The Virginia Senate voted down a bill this week which would have provided tax credits to corporations that give scholarships to low-income children in order to attend private schools.  The proposal was backed by Governor McDonnell as part of his “Opportunity to Learn” initiative and passed the House of Delegates on February 8.

Critics of the bill argued that the tax credit would divert the state’s general fund dollars away from the public school system towards private schools.  Proponents, including the Governor, claimed it would afford low-income students educational opportunities they would otherwise not be able to access.

The debate over the education tax credit bill contrasts vividly with Virginia’s reduction in Earned Income Tax Credit (EITC) benefits last year.  Virtually every state with an EITC ties its benefits to the federal program.  However, when President Obama expanded the federal EITC, Virginia was one of two states that decided to “decouple” its EITC from the federal changes.  Obama's EITC expansion increased benefits for families with three or more children and reduced the marriage penalty.  This would have made a minimal impact on the cost of Virginia’s EITC, which is set at 20 percent of the federal level, yet would have provided greater benefits to low-income families.

Of course, decoupling creates administrative difficulties, because it's far easier to calculate a state EITC that is simply a percentage of the federal one.

Soon, Virginia will again be faced with this decoupling issue.  The federal tax compromise enacted in December of 2010 extended the Obama EITC expansion through 2012.  When the issue arises again, lawmakers and citizens should grapple with why Virginia’s governor and House members seem willing to provide a tax credit to corporations for removing low-income children from public schools, but not a credit that goes directly into the hands of hard-working Americans.

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

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

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

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

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

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

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.

Virginia Delegate Harry Purkey, chairman of the House Finance Committee, introduced a bill earlier in the year to eliminate the state’s corporate income tax as a way to give the state (often ranked as one of the most business friendly) a “competitive edge.”  While the bill was not enacted, a joint resolution was passed directing staff of the Joint Legislative Audit and Review Commission (JLARC) to undergo a comprehensive study of Virginia’s corporate income tax system.

The draft report was released last week and delivered news that Del. Purkey is not likely to like.  The bottom line?  Virginia cannot afford to lose its corporate income tax, the state’s third largest revenue source.  Researchers found that eliminating the corporate income tax would result in a five year revenue loss of more than $3.6 billion while only generating about $220 million in additional personal income tax revenue.  To break even on revenue from eliminating the corporate income tax, Virginia would need to add more than 160,000 new jobs.  The study estimated the change would result in an additional 12,500 jobs, only 8 percent of what would be needed.  

But the corporate income tax is more than just an important revenue source. It's also an important part of ensuring tax fairness.  As the draft report says, “The fundamental purpose of all taxes is to raise revenues to finance public programs and services.  Nearly all states tax corporations because they benefit from many of these programs and services. For example, corporations use state-maintained roads to transport goods, hire employees who have been educated and trained in state-funded facilities, and rely on state courts to resolve legal matters.”

It would behoove the new governors in Wisconsin, South Carolina, and Florida, all of whom have proposed eliminating their state’s corporate income tax, to consider the new Virginia study before making a move that will deplete state revenues with no economic gain.

Earlier this week, voters in states across the nation voted overwhelmingly against implementing major changes to their states’ tax codes. Voters in Massachusetts defeated an effort to slash the state’s sales tax, preserving much-needed revenue to fund education, public safety and other vital services. In Colorado, three anti-tax measures that would have wreaked havoc on the state’s budget were also soundly defeated. Washington State voters rejected a plan that would have created an income tax while rolling back other taxes.

In other states, big business successfully used its money to influence the outcomes of ballot measures on tax issues. Voters in Missouri and Montana passed initiatives designed to ensure that neither state could implement a tax on the transfer of real estate. Neither state currently has a real estate transfer tax, yet the real estate lobby spent millions trying to pass the initiatives. In Washington and Massachusetts, the beverage and alcohol industries poured millions of dollars into campaigns to see that sales taxes levied on their products were rolled back.

And in California, corporations spent millions to defeat a ballot measure that would have repealed several poorly-thought out corporate tax breaks. As the New York Times noted earlier this week, Fox News aired a critical piece on the ballot measure as part of their "War on Business" series, as parent company News Corporation gave $1.3 million to defeat the measure. Fox executives said they "didn't know" the parent company had made these contributions.

Unfortunately, voters in a number of states also ratified measures that will make it harder to raise revenues going forward. California and Washington each face tighter supermajority constraints on revenue-raising, Indiana voters enshrined property tax caps in their constitution, and voters in Massachusetts and Washington retroactively rejected small tax increases enacted by state legislatures in the past year.

Here are the results of initiatives we’ve been following.

Personal Income Tax

Washington: Initiative 1098 - FAILED
Initiative 1098 would have introduced a limited personal income tax applicable only to the richest Washingtonians, reduced the state property tax and eliminated the Business and Occupation tax for many businesses.

Colorado: Proposition 101 - FAILED
Proposition 101 would have reduced Colorado’s income tax rate and eliminated various fees resulting in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Business Tax Breaks

California: Proposition 24 - FAILED
Proposition 24 would have eliminated several business tax breaks enacted in 2008 and 2009 and would have increased state revenues by more than $1.3 billion.

Super Majority Voting Requirements

California: Proposition 25 - PASSED
California: Proposition 26 - PASSED

The passage of California’s Proposition 25 removes the current two thirds super majority requirement needed to pass the state budget (replacing it with a simple majority vote). However, Proposition 26 institutes a new super majority requirement for raising certain fees (classifying them as taxes, which still require a two thirds vote).

Washington: Initiative 1053 - PASSED
Initiative 1053 will ensure that all tax increases (no matter their size) be approved either by a two thirds majority in the legislature or a public vote of the people.

Earnings Tax

Missouri: Proposition A - PASSED
Proposition A requires voters to decide whether two local earnings taxes levied in St. Louis and Kansas City should exist and also prohibits other localities from levying a local income tax.

Sales Taxes

Massachusetts: Question 1 – PASSED
Massachusetts: Question 3 - FAILED

Question 3 would have cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 removes the sales tax on alcohol, which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 - PASSED
Initiative 1107 repeals a recently enacted sales tax increase on a variety of goods including soda, bottled water, and candy.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 - PASSED
This constitutional amendment fully exempts disabled prisoners of war (POWs) from paying property taxes.

Virginia: Question 2 - PASSED
Question 2 changes Virginia’s constitution to exempt disabled veterans and their surviving spouses from paying property taxes.

Property Tax Caps

Indiana: Public Question #1 - PASSED
The amendment to Indiana’s state constitution permanently limits property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. These limits already existed in statute. This ballot measure simply makes them more difficult to repeal.

Colorado: Amendment 60 – FAILED
Amendment 60 would have taken away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes and require school districts to cut property tax rates in half over the next ten years, replacing the lost revenue for K-12 schools with state funding.

Real Estate Transfer Fees

Montana: Constitutional Initiative 105 - PASSED
Initiative 105 prohibits the state from enacting any type of real estate transfer tax.  

Missouri: Constitutional Amendment 3 - PASSED
Amendment 3 prohibits the state from enacting any type of real estate transfer tax.

Government Borrowing

Colorado: Amendment 61 – FAILED
Amendment 61 would have prohibited or restricted all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.

California: Proposition 22 – PASSED
Proposition 22 amends California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.

The stakes will be high for state tax policy on Election Day, with tax-related issues on the ballot in several states. With a couple of notable exceptions (a new income tax in Washington and rollback of corporate tax breaks in California), these ballot initiatives would make state taxes less fair or less adequate (or both).

Personal Income Tax

Colorado: Proposition 101 would reduce or eliminate various fees and immediately reduce the state’s income tax rate from 4.63 to 4.5 percent and eventually to 3.5 percent).  If passed, Proposition 101 will result in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Washington: Initiative 1098 would introduce a personal income tax, reduce the state property tax and eliminate the Business and Occupation tax for small businesses. If passed, this legislation would improve tax fairness in the state with the most regressive tax structure in the country.  For more read CTJ's Digest articles  about this initiative.

Business Tax Breaks

California: Proposition 24 would eliminate several business tax breaks enacted in 2008 and 2009 and increase state revenues by more than $1.3 billion.  For more details on these tax breaks, read the California Budget Project's Budget Brief on the initiative.

Super-Majority Voting Requirements

California: Proposition 25 would remove the current two-thirds super-majority requirement needed to pass the state budget (replacing it with a simple majority vote), while Proposition 26 would institute a new super-majority requirement for raising certain fees (classifying them as taxes).  For more details on these initiatives, read the California Budget Project’s initiative summaries.

Washington: Initiative 1053 would, if approved, ensure that no tax increases (no matter their size) become law without either approval by a two-thirds majority in the legislature or a public vote of the people. The Washington Budget and Policy Center gives a helpful summary of the initiative and its potential impact.   

Earnings Taxes

Missouri: Proposition A, if approved, would require that voters be asked every five years to decide whether or not local earnings taxes levied in St. Louis and Kansas City should exist. (If voters then decide to not allow them, they will be phased out over a ten-year period). The Proposition would also exclude any other local government from levying its own earnings taxes. For more on Proposition A, read Missouri Budget Project’s fact sheet.

Sales Taxes

Massachusetts: Question 1 and Question 3
A diverse coalition of businesses, advocacy organizations, citizens groups and political leaders have joined together to defeat Question 3, an initiative that would cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 would remove the sales tax on alcohol which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 would repeal the new sales taxes on a variety of goods including soda, bottled water, and candy. For more information, read CTJ's Digest article on the issue and the Washington Budget and Policy Center’s summary.

Despite the regressive nature of the sales tax, it's an important revenue source. Slashing it in either Washington or Massachusetts without replacing the lost revenue with another source would cripple the ability of those states to provide core services such as education and public safety to their residents.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 would exempt fully disabled prisoners of war (POWs) from paying property taxes. Read Missourians for Tax Justice’s take on this issue.

Virginia: Question 2 would change Virginia’s constitution to exempt veterans and their surviving spouse from paying property taxes if the veteran is 100 percent disabled.

Property Tax Caps

Colorado: Amendment 60 would take away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes.  Currently, voters can approve an increase in property tax rates above the constitutional limit which caps increases at the rate of inflation plus a small measure of local growth.  The amendment would also require school districts to cut property tax rates in half over the next ten years and replace the lost revenue for K-12 schools with state funding (an estimated $1.5 billion will be required from the state, meaning reductions will have to made to other services to support an increase in K-12 spending).

Indiana:  Public Question #1 will ask Indianans to decide if their state's constitution should be permanently altered to limit property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. Voters may find it helpful to read this brief from the Indiana Institute for Working Families.

Real Estate Transfer Fees

Missouri: Constitutional Amendment 3 would prohibit the state from enacting any type of real estate transfer tax. Missouri currently doesn’t levy any such tax.  Placing the question before voters is seen as a preemptive move by the Missouri Association of Realtors to ensure that the state can’t create a transfer tax.

Montana: Constitutional Initiative 105 would, if approved, prohibit the state from enacting any type of real estate transfer tax.  The state currently doesn’t levy such a tax. The Billings Gazette has weighed in on this Initiative.

Government Borrowing

California: Proposition 22 would amend California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.  For more information, read the California Budget Project’s brief on the initiative.

Colorado: Amendment 61 would prohibit or restrict all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.

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

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

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

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

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

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

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

The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.

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?

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

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

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

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

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

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

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

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

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

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

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

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

For many states, the fiscal picture for the next year remains cloudy at best. After years of painful spending cuts, how can states balance their budgets without further damaging essential public investments? A new report from United for a Fair Economy (UFE) lays out a few important guidelines for budget reform.

Among the more interesting recommendations: States shouldn't be afraid to meet spending needs by borrowing or drawing down their rainy day funds — but should do each in a straightforward and rational manner. This means that states seeking to adequately fund public investments that benefit future generations (such as transportation spending) shouldn't feel bad about issuing general obligation debt to fund these needs, ensuring that future generations will pay part of the cost of funding these investments. (Of course, lawmakers generally don't need any help shifting costs to future generations, but it's important to remember that there is, in some areas, a sound rationale for doing so.)

On rainy day funds, the report is a reminder that when the rainy days come, the funds should be used — and that damaging cuts to education and health care spending are a far worse result than depleting state reserves.

Responding to a recent report from the Pew Center for the States that generated hysterical headlines about unfunded state pension systems, the UFE report also notes that in the short run, unfunded long-term liabilities of the sort documented in the Pew report are a far better alternative than the loss of vital public services in the present day.

As the report reminds us, virtually every state could avoid damaging spending cuts through progressive tax reform focused on the state income tax — but these other tools should also be considered before resorting to further across-the-board spending cuts.

Many states across the country have stood idly by while inflation and improving vehicle fuel efficiency have cut into their gas tax revenues, reducing their ability to build and maintain an adequate transportation network.  Fortunately, new developments in at least four states demonstrate an increasing level of interest in addressing the transportation problem head-on.

In Arkansas this week, a state panel created by the legislature endorsed increasing taxes on motor fuels, and taking steps to ensure that such taxes can provide a sustainable source of revenue over time.  Specifically, the panel expressed an interest in linking the tax rate to the annual “Construction Cost Index,” a measure of the inflation in construction commodity prices.  As the committee chairman explained, this method would provide a revenue stream better suited to helping the state maintain a consistent level of purchasing power over time. 

Wisely, the proposal would also ensure that fuel tax rates would not increase by more than 2 cents per gallon in any given year.  Such a limitation should help to prevent the types of political outcries that have surfaced in other states when indexed gas taxes have increased by large amounts in a single year.

In Texas, attention has begun to turn toward a vehicle-miles-traveled (VMT) tax which, as its name suggests, would tax drivers based on the number of miles they travel.  Such a tax is similar to a gas tax in that it makes the users of roadways pay for their continued maintenance.  VMT’s, however, are able to avoid some of the most serious long-run revenue problems associated with gas taxes, since their yield is not eroded as individuals switch to more fuel efficient vehicles.  But Texas Senator John Carona hit the nail on the head in his description of the VMT as an idea “far into the future and way ahead of its time.”  While states like Texas should begin studying this option now, they should also follow Carona’s lead in the meantime by embracing an increase in motor fuel tax rates to address the funding problem already at their doorsteps.

Nebraska legislators have also begun discussing the need for additional transportation dollars.  In a report outlining the testimony given at eight hearings conducted last fall by the Legislature’s Transportation and Telecommunications Committee, 31 separate options for raising transportation revenues are examined.  Among those options are an increase in the gas tax and indexing the tax either to inflation or directly to the costs associated with the continued maintenance and construction of the state’s transportation network.  As the report explains, “there was nearly unanimous support from all testifiers for some type of tax or fee increase to support the highway system.”  Committee Chairwoman and State Senator Deb Fischer expects to have a major highway-funding bill ready for the 2011 legislative session.

Finally, legislators in Kansas this week also pushed forward with proposals to enhance the sustainability and adequacy of their transportation revenue streams.  A joint House-Senate transportation committee advanced two options for raising motor fuel tax collections: (1) applying the state sales tax to fuel purchases and slightly lowering the ordinary fuel tax rate, and (2) raising the fuel tax rate and indexing it to inflation.  While either proposal would be a great improvement to Kansas' stagnant, flat cents-per-gallon gas tax, the inflation-indexed approach would provide a somewhat more predictable revenue stream since its yield would not be contingent upon the (often volatile) price of gasoline.

In addition to these four states, we have also highlighted stories out of South Dakota and Mississippi during the latter half of 2009 that indicated a similar interest in doing something constructive to enhance current transportation funding streams.  And more beneficial debate has occurred in a number of states where progressives have insisted on offsetting the regressive effects of transportation-related tax hikes by enhancing low-income refundable credits.

Virginia is one of the major exceptions to the trend toward a more rational transportation funding debate.  As the Washington Post explained in an editorial this week, “[Governor-elect Robert McDonnell’s] transportation plan, which ruled out new taxes, relied on made-up numbers and wishful thinking to arrive at its promise of new funding.”  Rather than acknowledging the futility of attempting to fund a 21st century transportation infrastructure with a gasoline tax that hasn’t been altered since 1987, McDonnell worked to repeatedly block attempts to raise the gas tax during his time in the state’s legislature. 

Following the leads of policymakers in Arkansas, Texas, Nebraska, Kansas, South Dakota, and Mississippi and keeping higher taxes on the table is absolutely essential to the construction and maintenance of an adequate transportation system.  As the Washington Post cynically suggests, new revenue is so desperately needed that McDonnell should even be forgiven if he has to rebrand new taxes as “user fees” in order to get around his irresponsible campaign promise not to raise taxes.

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.

Up until last week, Virginia gubernatorial candidate Creigh Deeds had attracted a lot of criticism for failing to take a position on raising taxes to fund transportation.  Now that criticism is old news, as Candidate Deeds has firmly stated: “I have voted for a number of mechanisms to fund transportation, including a gas tax. And [if elected Governor] I'll sign a bipartisan bill with a dedicated funding mechanism for transportation -- even if it includes new taxes.”  In contrast, Republican candidate Bob McDonnell has put forth a plan that has been rightly criticized by The Washington Post as relying on “wildly optimistic assumptions, brazen exaggerations, gauzy projections and far-off scenarios.”  McDonnell’s package consists of a hodge podge of proposals: some of which run counter to federal law, some of which are politically impossible, and some of which are attached to revenue estimates that can only be described as being “invented or, worse, an intentional distortion.”

Much of Virginia’s transportation problem stems from its inadequate gas tax.  Unlike sales taxes, which are collected as a percentage of an item’s purchase price, gasoline taxes are collected as a specific number of “cents per gallon.”  In Virginia, the gas tax has been at 17.5 cents per gallon of gasoline since 1987.

Of course, given inflation, 17.5 cents today isn’t worth nearly what it was in the 1980s.  More specifically, in 1987, 17.5 cents had about the same purchasing power as 33 cents does today.  In other words, over the last 22 years, inflation has cut the real value of the gas tax by nearly 50%.  Add to that the downward pressure on gasoline sales brought about by increasing vehicle fuel-efficiency, and it’s clear why the state’s transportation infrastructure is in such dire straits.

In this light, Bob McDonnell’s transportation plan completely misses the mark.  His plan to turn Virginia’s interstates into toll roads will require approval from the federal government – something which is far from certain.  His promise to sell off the state’s liquor stores has been attached to a $500 million revenue estimate that has been thoroughly rebutted as being wildly unrealistic, especially given its assumption that $100 million in current liquor store profits will be siphoned away from “mental health, substance abuse and other human services” in favor of transportation.  Moreover, McDonnell’s pledge to redirect sales tax revenue away from schools and public safety, and toward transportation could be categorized as outrageous, were it not so politically unrealistic as to be laughable.

Adding to the absurdity, one of McDonnell’s recent campaign ads bragged that The Washington Post found his transportation plan to be deserving of credit for “the extent and specificity of its proposals.”  But “specificity” is of little value if the specifics don’t add up.  In fact, the same article that McDonnell cites in his campaign ad also included the following passage:

“Given [the] crisis in funding, and the centrality of transportation infrastructure to Virginia's economy, you'd think the candidates for governor would advance serious, plausible proposals -- and that they would include fresh revenue from new taxes or fees.  Unfortunately, former attorney general Robert F. McDonnell, the Republican, is pushing a plan that mostly rules out such revenue and that would deliver significant new funds for road-building only at the probable expense of the state's colleges, public schools, police departments, prisons and health programs… [In addition], unfortunately, the new revenue [McDonnell] identifies is one-time-only, many years distant or paltry.”