP data) showing that the bottom 60 percent of taxpayers would experience a tax hike under the proposal. In fact, “[a] family earning $24,000 a year would see its taxes rise by $500, while one earning $1 million would get a $41,000 break.” The News and Observer gets it right when they opine that the “proposed changes in North Carolina and elsewhere are based in part on recommendations from the Laffer Center for Supply Side Economics.  Supply-side economics (or “voodoo economics,” as former President George H.W. Bush once called it) didn’t work for the United States…. We wonder why such misguided notions endure and fear where they might take North Carolina.”

Looks like the “spin room” in Topeka has been busy lately. Read how Kansas Governor Brownback and his staff “fashion[ed] a new budget narrative” in reaction to criticism over massive budget cuts he signed (PDF) earlier this year and possible further reductions. Insisting that revenue lost to his pet tax cuts (which take effect next year) won’t be responsible for budget shortfalls, the governor is saying that somehow the European debt crisis and other things beyond the state’s control are forcing spending cuts.

It’s been a while since we’ve heard much about “marriage penalties” imposed by state tax structures (a so-called marriage penalty is imposed when single filers pay more tax as married couples than if they filed as two single filers). But the issue is rearing its head in Wisconsin and this thoughtful blog post from the Wisconsin Budget Projects helps to put the concept in context.

In order to debunk the absurdity of Mitt Romney’s 47 percent claim, an opinion piece in the Las Vegas Sun reminds Nevadans -- by pointing to research from the Institute on Taxation and Economic Policy -- that low income people are paying more than their fair overall share because of state and local taxes.

Here the Charlotte Observer editorial board decries both gubernatorial candidates’ calls for politically popular rate reductions and their failure to commit to genuine, comprehensive reform for North Carolina. “Today’s tax code is riddled with exemptions, loopholes and preferential treatment that sap the state of needed revenue... [and] it’s time for tax code reform to take a prominent place on the agenda of the state’s chief executive. The public – the voting public – should insist on it.”

North Carolina is home to one of the great examples of how economies flourish when government gets involved: the Research Triangle Park. It was developed in the 1950s by a public-private partnership, depended heavily on more than one governor’s leadership and on the proximity of three major research universities (two of which are public), and succeeded in fundraising after it was granted nonprofit status from the state. It was designed with the goal of helping North Carolina transition into the modern economy, and it worked.

But a candidate for governor named Pat McCrory wants to turn the state into a low-tax, low-service loser that could never undertake such a visionary project. While McCrory takes full credit for overseeing Charlotte’s economic boom while he ran that city as its Mayor, if he follows through on his anti-government campaign promises, North Carolina won’t have the resources to usher in the economic boom McCrory says he can deliver statewide.

McCrory has made cutting taxes the centerpiece of his campaign for governor. He has pledged to cut the corporate income tax, the individual income tax and the estate tax if elected. Sadly, yet predictably, this candidate has also refused to release any details about the structure of these proposals, including their bottom-line cost in terms of revenues. What we do know, though, is that he’d have a friendly audience in the state capital, where GOP leaders – who control the legislature – have already proposed the outright elimination of personal and corporate income taxes. 

As the Institute on Taxation and Economic Policy (ITEP) has explained, corporate and personal income taxes are among the few tools state policymakers have for minimizing the stark regressivity of state tax systems, including North Carolina’s. An analysis (PDF) of all state and local taxes paid by Tar Heel State residents shows that the highest earners pay a far smaller portion of their income in taxes than do middle- and low-income families. McCrory’s proposed tax cuts would only exacerbate this gap. Indeed, the candidate has held up Tennessee and Florida as his models for state tax policy—two states that also happen to be among the five most regressive state tax systems in the country.

But McCrory doesn’t talk about tax fairness. Instead, he presents the party line and says tax cuts are a means to support North Carolina’s “economic development brand,” which he claims is diminished by high taxes.

Here are three reasons he is wrong.

One, while the state’s unemployment rate is stubbornly high (9.4 percent), the cause is the state’s dependence on waning manufacturing jobs, not its tax policy. The unemployment rate is just as high across the border in manufacturing-dependent South Carolina despite that state’s lower business and personal income tax rates. Two, as the News & Observer points out, North Carolina is already regarded as being very business-friendly in national surveys of executives and industrial recruiters. And three, as research from ITEP has shown, supply side arguments for cutting taxes to grow the economy simply do not hold up in the face of evidence.

Instead of making the state more enticing to business, McCrory’s race-to-the-bottom strategy on tax policy would threaten the public services that make the state so appealing. North Carolina’s public investments are already suffering from acute budget cuts. The legislature recently dealt a blow to the University of North Carolina system and the community college system, as well as to job recruitment and economic development programs. McCrory’s tax cuts would make additional cuts to such critical public programs all but inevitable, exacerbating the economic slump that is, of course, a nationwide phenomenon.

Any political candidate who’s serious about learning how taxes affect the economy should read ITEP’s Four Tax Ideas for Jobs-Focused Governors.  This short report explains that the way you make taxes support economic growth is not by cutting them, but rather by wisely deploying them as revenues in the public interest.

Cartoon by John Cole, NC Policy Watch

Months after cutting the state income tax for wealthy taxpayers, Idaho’s budget situation isn’t looking good.  The Associated Press reports that “earlier this year it looked like the state had sufficient revenue to provide a $36 million tax cut, as well as give state employees a 2 percent raise” but that surplus has already evaporated. In fact, there was never real consensus about the state’s revenue projections in the first place.

Kansas Governor Sam Brownback admits his radical tax cut package is a “real live experiment.”

The South Carolina House approved a measure to keep the state running if it doesn’t have a budget by July 1 when the new fiscal year begins.  The Senate and House are currently bickering over how to implement a (regressive) tax cut for so-called "small" business owners.

It’s back! New Jersey Assembly Democrats are once again planning to introduce a millionaire’s tax into the budget debate.  Proponents of the tax on the wealthiest New Jerseyans want to use the $800 million in revenue it would raise to boost funding to the state’s current property tax credit program for low and middle-income homeowners and renters.  Governor Chris Christie has already vetoed a millionaire’s tax twice. 

The clever folks at Together NC, a coalition of more than 120 organizations in North Carolina, held a Backwards Budget 5K race this week to “to shine a spotlight on the legislature’s backwards approach to the state budget.” 

California Governor Jerry Brown’s revenue raising initiative (which temporarily raises income taxes on the state’s wealthiest residents and increases the sales tax ¼ cent) has officially qualified for the state’s November ballot. Two additional tax measures will join Brown’s plan on the ballot: a rival income tax measure pushed by a billionaire lawyer to fund education and early childhood programs; and an initiative to increase business income tax revenues by implementing a mandatory single-sales factor (PDF backgrounder) formula.

The Pittsburgh Post-Gazette editorializes in favor of capping Pennsylvania’s “vendor discount,” a program (PDF) that allows retailers to legally pocket a portion of the sales taxes they collect in order to offset the costs associated with collecting the tax.  The Gazette explains that a handful of big companies are taking in over $1 million per year thanks to this “antiquated” giveaway.  Computerized bookkeeping takes the effort out of tax collecting and a cap would only impact the national chain stores who disproportionately benefit from the program.

• Last night’s Washington Gubernatorial debate did not answer the call  to shift their focus to the state’s broken revenue system.  Instead, the Republican candidate, Attorney General Rob McKenna said that the Democrats “just keep insisting we need higher taxes.”  Whoever wins, they will have to contend with the fact that Washington State has the most regressive tax structure in the nation.

• Last week we reported on public scrutiny of a $336 million “small business” tax break in North Carolina that is, in fact, going to benefit some of the state’s wealthiest individuals. Yesterday, Senate Republicans - torn between public outrage and affluent constituents - successfully wiggled out from under having to vote on a measure to modify it so it targets truly small businesses, as intended.  

• New Hampshire voters will go to the polls in November to decide whether the state’s lack of a personal income tax should be enshrined in the constitution. In better news, the state’s lawmakers heeded the advice of the New Hampshire Fiscal Policy Institute and defeated a constitutional amendment requiring a supermajority to pass any tax or fee increase.

• Here’s an interesting read on the economic development impact of the arts. A new study contends that not only do the arts make Nebraska (for example) a better place to live, but they also contribute to state and local coffers to the tune of $18 million. For more on the impact of the arts in other states check out the study, Arts & Economic Prosperity IV.

 

Late in North Carolina’s legislative session last summer, lawmakers quietly passed a $336 million tax cut – one of the largest tax cuts the state has seen in the past decade.  Originally intended to target “small businesses” – defined as those with less than $850,000 in annual revenue – the final legislation removed the cap and exempted the first $50,000 of pass-through income for any size pass-through business. That’s a roughly $3,500 tax break that is now available to law firm partners, doctors, dentists, and in some cases the same lawmakers who passed the legislation.

An article in the Raleigh News and Observer this week finally shone some light on this expensive and ill-targeted tax break, and illustrates the provision’s effect with examples like this:

"…lawyers who are equity partners at Womble Carlyle Sandridge & Rice, the state’s largest law firm, will each receive that tax break for income they earned in North Carolina. The Winston-Salem based firm brought in $279 million in 2011, and generated profits equal to $590,000 per partner, according to The American Lawyer, a trade publication.”

That is, because it’s a structured as a pass-through firm, the partners report its profits and pay its taxes. The proponents of the tax cut argue (as usual) that it will spur private-sector job creation- close to 4,000 jobs over the next two years, according to a study they cite.  But as the article points out, the cost of the tax break is equivalent to 6,400 state employee positions.  You do the math there. As Gary Hancock, a lobbyist interviewed for the article, said:

 "...it makes no sense to provide a tax break – particularly to those who don’t need it – while cutting teachers and other public employees who perform needed services…As a general proposition, tax breaks for the wealthy while we are starving public schools and public services is bad government.”

The News and Observer story was cited in a scathing editorial from the Charlotte Observer which had this to say:

“When many of the people being helped by a tax break end up criticizing it, questioning it or refusing comment on it, something’s badly amiss. N.C. lawmakers in the Republican-dominated General Assembly should take note of this reaction to a tax break they gave to businesses in last year’s legislative session…. At a time when lawmakers are slashing funding for schools, law enforcement and other vital services, a perk for those who don’t need it is misguided and feels callous."

The Observer editorial characterizes the state’s current tax system as “inadequate, outdated and unfair” and in need of real reform. We concur. And given the enterprising journalism and good policy analysis available, it’s time to get that process started.

North Carolina’s two major newspapers, the Raleigh News and Observer and Charlotte Observer, published editorials in support of the state’s estate tax in the wake of a hearing last week called to eliminate it.  From the News and Observer: “The estate tax is hardly a burden on those few inheritors who have to pay it. It is a modest but valuable asset to government revenue, and there is nothing unfair about [it]."  And, from the Charlotte Observer: “Some Republicans support abolishing the federal estate tax. They should explain why the extremely wealthy should be able to avoid paying any taxes on unrealized capital gains.”

Washington State’s special legislative session started yesterday. The media is reporting that the session will be a contentious battle over how the state should close its $1 billion budget gap. (Hint: the answer’s in the Washington State Budget and Policy Center’s proposal to tax capital gains income. )

An article from The Miami Herald reveals some ugly details surrounding the $2.5 billion in business tax cuts just passed by the Florida legislature.  As the Herald points out, “those benefiting had plenty of lobbyists … AT&T, which has 74 Florida lobbyists, spent $1.68 million on lobbying last year, more than any other company.”  Not coincidentally, AT&T and Verizon – both champion tax dodgers – were among the biggest winners.  A last-minute amendment to the legislation could give the telecommunications industry a tax break as large as $300 million.

A great op-ed in the Kansas City Star asks why Governor Brownback wants taxes in Kansas to be like Texas, reminding Kansans that Texas ranks low in everything that really matters, from high school graduation rates to household income to crime.

Dolly Parton’s Dollywood Co. and Gaylord Entertainment Co. have struck a deal with Nashville, Tennessee Mayor Karl Dean that, if approved, would result in an estimated $5.4 million in property tax breaks for their planned water and snow park.  Ben Cunningham of the Nashville Tea Party was right to point out that the plan amounts to a “giveaway” to companies that plan to move to the city anyway and that it’s time to stop “giving in to this kind of corporate extortion.”

Photo of Dolly Parton via Eva Rinaldi Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, the Institute on Taxation and Economic Policy will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would increase state revenues to pay for important public investments. 

Given the number of Governors calling for major tax cuts in their states, you’d think that states are suddenly awash in cash and well on the road to economic recovery.  But the reality is that very few states are back to where they were before the recession hit in terms of tax collections and public spending.  Many were limping along with federal stimulus funds, but now that’s dried up, too. Recognizing the need to begin restoring investments in education, transportation, and health care or prevent even more devastating cuts to these services, a handful of Governors have put tax increases on the table.  The proposals range from across-the-board rate increases to tax hikes only on the wealthiest, permanent to temporary changes, and plans that require only legislative approval to ballot initiatives for the public to decide.

California Governor Jerry Brown is taking his proposed tax increase to the voters in November.  In an effort to prevent damaging cuts to public education, Brown is asking wealthy Californians to pay more income taxes and everyone to chip in with a higher sales tax for the next five years.  A recent poll shows Californians are overwhelmingly on his side- more than 2/3rds of those surveyed support the Governor especially when the tax increases are linked to investments in education.

Maryland Governor Martin O’Malley included several revenue raising measures in his recent budget proposal to help close a $940 million gap.  Most notable is a plan to raise taxes on upper-income Marylanders through limiting the amount of itemized deductions and personal exemptions they are able to claim - a recommendation ITEP made last year.

O’Malley also proposed taxing internet transactions, digital downloads and increasing taxes on tobacco products and the state’s “flush tax.”  He recently announced a plan to apply the sales tax to gasoline rather than an increase in the designated gas tax to address transportation needs in the state.

Washington lawmakers are facing off on how best to address a $1 billion budget gap this year.  Governor Christine Gregoire is pushing for a temporary half-cent sales tax increase that would raise roughly $500 million, and to close the remaining gap with spending cuts.  At least two competing proposals, however, have emerged that would raise needed revenue and improve the fairness of the state’s tax structure.  The first is a one percent tax on corporate and personal income that would raise $500 million and allow for a reduction in the state’s sales and business-occupations taxes. Another plan would tax realized capital gains at five percent, raising between $215 million and $650 million a year. 

Given Washington’s restrictive rules on revenue-raising (a two thirds legislative supermajority is required to enact increases), any proposed tax increase will likely end up on a ballot (which a legislative simple majority can implement) for the voters to decide this Spring or Fall.

North Carolina Governor Beverly Perdue recently proposed reinstating most of a temporary sales tax increase that expired last year.  She wants to invest the $800 million the tax would raise in the state’s public schools, community colleges and universities, all of which suffered massive cuts over the past four years.

Massachusetts Governor Deval Patrick is promoting some revenue raising ideas he says are supported by the public.  His $230 million revenue package includes a 50 cent per pack increase in the cigarette tax (bringing the total to $3.01), increases on other tobacco products, expanding the bottle bill so that a wider range of beverages require a redeemable nickel deposit, and taxing candy and soda at the state’s 6.25 percent rate (both are currently exempt from taxation).

Rhode Island After failing to gain legislative support last year for his reform-minded and sensible tax plan, Governor Lincoln Chafee has offered up a hodgepodge of tax changes this year he thinks lawmakers can stomach.  Chafee’s$88 million tax package includes some modest expansion of the sales tax to items such as taxi and limousine rides and pet services.

Photo of Christine Gregoire via Studio 8, photo of Deval Patrick via Green Massachusetts, and photo Jerry Brown via Steve Rhodes Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would reduce or eliminate state inheritance and estate taxes.  If you haven’t already, be sure to read our inaugural article in the series on proposals in some states to roll back or eliminate income taxes, which are the uniquely progressive feature of our tax system.

Whether state or federal, inheritance and estate taxes play an important role in limiting concentrated wealth in America. Warren Buffett views the estate tax as key to preserving our meritocracy, and the great Justice Louis Brandeis famously warned that we could have concentrated wealth or we could have democracy, but not both.  While the federal estate tax is often the source of passionate debate, these taxes are particularly important at the state level because they help offset some of the stark regressivity built into most state tax systems.  Unfortunately, lawmakers in some states have bought into the bogus claims of the American Family Business Institute (a.k.a. nodeathtax.org), Arthur Laffer, and others in the anti-tax, anti-government movement that repealing estate and inheritance taxes will usher in an economic boom.

Nebraska – Governor Dave Heineman has proposed repealing Nebraska’s inheritance tax entirely, determined, it seems, to pile on to the tax cuts already enacted earlier in his term.  (Inheritance taxes are very similar to estate taxes, except that inheritance taxes are technically paid by the heir to the estate, rather than by the estate itself.)  Unfortunately, in addition to worsening the unfairness of the state’s tax system, the Governor’s proposal would also kick struggling localities while they’re down, since revenue from Nebraska’s inheritance tax flows to county governments.

Indiana – Senate Appropriations Chairman Luke Kenley recently made the same proposal as Nebraska’s governor: outright repeal of the inheritance tax.  Kenley has floated the idea of using sales taxes on online shopping to pay for the repeal, but while Internet sales taxes are good policy on their own, this change would amount to an extremely regressive tax swap overall.  Indiana’s inheritance tax is already limited, however, and exempts spouses of the deceased entirely, as well as the first $100,000 given to each child, stepchild, grandchild, parent, or grandparent.

Tennessee – Governor Bill Haslam’s inheritance tax proposal may be less radical than those receiving attention in Nebraska and Indiana, but not by much.  Rather than repealing the tax entirely, Haslam would like to increase the state’s already generous $1 million exemption to a whopping $5 million.  It’s surprising, to say the least, that one of Haslam’s top tax policy priorities should be slashing taxes for lucky heirs inheriting over $1 million.

North Carolina – Efforts to gut the estate tax in North Carolina haven’t gained backers as visible as those in Nebraska, Indiana, and Tennessee.  But there are rumblings that repeal could be on the agenda of some legislators, as evidenced by the vehemently anti-estate tax testimony that a joint House-Senate committee heard from the American Family Business Institute this month.

With the state’s gas tax pegged to the price of gasoline, North Carolina is scheduled to raise its gas tax rate tomorrow (July 1). This increase was entirely predictable, but is understandably controversial. Unfortunately, the debate surrounding what to do in the wake of this increase has been far too narrow, focusing on just two options: capping the maximum tax rate, or doing nothing at all.Read the ITEP Press Release.

Photo via herzogbr Creative Commons Attribution License 2.0

Expert to North Carolina: Don’t Cap the Gas Tax

Statement from the Institute on Taxation and Economic Policy (ITEP)

June 23, 2011

Washington, DC – With the state’s gas tax pegged to the price of gasoline, North Carolina is scheduled to raise its gas tax rate on July 1. This increase was entirely predictable, but is understandably controversial. Unfortunately, the debate surrounding what to do in the wake of this increase has been far too narrow, focusing on just two options: capping the maximum tax rate, or doing nothing at all.

Carl Davis, Senior Analyst at the Institute on Taxation and Economic Policy (ITEP) and author of a major 50-state gas tax report due out late this summer, issued the following statement in response to the controversy:

“North Carolina’s gas tax is clearly in need of reform, but a simple gas tax cap is a blunt instrument that can do more harm than good. The neighboring states of Kentucky and West Virginia have gas taxes similar to North Carolina’s, and both have wisely chosen to address the problem of price-related volatility by limiting changes in their tax rates to no more than 10%. They don’t cap the tax, but they do cap the volatility.

“A cap on the variable portion of North Carolina’s gas tax, similar to the type used in Kentucky and West Virginia, would have resulted in the state’s gas tax rate rising just 1.5 cents this July 1, rather than the full 2.5 cents currently scheduled to occur. A cap above or below 10% could have resulted in a slightly larger, or smaller, increase.

“A limit of this type would produce a more stable and predictable gas tax, and one that results in fewer surprises for taxpayers, transportation officials, and state lawmakers.

“Such a limit would also allow the state’s gas tax to retain its character as a tax on the actual price of gas, while smoothing some of the jarring ups and downs seen in recent years. Gas tax caps, by contrast, run the risk of transforming North Carolina’s extremely sensible price-based tax into a stagnant, flat levy that can never keep up with the state’s transportation needs. In Pennsylvania, for example, a gas tax cap has left state’s tax rate unchanged since 2006, resulting in flatlining revenues while transportation funding needs continue to climb. Pennsylvania is the poster child for bad gas tax policy.

“The problem facing North Carolina lawmakers is not new, and not unique to North Carolina. The Tar Heel State’s neighbors to the north have already dealt with this issue, and North Carolina should learn from their experiences by implementing a similar reform.”

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Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. ITEP’s full body of research is available at www.itepnet.org.

If a multistate corporation doing business in North Carolina shows signs of shifting income around to avoid paying state taxes, the state’s Department of Revenue has authority to require additional information to be sure the company’s not simply offshoring its profits. But that may be about to change.

In the last hours of North Carolina’s legislative session this year, the House and Senate passed a two-pronged bill that will legally allow multistate corporations doing business in North Carolina to avoid paying corporate income taxes rightfully owed to the state.

First, the bill limits the Department of Revenue’s power to demand companies “combined reporting,”  i.e., fully disclose income for all of a company’s subsidiaries, regardless of their location.

Under the new law, the Secretary of Revenue could only force a combined report if transactions between subsidiaries have no "reasonable business purposes" other than reducing the corporation’s tax liability. As the NC Budget and Tax Center noted, “corporate accountants could easily restructure tax shelters and give them the appearance of "business purposes," even if the primary purpose was to, in fact, reduce corporate taxes.”

Second, the bill reopens the egregious “royalties and trademark loophole” closed by legislators ten years ago.  Multistate corporations operating in North Carolina with headquarters out of state will now be allowed to charge their North Carolina entities for the right to use the corporations’ trademarks.  There is no limit to the ‘charge’ for this privilege and as such, it can (and will) be used to offset profits made in North Carolina for any given tax year resulting in zero state tax liability. 

Speaking out against the amendment, House member Jennifer Weiss said, "We are telling multistate corporations, 'Come on over, rip us off, we won't charge you any taxes, but we're going to tax the little guy…Go ahead, cheat us, it's legal."

House Majority Leader Paul Stam argued that affording corporations the confidence that they can, in fact, avoid taxes if they move to the state was “extremely important to the economy of North Carolina.”  He added that “of all the bills we've had this session, this is the jobs bill."

The bill now awaits the signature of Governor Bev Perdue.

Earlier last week, the Republican led legislature overrode the governor’s veto of the damaging state budget they crafted.  News of this last minute move to support corporate interests over the public interest is even more disturbing in light of the fact the state already has a budget in place that severely underfunds all levels of education, eliminates thousands of state workers  and limits access to health care.

Photo via Jimmy Wayne Creative Commons Attribution License 2.0

Last weekend, North Carolina’s General Assembly gave final approval to a state spending plan for next year that significantly cuts spending, allows temporary taxes to expire, and offers small businesses a new tax break.  The budget now sits on Governor Bev Perdue’s desk and observers are watching closely to see if she will keep her promise to veto a budget that moves the state backwards in education spending.

New North Carolina Speaker of the House Thom Tillis penned an op-ed describing his party’s approach to the Tarheel state’s $2 billion shortfall as a “new choice for North Carolina.”  This choice includes sticking to a campaign pledge not to raise taxes. It slashes funding to the state’s early childhood education programs, K-12 schools, community colleges, universities, Medicaid, court and prison systems, and substance abuse and mental health services resulting in the loss of thousands of government jobs. 

But, there are alternatives to rolling back North Carolina spending to unprecedented levels, laying off government workers, and securing the economic recovery the state’s new leaders seek.  

As the North Carolina Budget and Tax Center points out, the most damaging cuts in the final legislative budget agreement could be altogether avoided if lawmakers would extend two temporary taxes and close other major tax loopholes in the state. 

First, Governor Perdue included an extension of ¾ of the 1 cent sales tax increase in her budget plan.  Second, advocates have also called on state leaders to extend a temporary personal income tax surcharge for the state’s wealthiest taxpayers as well as a surcharge for profitable corporations. Finally, tax loopholes abound and for years lawmakers have talked about, but failed to act on, comprehensive tax reform that would ensure more fair and adequate revenues in the short- and long-term.

Unfortunately, unless a minimum of 2 of the 5 democratic House members who voted in support of the budget are convinced to change their minds, it appears a veto from the governor could be overturned and the ‘new choice’ for North Carolina will be in effect for at least a year in the state.

The ongoing recession, the expiration of two temporary taxes, and the end of federal recovery aid have left North Carolina with a $2.4 billion gap for next fiscal year.  The state’s Democratic governor, Bev Perdue, and the Republican-led legislature have taken very different approaches to plugging the gap. 

Governor Perdue’s budget plan, released earlier in the spring, balanced spending reductions (around $1.4 billion) with about $1 billion of additional revenue.  The primary means for raising revenue in her budget included extending three fourths of a temporary sales tax increase enacted in 2009 and set to expire this summer.  She also proposed reducing the state’s corporate income tax rate from 6.9 percent to 4.9 percent, a move Republican leaders have, surprisingly, not yet embraced.
 
Republican House and Senate leaders have adamantly opposed extending either the temporary sales tax or personal income tax surcharge, taking a cuts-only approach to the state’s fiscal problems.  In fact, they have proposed new tax cuts that would force them to reduce state spending beyond the $2.4 billion budget gap and far beyond the governor’s proposal.
 
The North Carolina Senate released its budget plan this week.  It includes around $550 million in tax cuts, once it's fully phased-in, resulting in deeper cuts to education, public safety, and health care. 

Billed as a ‘Jobs Package’, it would cut personal income tax rates by 0.25 percentage points in each bracket and exempt the first $50,000 of small business income from the personal income tax for businesses with gross receipts under $850,000, at a cost of around $485 million.  The Senate would also eliminate the state’s estate tax for an additional loss of $72 million. 

The plan raises small amounts of revenue by eliminating a handful of random state tax expenditures such as the credit for oyster recycling and the sales tax holiday for Energy Star appliances. 

The House GOP’s budget plan, released earlier in the month, was short on tax package details other than sticking to the promise to allow the temporary taxes to expire.  However, rumors are swirling that their plan will be released soon and will likely closely mirror the Senate’s proposal. 

If these rumors are true, their plan would not only cut taxes for wealthy taxpayer and businesses, but would also increase taxes on working families by eliminating the state’s Earned Income Tax, Child Tax, and Child and Dependent Care credits.

House and Senate GOP leaders had made veiled promises to reform the state’s outdated and inadequate tax code this year.  Both hinted they would start by broadening the personal income tax base, moving from federal taxable income to federal adjusted gross income (AGI).  This move would eliminate costly tax breaks for the best-off taxpayers. 

The Senate’s plan does indeed move the starting point for calculating North Carolina income taxes to federal AGI, but the move is completely revenue-neutral and only meant as a way to simplify tax forms. This would do nothing to truly reform its narrow tax base.  Rather than walking through a series of calculations to add back the difference between the state and federal amounts for the standard deduction and personal exemption, under the plan, taxpayers would simply subtract the state amounts from federal AGI and still be allowed to take all of their federal itemized deductions (with the exception being the deduction for state income taxes).  Social Security income would also continue to be exempt from state taxation.

The North Carolina Budget and Tax Center said in a statement about the Senate budget plan that “these measures will do nothing to improve the upside-down nature of the state’s revenue system. North Carolina’s revenue system must provide adequate revenue for critical investments and must be fair and equitable.”

North Carolina advocates seeking to protect the state’s Earned Income Tax Credit and supporting a balanced approach to the state’s budget crisis have stepped up their efforts to build public support with new multimedia campaigns.  

The SaveEITC.org website, launched last week, features a clever ad titled "If You Work Hard, You Deserve a Chance to Get Ahead." The website also features fact sheets, and an action center where individuals can send virtual postcards to lawmakers explaining the many ways the EITC supports North Carolina’s low-wage workers and families. 

TogetherNC, a coalition of more than 120 advocacy groups, service providers and professional associations, started running ads this week in 15 North Carolina newspapers calling on lawmakers to support teachers, firefighters, public health workers, and other vital services with new revenue. 

Each of the four unique ads ends with the following message, “When our economy is out of balance, so are our classrooms.  Schools and parks. Libraries and fire stations. The things that make our communities great places to work and live are in jeopardy. Lawmakers, North Carolinians want a practical approach to our economy and our state budget–one that includes not only careful spending cuts but also new revenues that work for our changing economy. Balance is a beautiful thing.”

The Together NC coalition also launched a new website, SpeakNC, which will introduce a new video each week featuring North Carolinians who rely on the hundreds of services in jeopardy of being gutted in this year’s budget. 

Finally, the North Carolina Budget and Tax Center released their revenue raising and modernization plan this week.  The report describes the current failings of the state’s tax system and offers a comprehensive revenue modernization plan that would update the state’s personal income tax, sales tax, business taxes, and “tax-code spending” practices.  ITEP contributed substantial analysis and technical expertise to the report.

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.

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.

Add North Carolina to the list of states considering increasing taxes on the low-income working families hit hardest by the economic downturn.  Republican lawmakers in North Carolina recently filed a bill to convert the state’s refundable 5 percent Earned Income Tax Credit (EITC) to a nonrefundable credit, essentially eliminating the benefit of the program for the lowest income households. 

An op-ed this week by Lucy Gorham, director of the EITC Carolinas Initiative, put it this way: “The Republican leaders won their seats, in part, by pledging not to raise taxes and to represent those North Carolinians who work hard to provide for their families in the face of one of the worst economic downturns most of us have ever lived through. Strange, then, that in one of their first moves in the current legislative session, the leadership proposes to increase taxes on low- and moderate-income working families by eliminating the refundable portion of the state's Earned Income Tax Credit (EITC).”

North Carolina’s House Finance Committee heard the bill on Wednesday.  Only two lawmakers spoke out in favor of the proposed change to the credit.  Representative Edgar Starnes, the bill's sponsor, delivered an endorsement of the credit even while he moved to destroy its value.  He said he recognizes the EITC is an extremely good program, but given North Carolina's large budget shortfall, he claims the state can no longer afford the cost and lawmakers must look to every program for savings, including the EITC. 

Naturally, the opponents of the proposal turned the committee debate into a question of why the majority party was starting with the EITC — an attack on the state’s most vulnerable residents — and suggested they should look elsewhere for the $50 million saved by the regressive change.  

House and Senate Democrats also held a press conference this week to show support for the EITC.  They argued that the refundability is a means to reimburse low-income families for other taxes they pay and pointed out that low-income workers pay a much larger share of their incomes in state and local taxes than wealthier households.  North Carolina’s governor, Bev Perdue, also weighed into the debate via Twitter: “Concerned that EITC bill hurts working families: waitresses, construction wrkrs, store clerks -- the backbone of our communities. #NCGA”

The North Carolina Budget and Tax Center has argued that “working class, tax-paying families could no longer benefit from the credit’s ability to help them cover the substantial share of their income they pay in sales and property taxes” if refundability was eliminated.  An ITEP analysis found that eliminating the refundability of North Carolina’s EITC would result in a tax increase for 1 in 10 households.  The Budget and Tax Center also released an interactive map this week that demonstrates the wide-ranging and deep benefits of the North Carolina’s Earned Income Tax Credit.

North Carolina lawmakers will continue to grapple with significant budget dilemmas in 2011 and beyond.  But balancing their budget on the backs of those families hit hardest by the recession should be a non-starter.

It’s pretty evident that state corporate income taxes are especially flawed and riddled with loopholes. But, of course, that doesn’t have to be the case. In fact, there are lots of things that legislators can do (given the political will) to strengthen their corporate income taxes, including enacting combined reporting, increasing corporate tax disclosure, and closing selected loopholes.

Despite all these options to strengthen the corporate tax, lawmakers from coast to coast are doing their best to undermine this inherently progressive tax. This seems especially sort-sighted given the revenue needs of many states.

Here are some recent bad ideas regarding state corporate income taxes:

Arizona Governor Jan Brewer’s budget outline includes a proposal that would phase out the state's corporate income tax over four years.  

Florida Governor Rick Scott has proposed reducing the corporate income tax rate from 5.5 to 3 percent.

Indiana’s Senate is considering a bill to reduce the state’s corporate income tax by 20 percent. This bill recently passed the Senate Committee on Tax and Fiscal Policy.

Iowa Governor Terry Branstad has said that he would like to cut Iowa’s corporate income tax in half, despite evidence that this tax change would only benefit large corporations.

Recently, bills have been dropped in the both the Kansas House of Representatives and the Senate which would phase out the state's corporate income tax altogether.

North Carolina Governor Beverly Perdue is proposing that the corporate income tax rate be reduced to 4.9 percent from 6.9 percent.

Instead of slashing or completely eliminating the state corporate income tax, lawmakers should be working to strengthen this revenue source.

Governors are in the midst of crafting their budget proposals for next year, and many state leaders continue to grapple with historic budget shortfalls due to lagging revenue recovery and a high demand for public services.  In 2009 and 2010, most states balanced their budgets with a mix of temporary and permanent tax increases, significant federal assistance, and spending cuts.  This year, state revenues continue to lag, many of the temporary tax increases are set to expire, and federal stimulus assistance will dry up, yet the need for quality education, safe communities, affordable health care, public transit and well-maintained roads has not diminished.

As the Tax Justice Digest has previously noted, so far this year we have seen mostly a slew of bad proposals from state leaders. Many states are offering tax breaks to corporations and wealthy households and refusing to consider new taxes, while choosing to cut state spending to historically low and damaging levels. A few governors, however, have recently bucked the cuts-only trend and have made it clear that taxes must be a part of the solution.
 
In Connecticut, newly elected Governor Dannel Malloy plans to address the state’s $3.7 billion budget shortfall with an almost equal share of spending cuts ($2 billion) and tax increases ($1.7 billion).   While the details of his tax plan will not be unveiled until February, he is likely to support eliminating a majority of the state’s sales tax exemptions as one part of his revenue raising plan.

Hawaii’s new governor, Neil Abercrombie, has also embraced the need to raise new revenues as part of a budget-fixing compromise.  Governor Abercrombie proposed raising $279 million, including taxes on soda, alcohol, and time-shares. Most significantly, Abercrombie would tax pension income (which is generally exempt from taxation currently) for taxpayers with incomes over $50,000, raising around $114 million a year.  He also supports eliminating the state deduction for state taxes, a smart reform measure that would raise $70 million a year.  

North Carolina lawmakers addressed their budget crisis in the previous two years in part with $1.3 billion in temporary taxes which are set to expire this year.  For months, Governor Bev Perdue opposed extending the taxes for another year despite a shortfall of nearly $4 billion.  She recently changed her tune, and is now considering including an extension of these temporary tax increases (a 1 cent sales tax increase and income tax surcharge on high-income households and corporations) in her budget proposal in order to stave off massive cuts to K-12 education.

Faced with huge budget deficits, many state lawmakers are eyeing dangerous short-sighted budget cuts that threaten to gut essential services and state infrastructure.  In response, dedicated advocacy organizations, service providers, religious communities, concerned citizens, and professional associations have formed coalitions in more than 35 states to battle for smart fiscal policies that will protect core services and ensure that states have the resources to meet current and future needs. 

Here’s a brief overview of the newest of these coalitions:

In Georgia, the coalition 2020 Georgia officially launched on January 18th to promote a balanced approach to their budget that adequately addresses the long-term needs of the state instead of pursuing damaging cuts to services that can hurt the state’s economy.  The coalition consists of a wide variety of partners, including AARP, the League of Women Voters of Georgia, and the Georgia Public Health Association.  2020 Georgia hopes to maintain smart investments in education, public safety, health, and the environment.

In Texas, a wide coalition of organizations have created Texas Forward, a group that hopes to spur continued investment in vital public services instead of devastating budget cuts.  Texas Forward believes that smart investment now can prevent future generations from shouldering the burden of the lasting damage caused by disinvesting in services during this time of financial need.  Recently, Texas Forward urged state lawmakers to seek new revenue sources and federal funding to minimize the impact of the projected $24 billion deficit.

In Iowa, the Coalition for a Better Iowa was formed with the express mission “to maintain and strengthen high quality public services and structures that promote thriving communities and prosperity for all Iowans.”  The Coalition for a Better Iowa includes organizations representing children, seniors, human service providers, environmental organizations, and politically engaged citizens.  The coalition is committed to creating a balanced solution to the budget shortfalls while protecting vital services and investing sustainably in the state’s future.

In Montana, a group called the Partnership for Montana’s Future offers an extensive list of revenue-raising mechanisms to solve the state’s budge crisis.  The list has many specific proposals, generally categorized as collecting new revenue through improved tax compliance, closing tax loopholes, targeted tax increases, and other miscellaneous options.  The coalition consists of a wide variety of health, education, environmental, labor, and policy organizations.

In Pennsylvania, Better Choices for Pennsylvania is a coalition of health, education, labor, and religious organizations that recognize that all Pennsylvanians benefit from the services and infrastructure provided by state government.  Like the other coalitions featured, Better Choices for Pennsylvania refutes the proposition that deep tax cuts can solve the state’s budget problems.  Instead, BCP is pushing for closing special tax breaks and loopholes.  The coalition believes that helping working families through hard times will put the state in a better position towards long-term financial stability.

In Michigan, the revenue coalition, A Better Michigan Future recently issued a press release reviewing Governor Snyder’s budget proposal.  The group supports smart revenue-raising tactics like eliminating redundant and wasteful loopholes and modernizing the state sales tax to reflect the changing marketplace.

While not a new coalition, North Carolina’s revenue coalition, Together NC, recently launched a web ad.  The ad is meant to remind North Carolinians about the smart budget choices the state has made in the past that allowed it to prosper and spur citizens to take action to protect their state from falling behind (or, as the ad says, to keep North Carolina from becoming its neighbor to the south).

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.

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.

In 2009, North Carolina lawmakers eliminated their $4 billion budget gap (roughly 20% of the state’s general fund) with a mixture of spending cuts, increased federal assistance, and a two-year $1.3 billion temporary tax package.  While the tax package relied primarily on a regressive 1-cent increase in the state sales tax (it also included an income tax surcharge on high-income households and corporations), the significant amount of revenue it raised helped to stave off proposed devastating cuts to education, health care, and public safety.  But, the spending cuts made were still deep, and the impact has been felt by every family and community in the state.  

Last week, Governor Beverly Perdue announced that she intends to put together her 2011-2013 budget without the temporary taxes and instructed agencies to craft budgets that reduce spending by up to 15%. "I believe we should try to cut to the core ... and then we'll make those decisions later," Perdue said. "At this point in time, my budget will not have that sales tax increase."

Essentially, the state is back to the same budget challenge it faced two years ago — a new $3.3 billion budget shortfall — but this time without the federal government pitching in, and, if Governor Perdue has her way, with no new revenue package.  

The good news is North Carolina House and Senate Finance Committee members have been working together on a proposal for comprehensive tax reform, but no legislation has emerged from their discussions.  As North Carolina grapples with the news of a potentially significant budget shortfall next year, there are plenty of good reasons for state lawmakers to renew their commitment to progressive tax reform instead of resorting to painful spending cuts.

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.

We’re in the heart of sales tax holiday season now.  Despite cooler heads prevailing in DC and Georgia, where sales tax holidays have been scrapped due to gloomy budget projections, Massachusetts and North Carolina have recently decided to move ahead with their holidays, and Illinois has decided to join the party for the first time.

By now, you may be familiar with all the reasons why sales tax holidays are a bad idea (read this ITEP policy brief if you’re not).  Aside from those groups with a vested interest in the holidays (e.g. retailers looking for free advertising, politicians looking to build their anti-tax credentials, and confused parents thinking these things actually save them money), just about everyone seems to agree that sales tax holidays are a worthless political gimmick.  Stateline pointed out last week that analysts as varied as those at Citizens for Tax Justice and the Tax Foundation have come to an agreement on this point.

But as long as sales tax holidays remain popular enough to remain impervious to most state budget crises, we might as well take a moment to marvel at some of their more glaring absurdities.  For example, this year, Massachusetts’ sales tax holiday will apply to alcohol.  College students in the state clearly have quite an effective lobbying presence in Boston.  Interestingly, neither tobacco nor meals will be included in the holiday.

In Illinois, which doesn’t have any experience with sales tax holidays, one columnist speculates that his wife isn’t alone in erroneously believing that the back-to-school holiday applies only to children’s clothes.  Indeed, adult clothes are included as well; as are aprons and athletic supporters.  Work gloves, however, will still be subject to tax.  You’d think that the Illinois Department of Revenue already has enough on its plate without having to worry about such minutia.

Finally, in South Carolina, it looks like the state’s Tax Realignment Commission is going to recommend quite a few changes to the state’s tax holidays.  For starters, the state’s bizarre post-Thanksgiving tax holiday on guns has to go, according to the Commission.  And changes could be in store for the August holiday as well.  The State reports that if the Commission gets its way, “this could be the last year to get your wedding gown, baby clothes, pocketbooks and adult diapers at a discount on back-to-school tax-free weekend.”  Interestingly, the South Carolina representative who first introduced the sales tax holiday idea actually agrees, claiming that he wanted only the holiday to apply to stereotypical “back to school” purchases – that is, things other than wedding gowns and adult diapers.

Despite continued fiscal woes that have forced states to cut billions of dollars in spending on education, health care, transportation, and public safety, North Carolina and Missouri became the latest states to pass expensive tax breaks in the hopes of luring, or retaining, business. 

Unfortunately, there is no evidence that these unaffordable tax breaks will lead to economic recovery and job creation.  The University of North Carolina’s Center for Competitive Economies recently surveyed companies to determine the importance and effectiveness of economic development incentives on their location decisions. Availability of a skilled workforce, quality infrastructure, and presence of community colleges and universities ranked much higher than special tax breaks (13th on the list).  Time and time again, research has shown that the most effective growth strategy for states is investing in education and public infrastructure, not special tax breaks for corporations.

During the final hours of North Carolina’s legislative session last week, state lawmakers passed a pair of bills that extended, expanded and created new incentives for specified industries and companies at a cost of more than $275 million over the next 5 years.  The most costly change was an expansion of the state’s refundable film production tax credit which raised the maximum amount of the credit that can be taken from $7.5 million to $20 million.  New credits were created for video game developers and businesses who locate in eco-friendly industrial parks.  Lawmakers also extended a tax credit program known as Article 3J that legislative staff and University of North Carolina researchers have found to be ineffective at job creation, and as recently as this spring they recommended it should be eliminated altogether.
 
The second bill was developed with specific corporations in mind (although they were not named in the legislation and have still not been publicly disclosed). Commerce officials say these corporations are considering North Carolina as a finalist for their new facilities and incentives were needed to “clinch the deal”.  The legislation grants special sales tax exemptions on electricity and machinery to two data centers, a turbine manufacturing facility, and a paper mill.  Recent news reports suggest such “struggling” corporations as Microsoft (working under the code name “Project Deacon”) and Fidelity are likely to be the parties to benefit from the special rules for the new data centers. 

Proponents of the tax breaks suggested they were needed for North Carolina to remain competitive and to spur economic recovery and job creation.  Yet, no industry listed in the second package will be required to meet a targeted employment level.  

Earlier this week in a special session called by Governor Nixon, Missouri lawmakers passed a $150 million incentives package for Ford Motor Company and its suppliers.  Without the incentives, lawmakers claimed Ford would close its assembly plant in Claycomo and 4,000 jobs would be lost.  But, there’s no guarantee that Ford will stay even with the special treatment and attention it received from Missouri lawmakers.  The special tax break was paid for by cutting pensions for newly hired state employees.

North Carolina’s state Senate has gone to bat for big business by voting to eliminate an important incentive for companies to pay their fair share of corporate income taxes.

North Carolina remains in the minority of states that levy corporate income taxes but do not require corporations to file a combined tax return for all of their affiliates, a requirement called "combined reporting" by policymakers. The lack of combined reporting leaves the state vulnerable to various income shifting strategies used by large, multi-state corporations.  However, since 1941, North Carolina’s Department of Revenue (DOR) has had the authority to (at its discretion) force affiliated corporations to file combined returns.  In recent years, due to major court decisions affirming this authority and engaged leaders at the DOR, they have used this power aggressively, and successfully, to seek out corporate tax dodgers and hold them accountable for the true tax they owe.  

Last year alone, DOR’s ramped up corporate tax compliance efforts brought in more than $400 million ($150 million was budgeted) and the governor, Senate, and House’s FY10-11 budget proposals are counting on DOR to bring in another $110 million this year.

But the North Carolina Senate’s budget proposal also strips DOR of another tool that has allowed for their success, the 25 percent “large tax deficiency” penalty.  The penalty works like this: If the new tax liability determined from combining returns is more than 25% of the original tax paid, corporations may have to pay a penalty equal to 25% of the difference on top of the new tax they owe. 

North Carolina’s Revenue Secretary, Ken Lay, says that without this penalty, multi-state corporations would continue to engage in tax avoidance strategies, playing the “audit lottery” and taking a chance on hiding their income.  The DOR uses the penalty to incentivize companies that owe back taxes to settle quickly and, as a reward for doing the right thing, DOR will waive the penalty. 

They need this “stick” because without it their compliance efforts will fail to produce meaningful results and certainly will not yield the $110 million budgeted for collecting unpaid taxes.
 
Whether or not to strip this authority is at the center of North Carolina’s final budget negotiations between the Senate and House.  The provision was not included in the House’s budget proposal.

Sen. Dan Clodfelter, a Democrat and chair of the Senate’s finance committee, is leading the charge against DOR.  He thinks removing the penalty is “only fair” because businesses should not be punished for not anticipating a DOR audit that would result in different tax liability from a combined versus separate entity reporting practice. Other proponents claim that those forced to pay the penalty were “well-intentioned” and “had no way of knowing the department would disagree with its tax return years later.”
 
Secretary Lay disagrees and says that DOR focuses on pursuing cases in which businesses are believed to be intentionally hiding income through complex tax avoidance schemes commonly used by large, multi-state corporations. When DOR determines a corporation did not purposefully abuse its separate entity filing status to hide income, the penalty is waived.
 
With few exceptions, big corporations are fully aware when they're dodging their tax responsibility.  They frequently hire large accounting firms who tout tax avoidance schemes and promise them substantial tax savings. And in two recent high-profile court cases in North Carolina against Wal-Mart and Food Lion, the evidence was clear that the two companies restructured their operations with the intention to reduce their taxes in the state and elsewhere.  

Even North Carolina’s major newspapers have joined this debate on what would seem to be an unusually technical issue.  Sen. Clodfelter’s hometown paper called the Senate’s proposal to “ease corporate taxes” a” bad idea” and the Raleigh News and Observer suggested big businesses’ campaign contributions may be behind the Senate’s efforts to eliminate “tax enforcement policies that are both fair and rigorous.”

As the North Carolina Budget and Tax Center recommends, the obvious solution to address Sen. Clodfelter’s concerns would be to enact mandatory combined reporting.  Mandatory combined reporting would not only prevent tax-dodging and level the playing field between large, multi-state corporations and smaller, in-state businesses, but it would also offer clear guidance on the correct way to report income and business activity that occurred in North Carolina.

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.

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.

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.

North Carolina policymakers are facing short-term and long-term challenges this spring. A temporary 8 percent top income tax rate - and a quarter cent sales tax hike - are scheduled to expire on July 1, and leading elected officials (including Governor Mike Easley) are arguing that extending each of these tax increases will be necessary to make ends meet for the upcoming fiscal year.

And with an eye on long-term reform, a " State and Local Fiscal Modernization Commission" is asking hard questions about how best to reform the state's tax system ... and how to divide funding responsibilities between state and local governments. ITEP staff testified before the commission earlier this week. Among the likely recommendations of the Commission: eliminating county governments' responsibility for paying some Medicaid expenses, and diversifying the revenue-raising options available to local governments. One possible source of new county tax revenue: a real-estate transfer tax on home sales. NC Policy Watch has some sensible commentary on the merits (and demerits) of this proposal.

NC Budget and Tax Center Report:

Strategies for Helping Low-Income Taxpayers - Comparing a No-Tax Floor to a State EITC

Governor Michael Easley's recommended state budget set aside $63 million to reduce the income taxes paid by low-income taxpayers to be delivered through a "no-tax floor" plan. In fact, hundreds of thousands of the proposed 1.2 million taxpayers his plan claims to help already pay no income tax and would see no new benefit. In addition to not benefiting very low-income taxpayers, the governor's "no-tax floor" also has numerous design flaws that make it inferior to a state EITC.

"People in poverty should not pay income tax in this state." It was North Carolina Governor Mike Easley who said it last week in his "State of the State" speech, but it's a sentiment that is widely shared by policymakers of all stripes around the nation. However, Easley's proposed remedy "a tax credit that eliminates all state income tax for some low-income families, and cuts the income tax bill in half for others" shows both the power and the limitations of this sentiment. A new report by the North Carolina Budget and Tax Center (BTC) highlights the flaws in Easley's "no-tax floor". The main problem is that the proposed tax credit is non-refundable, which means it can be used to reduce income taxes to zero but can't be used to offset regressive sales and property taxes. As ITEP's Who Pays report has documented, these non-income taxes hit poor families far more heavily, on average, than does the income tax.

This fact may have been unclear to many initially when the proposal was presented. The governor's projections of the number who would be taken off the income tax rolls by his plan erroneously included the hundreds of thousands of North Carolinians who already pay no income taxes because of the standard deduction and personal exemption already in place.

As the BTC has also documented, there's a better answer for policymakers who are truly concerned about not taxing low-income families further into poverty: a refundable state Earned Income Tax Credit. The goal of eliminating income taxes on poor families has gained heightened visibility in recent years, largely due to the Center on Budget and Policy Priorities' terrific annual report on this topic. Now, the BTC's work is prompting a healthy debate on how best to redress the inequities highlighted in the CBPP report.

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

Several states are debating ways to spend budget surpluses.

Arkansas Governor Mike Huckabee has "tax reformation" plans which include putting more money in a rainy day fund and rebating money to taxpayers in the form of a tax credit.

In response to the surplus in Idaho, legislators are debating ways to shift the tax burden from property taxes to regressive sales taxes.

North Carolina legislators are taking notice of the financial hit that mental health services took during the previous recession and both houses have passed budgets that would provide more funds for these services. Of course, if any of these states had a Colorado-style TABOR policy there wouldn't even be a question about how to spend state surpluses because TABOR takes these important budget decisions out of the hands of elected officials.