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.

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.

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

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

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

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

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

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

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

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

New polling out of Utah indicates that 53% of the state’s residents would rather their representatives raise taxes than cut state services.  Increases in the income tax, as well as additional taxes on tobacco, alcohol, coal, oil, and natural gas are all considered by Utahns to be preferable to additional state spending cuts.  Against this backdrop, Rep. Brian King is among a minority of legislators currently favoring an increase in the income tax.  Specifically, King’s plan would raise the tax rate paid by those earning more than $250,000 per year.

Although many Utah legislators remain opposed to tax hikes, even Utah’s largest business organization – the Salt Lake Chamber of Commerce – is supporting higher taxes in at least a limited form.  Specifically, the Chamber supports increasing the state’s fairly low cigarette tax rate, as well as hiking the state gasoline tax by ten cents per gallon.  The Chamber has, however, come out in opposition to Rep. King’s plan.

So far, the Republicans in control of Utah’s House, Senate, and Governor’s office have virtually ruled out tax increases, with the possible exception of a cigarette tax hike.  One state senator responded to the idea of tax increases by saying that “We're down so far in revenue ... down $1 billion dollars, that the tax increases that would be required to bring us up to where we were before would be so staggering that people who are advocating that don't understand how far we are."  Clearly, however, the same logic applies to state spending cuts, which were the primary vehicle used to close the state’s budget gap last year.  Utah’s situation is begging for a more balanced approach – a fact that Utahns appear to have recognized.

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.

While the Wall Street Journal has been complaining (without cause) about Maryland's recent tax on millionaires, they neglected to mention what has happened to states who actually took their advice and implemented flat tax reforms. According to the editorial board of the WSJ, raising rates on top earners should cause them to flee the state in search of lower taxes, while instituting low and flat taxes should attract those same taxpayers. It seems recent developments in Utah have shown that this is simply not the case.

Last year, Utah replaced its dual income tax system with a five percent flat rate. Earlier this week, Utah legislators were informed that the state is in rough fiscal waters, according to a revenue update by the Tax Commission. Although almost all sources of tax revenue are down in the beehive state, the number one culprit is the state's income tax revenues, which have fallen nearly $300 million (to date).

According to Pat Jones, the senate minority leader, had the state not lowered its income tax rates to five percent, and not reduced certain sales taxes, Utah would have gained $360 million in revenue.

Meanwhile, education funds (whose primary source is income tax revenues) and general funds are collapsing. As the recession pushes states further and further into the red, key social services are being cut to bare bones so that middle- and low-income families bear the burden.

Over the last three years Utah's tax structure has undergone major changes. In 2007, the state instituted a dual tax system that included one graduated and one flat rate income tax. Then in 2008 the state eliminated the dual tax system and replaced it with a five percent flat rate with two nonrefundable credits: one for retirement income and one to replace deductions and exemptions for low-income taxpayers.

There was much grumbling at the time about the complexity of all these major tax changes happening over such a short span of time. That grumbling is getting louder. This week the Deseret News is reporting on several problems with the new flat tax structure. Apparently, the 2008 state withholding tables were miscalculated and, more alarmingly, some folks are seeing dramatic increases that they did not expect. As former Utah Tax Commission economist Doug Macdonald says, "We were told that only a few people would pay more. It was like selling a used car -- those pushing the change (to a flat-rate tax) only talked about the good parts of the car, not the bad parts." Clearly all that glitters isn't gold.

We've heard of cigarette taxes being used to fund lung cancer research. We've also heard of alcohol taxes dedicated to alcohol treatment efforts. We've even heard of the idea to tax unhealthy foods to raise money for combating obesity. Along these same lines comes a new proposal out of Utah to tax tanning salons at a 10% rate to fund melanoma research.

Frankly, Utah would be much better off if it expanded its sales tax base to include tanning services. Twenty two states already do so. Admittedly, the 4.7% sales tax rate won't raise as much revenue as the 10% tax, but it would provide advocates of the tanning tax with much stronger footing on tax policy grounds. Given that their 10% tax failed to make it out of committee, it's certainly an idea worth considering.

The debate over whether and how to tax food has been in the news a lot lately. On the one hand, policymakers need the revenues generated from applying sales taxes to a broad base of goods and services. On the other hand, taxing food is regressive, and lawmakers always believe they will benefit politically from eliminating some portion of taxes. The result is that only a handful of states tax food.

This is currently a topic of a debate in Utah, where Governor Jon Huntsman wants to remove the sales tax on food entirely. But according to the Senate Majority Leader Sheldon Killpack, "(There's) really not much of an appetite for removing the rest of the sales tax." Governor Huntsman's plan to replace the revenue lost from removing the 2.75 percent sales tax on food is to increase the cigarette tax to $3.00 a pack. There are many reasons why increasing the cigarette tax is a lousy idea, regressivity and declining base being the most serious. Utah policymakers should follow the lead of other states like Idaho which tax food just as other goods are taxed, but then offer a targeted grocery tax credit ensuring that low-income folks receive some assistance for paying sales taxes.

Speaking of Idaho, Governor Butch Otter recently championed an increase in the state's grocery tax credit, but now that scheduled increase is threatened because the state is having difficulty balancing its budget. Kudos to Governor Otter for backing the scheduled increase in his State of the State address, rightly saying, "Idaho taxpayers are struggling. And that means we must fulfill our commitment to keep increasing the grocery tax credit. The budget I'm submitting today does just that and holds us to a principle-based policy that empowers Idahoans." While it may be tempting to delay the scheduled credit increase because of budget concerns, it's necessary that those most in need receive an increase in the credit that helps offset the sales tax they pay on food. For more on low-income credits and sales tax relief, read ITEP's policy brief.

While reports such as those out of Iowa and Virginia (see "Budget Fixes Worth Embracing", in this week's Digest) highlight some of the best ways for states to dig themselves out of their current budgetary nightmares, in many cases it appears that the cigarette tax is continuing to hold on to its title as the single most popular tax to increase among the states. Policy advocates and even many legislators are often careful to frame their support of cigarette tax hikes in terms of fighting smoking or reducing health care costs, but in times as desperate as these, it's hard not to suspect that revenue needs may be the driving force. The fact is that revenue from the cigarette tax is almost never sustainable over time because the U.S. smoking population is constantly on the decline. It's therefore difficult to get excited about the cigarette tax as a budget-fix for any period of time beyond the very short-term -- and even then, states should never be excited about raising revenue through such a regressive tax. But in states that have held their cigarette taxes constant at low levels for a number of years, it's also hard to get too upset over such proposals. Five states in particular made news this week in their debates over the cigarette tax: Florida, Mississippi, Oregon, South Carolina, and Utah.

The three states with the most intense cigarette tax debates at the moment are Florida, Mississippi, and Oregon. Florida and Mississippi haven't increased their cigarette tax rates in 18 and 23 years, respectively, and therefore have some of the lowest cigarette tax rates in the nation. Hikes in the range of 50 cents to $1 per pack are being proposed in Florida, while Mississippi's debate appears to be over a range of 24 cents to $1 per pack. In Oregon, the governor recently proposed a 60 cent hike as part of his budget. The intent of that hike is use the new revenue as part of a package to expand health care in the state -- such an arrangement is likely to result in tensions down the road as cigarette revenues fall and health costs continue to rise.

South Carolina provides another example of a state with a cigarette tax debate worth following. In this past year's session, the legislature approved a cigarette tax hike, only to eventually be vetoed by the governor, ostensibly out of concern over linking such an unsustainable revenue source to a permanent expansion of Medicaid. As the appearance of a recent op-ed praising the benefits of hiking SC's lowest-in-the-nation rate suggests, this debate is not yet over.

Utah provides another example of a potential budding cigarette tax debate. With the American Cancer society enthusiastically seeking to capitalize on what appears to be a favorable climate for a cigarette tax hike, one has to expect the idea to pick up steam during discussions over how to close the state's looming budget gap.

As we've argued in past Digest articles, there are good reasons for relying on gas tax revenues to fund transportation -- at least when an effort is made to offset the tax's stark regressivity. To the extent that the gas tax falls most heavily on those people who drive the furthest distances, or who drive the heaviest vehicles, there are certainly some advantages to the gas tax. But when the people driving the furthest distances are doing so because they can't afford to live near their places of work, for example, that advantage becomes much less appealing. In this light, recent news regarding the funding of transportation has been both good and bad. While states are seemingly beginning to come around to the idea that gas taxes will need to be raised to provide an adequate transportation infrastructure, interest in offsetting the tax's regressivity has yet to pick up steam.

Support for increasing the gas tax has gained some notable momentum in New Hampshire and Massachusetts as of late, and in Oregon, the Governor even included a small gas tax hike in his recent budget proposal. Utah has taken the idea to another level, as top officials are reportedly considering both increasing and restructuring the state's gas tax. In Vermont, however, while raising the gas tax has gotten some attention, the more prominent proposal has been to simply obtain permission from the federal government to continue using federal highway dollars without having to match that money with state funds (of which it has none). But while there are persuasive reasons for considering aid to the states as one form of stimulus for our troubled economy, one has to wonder why some Vermonters are apparently more averse than these other four states to the idea of paying for their own transportation network.

Unfortunately, while there has been an increasing acceptance of the fact that existing gas tax revenues are inadequate in many states, little notice has been given to the idea of offsetting the stark regressivity of gas tax hikes with low-income refundable credits. This idea was recently made a reality in Minnesota, and has been proposed by the Commonwealth Institute in Virginia as well. Notably, eight states already offer similar credits to offset the regressivity of the sales tax (usually designed specifically to offset the tax on groceries). Nineteen states and D.C. offer refundable EITC's, which while not designed specifically to offset regressive taxes, could perhaps be used in a similar matter. In states in need of additional transportation dollars, coupling any transportation related tax increases with the enactment of a low-income refundable credit, or the enhancement of an existing credit, should be a top priority.

Most of the tax proposals recently on state ballots would have, if approved, made state tax systems less progressive, but a new proposed ballot question in Utah would do the opposite. There, an initiative is being promoted by a group called the Rings True Coalition who are rightly aghast at the inherent unfairness of their state's single rate tax structure. Their proposal would replace that single rate tax structure with a six-bracket progressive income tax. It's not news to us that a flat rate income tax is not fair to low income folks. Doug MacDonald, a former chief economist for the Utah State Tax Commission brings this point home when he offered examples to the Deseret News of several low-income folks who actually saw their tax bill increase when the flat tax went into effect. He says, "The effect of the flat tax is that it's unfair, random and has unintended consequences." As our most recent policy brief explains, the progressive income tax is an essential element of a fair and sustainable tax system. We'll keep our eyes on the Beehive State for what could become the next big tax policy fight.

It's never too early to begin preparing for future ballot battles, particularly when they are likely to dramatically affect states' abilities to fund public services that residents depend on. Here are three states that might see major ballot battles in 2009 and 2010.

Maine: TABOR Question Appears Likely in 2009

It looks like Maine voters may face a bruising battle over state spending limits in 2009. The "Maine Leads" consulting firm claims to have gathered enough signatures to place a "Taxpayer Bill of Rights" (TABOR) spending cap on the 2009 ballot.

Supporters of this initiative have apparently learned very little from the lessons of two other states making headlines in recent weeks.

Colorado voters gave TABOR a chance, but because of the excessive restrictions it placed on their government's ability to provide valued services, a major, permanent scaling back of the requirement is being voted on this November.

Similarly, though California lacks a TABOR spending cap, the state has plenty of experience with supermajority requirements in its legislature (which TABOR would impose on any tax increase). After the recent budget debacle in California, serious talk has recently surfaced of ending their 2/3 requirement for the approval of state budgets (as explained below). Maine would be wise not to follow down California's obviously failed path.

Fortunately, a strong opposition to the TABOR campaign can be expected. The Maine Center for Economic Policy is very familiar with the issue, having already worked on the front lines of a similar battle when TABOR was on the ballot in 2006. At that time, they authored a report worth revisiting, aptly titled: "TABOR: Not Right for Colorado, Not Right for Maine.

Utah: A Return to a More Progressive Income Tax in 2010?

The Utah Rings True Coalition is beginning the process of getting a graduated rate income tax onto the 2010 ballot. The current, 5% flat rate income tax that took effect this year is defended by numerous lawmakers in the state, despite the huge breaks such a system offers to wealthy taxpayers. The group will have over a year to gather the 92,000 signatures needed.

Utah Voices for Children has authored a variety of important policy briefs on the flaws of the flat-rate system. You can find them here.

California: Recent Budget Gridlock Renews Calls to End 2/3 Requirement for Budgets in 2010

With the recent gridlock surrounding the state budget still fresh in everyone's minds, multiple legislative leaders have voiced an interest in placing on the 2010 ballot a proposal to end supermajority requirements for passing state budgets. Referring to the recent delays the supermajority requirement created in enacting their 2009 budget, Senate leader Darrell Steinberg said "We can't keep doing this. This is ridiculous. It's unproductive."

And support for ending the supermajority requirement isn't coming only from the majority party. Republican state Senator Tom McClintock has said that "The two-thirds vote for the budget has not contained spending, and it blurs accountability! If anything, in past years, it has prompted additional spending as votes for the budget are cobbled together."

The outrageously named "Fair Tax" reared its ugly head in Utah earlier this month when members of the Utah Legislature's Revenue and Taxation Interim Committee heard a presentation by Fair Tax guru Thomas Wright. He proposed scrapping Utah's current tax system and shifting to a consumption tax on most goods and services, which he calls a "Fair Tax." This would actually be a disaster from the perspective of fairness and adequacy. Relying on sales tax revenues alone is folly and would place a larger burden on low-income families. Luckily there are advocates on the ground working against this proposal. Alison Roland, budget and research director for Voices for Utah Children says, "People are considering it a cure-all but I didn't see any solid proposals to mitigate regressivity. Low-income people live paycheck to paycheck, and they would be taxed on virtually everything they do." There are real reasons to want to reform the state's tax structure. The state's new dual income tax system is complicated and lacks low-income credits to help offset regressive sales and property taxes. Let's hope legislators investigate ways to reform the current ailments of the tax structure instead of inviting more unfairness and complexity with a so-called "Fair Tax."

For once, there's some upbeat news when it comes to Proposition 13, though unfortunately it doesn't involve California. The Utah Revenue and Taxation Committee this week heard testimony on the merits of enacting a Proposition 13 style property tax cap in their state. With home values generally on the rise up until recently, Utahans have begun to express some frustration with the rising property tax bills coming out of their current fair-market-value assessment system. One knee-jerk way to prevent property tax bills from rising is to enact a law preventing taxable home values from increasing more than a certain amount in any year -- which one of the major provisions contained in Proposition 13 does. Unfortunately, the unintended consequences of such laws, including grave inequities between neighbors, huge windfalls for the rich, and the potential to slow the housing market, are less than desirable. These consequences have been discussed in more detail in earlier Digest pieces, and this ITEP policy brief.

Thankfully, the reaction to the idea in the Utah legislature has been notably unenthusiastic. But with the debate still very focused on concerns over the recent "sticker-shock" of rising property tax bills and the possibility of "taxing people out of their homes", at some point property tax reform is likely to come to the state. So far, that reform appears to be headed in the direction of forcing localities to vote any time the property tax is increased. Perhaps with some work on the part of policy advocates, a more progressive reform (such as a low-income property tax circuit-breaker) could arise out of the discontent in Utah.

Until then, Utahns can at least take comfort in the fact that with home values recently on the decline, their property tax bills can be expected to do the same. If the state were to enact a Proposition 13 style cap on assessment increases, that would by no means be guaranteed, as has been shown in Michigan.