In Arizona, The Republic explains the “mixed legacy” left by the temporary, 1 percent sales tax increase that expired last week.  Rather than using the revenue for education, as voters expected when they approved the increase, “the tax revenue also partially subsidized an ambitious $538 million business tax-cut package that lawmakers approved less than a year after passage of [the sales tax increase].”  

Pennsylvania lawmakers are likely to vote this week on a bipartisan bill that would uncap the state’s gas tax. Pennsylvania’s gas tax is supposed to rise alongside gas prices, but an outdated tax cap still on the books prevents that from happening when gas prices exceed $1.25 per gallon. The result has been hundreds of millions in lost revenue as the gas tax has failed to keep pace with the rising cost of construction. The change is supported by Governor Corbett, and is just one of many transportation revenue enhancements that have been debated or enacted this year.

In reaction to the complete failure of radical tax reform this year, Nebraska lawmakers unanimously passed legislation forming the Tax Modernization Committee to study the state’s tax structure. Fourteen senators are expected to sit on the Committee and issue recommendations in December.

Here’s an interesting piece on the donation “check offs” available on the Wisconsin income tax forms. Interested in knowing which nonprofits are most popular in terms of giving? Check out the article and then ponder whether state Department of Revenues should be burdened with the administration of collecting donations for these (albeit worthy) causes.

Wednesday, June 5, 2013 Update: The Wisconsin legislature’s Joint Finance Committee approved a budget early this morning that included an income tax cut that reduced income tax rates from 4.6%, 6.15%, 6.5%, 6.75%, and 7.75% to 4.4%, 5.84%, 6.27%, and 7.65%. The legislation also reduced the number of tax brackets from five to four. This plan stops short of Rep. Kooyenga’s plan plan described below, but is more costly than Governor Walker’s $340 million initial proposal. According to the Legislative Fiscal Bureau (PDF) these permanent tax cuts cost $632.5 million over two years and the distribution is again skewed to benefit the wealthiest Wisconsinites. Current reporting suggests this plan will pass the full legislature.

This week Wisconsin Representative Dale Kooyenga, an accountant who’s taking a lead roleon tax policy, released his plan to reform the state’s tax code. In a proposal that would more than double the tax cuts proposed by Gov. Scott Walker, Kooyenga seeks to reduce personal income tax rates and cut the number of income tax brackets from five to three. The latter would, as one report put it, put middle income earners like a secretary at a law firm in the same tax bracket as the high-earning lawyers.  Kooyenga touts simplifying the forms taxpayers file and eliminating nearly 20 tax credits.

Earlier this year, Governor Scott Walker proposed his own income tax cut ,which was slammed for mostly benefiting the wealthy (in large part because an Institute on Taxation and Economic Policy (ITEP) analysis showed that it was tilted that way). The Governor’s proposed income tax rate cuts were expected to cost the state $343 million over two years; Representative Kooyenga’s would cost $760 million in the upcoming budget and $914 million in the 2015 budget.

And it’s not just costly, it’s regressive. As the lawmaker himself concedes, “[i]t is nearly impossible to create a tax reform or tax cut that is not going to disproportionately lower taxes for upper-middle-class and rich taxpayers,” and a new ITEP analysis of Kooyenga’s plan shows his is no different. ITEP ran the numbers for the Wisconsin Budget Project (WBP) the impact of the Kooyenga income tax plan was shown to be even more skewed to the wealthy that Governor Walker’s, as WBP writes:

Here is how the tax cut would be distributed among income groups:

- The top 5% of earners alone, a group with an average income of $392,000, would receive more than 1/3 of the benefit of the income tax cuts.

- The top 20% of earners, a group with an average income of $183,000, would receive more than 2/3 of the benefit.

- The bottom 60% of earners – those making $60,000 a year or less – would only receive 11% of the benefit of the income tax cuts.

- The 20% of the Wisconsinites with the lowest incomes would receive just two cents out of every $100 in individual income tax cuts under this proposal.

WBP says that the Kooyenga tax plan’s expansion of Governor Walker’s proposal is a “bad idea made worse,” and they are right.  
 

Colorado lawmakers recently decided to enact a pair of poverty-fighting tax policies: an Earned Income Tax Credit (EITC) and a Child Tax Credit (CTC). Both had been on the state’s books at some point but had either been eliminated or were often unavailable. The EITC, equal to 10 percent of the federal credit, will become a permanent feature of Colorado’s tax code once state revenue growth improves – likely not until 2016. Similarly, the CTC will not take effect until the federal government enacts legislation empowering Colorado to collect the sales taxes due on online shopping.

Kansas legislative leadership and Governor Brownback are in the midst of secret meetings to discuss how the House and Senate will reconcile their varying tax plans. The largest sticking point is whether or not to allow a temporary increase in the state’s sales tax rate to expire. But the larger issue, that is getting less attention, is that (as ITEP’s recent analysis points out) both the House and Senate plans could eventually phase out the state’s income tax altogether.

The Rockefeller Institute is warning (PDF) states and the federal government not to get too excited about the recent “surge” in income tax revenues. Rather than indicating an economic recovery, the surge is likely a result of investors realizing their capital gains a few months earlier than usual in order to avoid the higher federal tax rates that went into effect on January 1st. As the Institute points out: “over the longer term, this could be bad news — it could mean that accelerated money received now, used to pay current bills, will not be there to pay for services in the future.”

California is one state enjoying a sizeable revenue surplus this year. The state’s Legislative Analyst’s Office understands that a good portion of the bump is thanks to rich Californians cashing in on capital gains in 2012 to avoid higher federal tax rates in 2013. Yet as budget season kicks off, lawmakers are sure to be at odds over exactly what to do with the more than $4 billion in unanticipated revenues they will have to either spend or save.  

Here’s an excellent editorial from the Wisconsin State Journal urging Governor Scott Walker and the legislature to be wise about a projected uptick in revenues and invest any “surplus” in public schools, which have endured cuts in recent years. “Our editorial board is less convinced a showy income tax cut makes sense. Up is certainly better than down when it comes to revenue predictions. But some caution is required.” It seems that the Governor may not heed this caution, however, as he appears poised to propose an expansion of his current income tax cut proposal.

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.

In his budget address this week, Wisconsin Governor Scott Walker followed through on his promise to provide middle class tax cuts. His proposal reduces the bottom three income tax rates and costs $343 million over two years. The Institute on Taxation and Economic Policy’s (ITEP) analysis of this proposal found that middle-income taxpayers do get some benefit from Governor Walker’s proposal ($43 on average), but many low-income Wisconsinites do not. In fact, those in the bottom twenty percent of the income distribution, many of whom were already dealt a blow in Wisconsin’s last budget, see an average tax cut of a mere $2. The Governor’s proposed tax cuts come on the heels of reductions to the state’s earned income tax credit and property tax homestead credit, both of which effectively raised taxes on low-income working families. A better approach would be to reverse the damage recently inflicted on the poorest Wisconsinites, by increasing the earned income tax credit and homestead credit.  

In his speech last week, the Governor also assured Wisconsinites that the state could afford his tax cuts because of a current budget surplus. That “surplus,” however, is not the result of economic growth in the state and it is not permanent, either. Instead, the Wisconsin Budget Project (WBP) offers the reality check that the surplus was created as “a result of a number of painful cuts and lapses” that were implemented to avert previous shortfalls. This year, “coupled with a rebound in revenue from the low level anticipated a year ago, state lawmakers now find themselves in the very unusual position of carrying a solid balance into the next biennial budget.” WBP also cautions that the budget surplus “isn’t an ongoing revenue stream” and that Governor Walker is wrong to assume that the state can afford his permanent tax cuts.

The Governor may be keeping a narrow political promise with his latest budget, but he is neglecting the state’s poorest residents, jeopardizing its fiscal future and potentially setting up a tax swap that middle income families will pay for in the long run.

Wisconsin Governor Scott Walker’s Secretary of Administration, Mike Huebsch, caused a kerfuffle recently when he said that the Governor “is considering” eliminating the state’s income tax and replacing the revenue with a larger sales tax. This is not a new concept, but to say it’s a flawed approach to tax reform is an understatement.  “For the first time in, I would say the last 20 years,” said Huebsch, “this is getting much more discussion across the nation. And I think it’s being led by governors like Bobby Jindal in Louisiana who are trying to figure out ways that they can eliminate their income tax. That’s really the motivation here. They want to eliminate the income tax.”  

Emulating Governor Jindal would be misguided. An Institute on Taxation and Economic Policy (ITEP) analysis found that Jindal’s proposal to eliminate income taxes and replace the revenue with higher sales taxes would actually increase taxes on the bottom 80 percent of Louisianans. Specifically, the poorest 20 percent of taxpayers, those with an average income of $12,000, would see an average tax increase of $395, or 3.4 percent of their income. The largest beneficiaries of his 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.

Since Secretary Huebsch’s comments, the Governor’s office has responded saying that Walker will propose a “middle class tax cut,” but not the complete elimination of the state’s income tax. For now, anyway.

The Governor’s spokesman did open the door to future, potentially more radical tax proposals when he said, “Governor Walker will propose a middle class income tax cut in the 2013-15 state budget. He considers this to be a down payment on continuing to drop the overall tax burden in Wisconsin in future years. He will review the impact of tax policy on job growth in other states as he considers future reforms."

Wisconsinites should know that a middle class tax cut is, like a Unicorn, commonly mentioned but rarely seen. While there are tax credits (like the making work pay credit and property tax circuit breakers(PDF)) that are genuinely targeted towards middle income families, a tax rate cut for middle income groups is almost always also a tax cut – and a bigger one, at that – for high income groups. That’s just how marginal tax rates work (and the reason across-the-board income tax cuts are such budget busters).

Income tax cuts and even elimination are practically epidemic this year. We’ll be watching to see if Governor Walker catches the bug, too. Meantime, he can already “review the impact of tax policy on job growth in other states” right here, and see that cuts do not, in fact, lead to growth.

Note to Readers: This is the third 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. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” proposals.  This post focuses on personal income tax cuts under consideration in the states.

While not as dramatic as wholesale repeal of the income tax, five states this year are likely to consider regressive income tax cuts that will compromise their ability to adequately fund public services now and in the future.

In Indiana, Governor Pence campaigned last fall on cutting the state’s already low, flat personal income tax rate from 3.4 to 3.06 percent, and has shoehorned that idea into a budget proposal that also fails to help schools that are “still reeling from the cuts” enacted during the recent recession. The Institute on Taxation and Economic Policy (ITEP) found that Pence’s tax plan would primarily benefit the state’s most affluent residents: 56 percent of the benefits would go to the best-off 20 percent of Indiana residents, while one in three of the state’s poorest residents would see no tax cut at all.  The South Bend Tribune, among others, has urged lawmakers to “pass on this tax cut” because of its high revenue cost and the way in which it would add to the unfairness (PDF) already present in Indiana’s tax code.

In Oklahoma, Governor Fallin has significantly scaled back her tax cut ambitions from last year.  Rather than aiming for a fundamental restructuring of the income tax, the Governor has proposed simply repealing the state’s top personal income tax bracket, thereby cutting the state’s top rate from 5.25 to 5.0 percent.  The Oklahoma Policy Institute explains that this proposal “would take $106 million from Oklahoma schools, public safety, and other core state services without offering any way to pay for it.”  And ITEP’s new Who Pays? report shows that last time Oklahoma cut its top income tax rate, in 2012, the vast majority of the benefits (PDF) went to the highest-income taxpayers in the state.  Meanwhile, State Senator Anderson has once again proposed a dramatic flattening of the income tax that would actually raise taxes on most of the state’s lower- and moderate income residents.

In Montana, two different proposals for cutting personal income tax rates have been floated in recent weeks.  A House proposal to cut the bottom income tax bracket has already been defeated, with Democrats opposing it because of its revenue cost and some Republicans opposing the idea of tax relief for the poor, despite the disproportionate impact (PDF) the state’s tax system currently has on low-income families.  Meanwhile, a Senate bill to repeal the top personal income tax bracket and cut the next tax rate is still alive.  A small portion of the bill would be paid for through scaling back the state’s regressive preference for capital gains income and hiking the state’s corporate income tax rate.  Overall, however, the bill would reduce both the fairness of Montana’s tax system and the revenue it generates.

In Arkansas, the debate over the income tax has yet to heat up, but the House Revenue and Taxation Committee Chairman says he’s “very bullish” about the possibility of enacting a large tax cut, and other Republicans in the legislature are reportedly discussing options for cutting the income tax. 

Finally, in Wisconsin, rumors briefly swirled that there may be a push to eliminate the state’s income tax and replace it with a much larger sales tax, akin to what’s been proposed in Louisiana, Nebraska, and North Carolina.  Governor Walker, however, responded by saying that he will wait and see how those debates play out in other states before deciding whether to advocate for such a change in 2015.  In the meantime, the Governor says he will propose what he claims will be a “middle-class” tax cut of about $340 million.  Assembly Speaker Robin Vos is hoping for a proposal of at least that size.  The Governor’s budget proposal is due out on February 20, and by then we should have a better idea of whether the plan will actually be aimed at middle-income Wisconsinites, as well as its true price tag.

In reference to Indiana Governor Mike Pence’s proposed tax plan, The South Bend Tribune urges lawmakers to “pass on this tax cut” and cites data (PDF) from our partner organization, the Institute on Taxation and Economic Policy (ITEP), to makes its case.  As the Tribune explains, “Needs of poor children, the elderly and mentally ill aren't being met … now is not the time to further stem income tax revenue. Gasoline tax revenue is down. Corporate taxes have been trimmed. The inheritance tax is being phased out. And then there's the Institute on Taxation and Economic Policy's analysis of Pence's across-the-board tax cut plan which concluded it would mostly benefit the wealthiest taxpayers. The poorest Hoosiers, who devote more of their household budgets to state and local taxes than any other income group, would be helped little, if at all.”

New Jersey’s expiring film tax credit is still paying out big bucks for TV shows and movies filmed years ago – even though these credits are billed as incentives. The state Economic Development Authority just handed the makers of Law & Order SVU $10.2 million of New Jersey taxpayers’ dollars for work done on the 2009-10 season of the show.  Hopefully New Jersey’s credit won’t be resurrected after 2015, given that studies have repeatedly shown them to be a poor use of taxpayer dollars.

Kudos to Wisconsin’s Transportation Finance and Policy Commission which will recommend to the legislature that the state increases its gas tax by five cents. This would be the first increase in the state’s gas tax since 2006. In more gas tax news, Washington State Senate Majority Leader Rodney Tom recently said that he would support an increase in the state’s gas tax. For more on the vital role that state gas taxes play in funding transportation needs across the state (and why states should raise theirs) read ITEP’s  Building a Better Gas Tax Report.

And in housekeeping news… We’ve done lots of behinds the scenes work to improve your experience when visiting the Institute on Taxation and Economic Policy (www.itep.org) and Citizens for Tax Justice’s (www.ctj.org) websites. Please take a minute and check out our slightly reorganized (and improved) site!

There’s no doubt the fiscal cliff compromise reached on New Year’s Day will impact state budgets in complex ways, as CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP) will be explaining in the coming weeks.  In the meantime here’s an important blog post from the Wisconsin Budget Project on why extending the federal estate tax cut will actually reduce Wisconsin state tax revenues.

The Roanoke Times is wrong to call Virginia Governor Bob McDonnell’s plan to eliminate the gas tax “worth debate” (we explain why here), but the editors hit the nail on the head with this: “The component of McDonnell's plan that does not merit consideration is his reliance on money plundered from education, health care, public safety and other programs to backfill transportation. The highway program is starved for money because the gas tax rate has not changed since 1987. Are teachers and their students to blame? No, they are not. Did doctors and mental health workers cause the problem? Absolutely not. Did sheriff's deputies and police officers? No. Legislators themselves are at fault, and it is shoddy business for them to strangle other services rather than accept responsibility.”

Focus on State of the State: In his combined inaugural and state-of-the-state address last week, Vermont Governor Peter Shumlin proposed cutting his state’s refundable Earned Income Tax Credit (PDF) by more than half to pay for an expanded low-income child care subsidy.  The Public Assets Institute called the governor out, observing that his proposal “would take from the poor to give to the poor.”  Rather than supporting broad-based tax increases to boost available revenue to pay for state priorities such as affordable child care, Governor Shumlin’s plan will substantially raise taxes on the very families he purports to help. From the Public Assets Institute: “...if the governor is going to insist on a zero-sum game and take from one group of Vermonters in order to “invest” in another, he should look elsewhere for the child care money. Vermont’s business tax credits would be a good place to start. The EITC was created to reduce poverty, and it’s been a great success. The same can’t be said about business tax credits and jobs.”

Focus on State of the State: During his 2013 State of the State speech, Idaho Governor Butch Otter officially outlined his intention to eliminate the state’s personal property tax. The state policy team at ITEP recently previewed this proposal (among others), saying that Idaho’s “personal property tax raises 11 percent of property tax revenue statewide, and in some counties it raises more than 25 percent. Some legislative leaders in the Senate have expressed doubts about the affordability of repeal, especially on the heels of last year’s $35 million income tax cut for wealthy Idahoans—a change that put more than $2,600 in the pocket of each member of Idaho’s top one percent (PDF), while failing to cut taxes at all for four out of every five Idaho families.”

Recent reports and opinion pieces in two states caution lawmakers about the affordability and fairness implications of excessive tax cuts.

In Indiana the Associated Press is reporting on “apprehension about [Governor Elect] Pence’s call for a 10 percent cut in the personal income tax … among top Republican lawmakers.”  Recent corporate income tax cuts, the elimination of the state inheritance tax, and declining gambling revenues have created a thick “fiscal fog,” as Republican House Speaker Brian Bosma describes it, which keeps him from committing to an income tax cut, at least for now.  To see how Pence’s plan would affect Indiana residents of different means, read the Institute on Taxation and Economic Policy’s report: Most of Indiana Tax Rate Cut Would Flow to Upper-Income Taxpayers (PDF).

Wisconsin Governor Scott Walker is making tax cutting a major priority in 2013. During a major policy speech at the Ronald Reagan Presidential Library he said, “We are working on massive tax reform…. We are going to continue to lower our property taxes.  We are going to put in place an aggressive income tax reduction reform in the state of Wisconsin.” This analysis from the Capital Times reminds us that the Governor really can’t do that much more for small businesses because the tax package he signed into law in his first budget actually eliminated taxes on many businesses altogether. The article also points out that tax cuts cost money -- money the state can ill afford to spend -- and the state’s “economy is sputtering.” If Governor Walker succeeds in making his tax cut proposals a reality, it warns, “something will have to give.”

Kansas First Lady Mary Brownback has been appointed an unofficial advisor to a task force addressing childhood poverty in the state. The Hays Daily News predicts that this could lead to some uncomfortable conversations between Governor Sam Brownback and his wife, especially regarding the tax package he recently signed into law that raised taxes on low-income families. The editors suggest, “[m]aybe the first lady can ask why the governor and state legislature agreed to an unprecedented reduction in income tax rates while at the same time eliminating various tax credits, such as the food sales tax rebate and breaks for child care and renters.”

Monday was the biggest day ever for online shopping. “Cyber Monday” shoppers spent 30 percent more this year than last. The Illinois Retail Merchants Association and other brick-and-mortar business groups used Monday’s online shopping surge to remind shoppers and policymakers alike that sales taxes should be collected on Internet purchases just as on items purchased in traditional stores: “The tax is supposed to be paid. If someone orders something from an online retailer or a catalog retailer that doesn’t collect the tax, the customer owes the money to the state.”

It appears that the gap between Wisconsin’s rich and poor continues to widen. The bottom two fifths of the state’s residents actually saw their incomes decline while the top fifth – and especially the top one percent – saw theirs climb over the last 25 years. One solution to this problem, identified by the Center on Wisconsin Strategy and the Wisconsin Budget Project, is to reform the state’s regressive tax structure because currently, “state and local taxes in Wisconsin increase income inequality rather than reduce it.”

A recent policy brief from the Washington State Budget and Policy Center identifies eight strategies to rebuilding the state’s economy. One of the goals identified is implementing a “Productive, Equitable Revenue System” through modernizing the tax structure and making it more fair. Washington has the most regressive state tax structure in the country; low income people pay far more of their income in taxes compared to wealthy Washingtonians. If state policymakers want to rebuild their economy, improving their tax structure is a good place to start.

A Missouri child advocacy group is planning on lobbying for an extension of the “Children in Crisis” tax credit during the upcoming legislative session.  But Missouri doesn’t need more tax breaks, even if they are designed with noble causes in mind. Instead, lawmakers should be looking at ways to sustainably raise enough revenue to adequately support children’s programs so they don’t have to resort to special tax breaks.

Some Wisconsin lawmakers continue to insist that Wisconsin’s progressive income taxes are too complex and unfair and that the best remedy is a flatter tax structure with a single rate. But this post from the Wisconsin Budget Project reminds us that moving to a flatter income tax structure “would benefit the biggest earners and could raise taxes for people in the working class.”  Flatter does not mean fairer.

In their brief arguing for increasing the state’s earned income tax credit, the Louisiana Budget Project (LBP) cites Institute on Taxation and Economic Policy (ITEP) data showing how the state’s tax structure asks low income families to pay more taxes as a share of their income than wealthier Louisianans. LBP advocates doubling the state’s current 3.5 percent tax credit saying, “the benefits for Louisiana families and children are proven.”

We’ve made the case for why tax breaks for big oil and gas companies should be repealed at the federal level, and now the Oklahoma Policy Institute has weighed in with their take on why state tax breaks for oil and gas should be jettisoned as well. According to the Institute, “Oklahoma’s oil and gas companies have ranked tax incentives as the least important factor affecting drilling decisions,” and offering these breaks is therefore unnecessarily “squeezing out resources for schools, roads, public safety, and other keys to long-term economic growth.”

Happy Halloween to our readers!

In honor of the spookiest of all holidays, we want to start by sharing this recent Wall Street Journal piece called Meet One of the Super-PAC Men which profiles Missouri’s Rex Sinquefield, the masked financier behind of one of the scariest state tax policy proposals around -- eliminating Missouri’s income tax and replacing it with increased sales tax revenues.

Word is that fracking taxes, income tax cuts, bank “tax reform” and possibly privatizing the Ohio Turnpike could all be priorities for Ohio’s ghoulishly anti-tax governor, John Kasich. Given the Governor’s track record of supporting tax cuts above all else, we are more than a little afraid about what is to come in the Buckeye State.

Kansas Governor Sam Brownback recently proposed a “property tax transparency” plan which will prevent automatic property tax increases when property values rise. But this proposal leaves local governments who depend on the property tax at the mercy of a zombie math formula. Brownback’s plan should spook all the citizens who depend on local government services.

This one will send a shudder up the spines of supply-siders who want to cut taxes on businesses and the wealthy under the guise of economic development.  The Wisconsin Budget Project is reporting on a national poll which found that a “majority of small-business owners believe that raising taxes on the top 2% of taxpayers is the right thing to do.” On this issue, anyway, it looks as though the good goblins are giving Grover a run for his money!

As part of the governor’s campaign to redistribute wealth to corporations and the state’s wealthiest citizens, Wisconsin lawmakers last year reduced the state's Earned Income Tax Credit (EITC) for low income, working families.  Now, leading Republican legislators have signaled their intention to build on this tax hike for the poor by dramatically cutting income taxes for the best-off Wisconsinites next year.

To that end, a joint House-Senate committee convened a hearing on income tax reform this week that was generally understood to be designed to give cover to legislative leaders' goal of replacing the state's graduated income tax with a flat-rate income tax (thus undermining the most progressive feature of any tax system, the graduated income tax).

Matt Gardner, Director of the Institute on Taxation and Economic Policy, was one of four panelists invited to testify before this hearing, and neither he nor any of the witnesses offered meaningful support for the lawmakers’ plan. Gardner's testimony pointed out that graduated income taxes (PDF) are the most sustainable long-run funding source available to states, and that moving to a flat rate income tax would actually slow revenue growth over time. Gardner also explained that the alleged “volatility” of this revenue source (e.g. revenues dip during economic downturns) is more a fiscal management problem than a tax problem. Most states maintain a rainy day fund that functions like a family savings account – it grows in good times and is there to help during bad times. Most states should also be significantly expanding their tax base by expanding the sales tax to services, modernizing their gas tax and closing loopholes in the personal and business tax codes. Gardner also reminded legislators that they should not consider relying on a broader sales tax to make up revenues lost to income tax cuts because sales taxes (PDF) are volatile in the short run as well as regressive, putting the heaviest burden on the lowest income households.

Instead, Gardner advised that the first step toward reforming Wisconsin's income tax should be eliminating loopholes such as the state's 30 percent capital gains tax break. Other panelists agreed.

It’s not necessarily what all of the lawmakers wanted to hear; we will learn when they return to session in January, 2013, if they decided to listen anyway.

Good news: Wisconsin appears to be  gearing up for serious income tax reform. Bad news: the legislator heading up the effort is a flat tax proponent.

Illinois Governor Quinn began the legislative session in February proposing a variety of loopholes be closed, but the budget he signed on June 30 didn’t close those loopholes.

Think state budgets don’t have an impact on what services localities can provide? Read this article about eight South Carolina school districts facing cuts.

Millionaires don’t flee taxes. With help from ITEP, the millionaire migration myth takes a hit in this Baltimore Sun letter to the editor.

Illinois’ pension system is in crisis.  This insightful column by the Center for Tax and Budget Accountability’s Ralph Martire argues that the state’s tax policy is at least partially to blame:  “For decades, Illinois’ antiquated, poorly designed tax policy created an ongoing structural deficit.”

Politifact highlights an increasingly common complication for those who sign Grover Norquist’s “no tax” pledge.  On July 31, Georgia voters will decide on a referendum to increase the sales tax to fund transportation, a measure that’s backed by Republican Governor Nathan Deal.  But having signed Norquist’s no-new-taxes pledge, the Governor is struggling to justify supporting a “new tax” that he believes will benefit his state’s economy.

More evidence that Wisconsin’s tax structure is unfair: two of the state’s billionaires paid no state income taxes in 2010.

Here’s a compelling read by former Congressman Berkley Bedell of Iowa, championing the “ability to pay” principle of taxation that he says accounts for the Great Prosperity period in post-war America.

An investigative series in the Toledo Blade reveals the Ohio Finance Agency isn’t properly overseeing the state’s low-income housing tax credit program.  Many of the beneficiaries of the credits are “large corporations such as banks, insurance companies, and tech firms [that] receive tax breaks even as the low-income rental homes for which they received the credits fall apart.”

Wisconsin Governor Scott Walker survived yesterday’s recall attempt. Walker has often been described as courageous by his supporters, like New Jersey Governor Chris Christie, South Carolina Governor Nikki Haley and  Senator Ron Johnson and by ideological allies like David Denholm and Gary Bauer. 

Walker seems to think of himself as courageous, too. In his victory speech he reprised a theme he’s struck before, in which he becomes the bearer of a legacy that dates back to the founding fathers and “men and women of courage” throughout history “who stood up and decided it was more important to look out for the future of their children and their grandchildren than their own political futures.”  He stops just short of calling himself one such “leader of courage” but it’s clear that’s what he’s getting at.

And how does he display this courage? By picking on people nowhere near his own size.  People like the state’s working poor whose low wages can’t support a family and who rely on the Earned Income Tax Credit to make up some of the difference.  Walker cut that.  He also cut medical programs and property tax credits that the state’s poor and elderly depend on.

This is courage?

The state’s most influential, on the other hand, got all kinds of perks from their governor, like a widely abused tax loophole for corporations and a nice tax break on capital gains for investors.

Since when does it take courage to pander to people in power?

Walker has made consistently bad choices about who wins and who loses in Wisconsin, and his all out assault on public sector workers is just one part of that.

It seems unlikely that the post-election, temporary change in the state’s Senate will slow Walker’s relentless pursuit of his boilerplate conservative agenda, which he admitted has been frenetic.

Governor Walker fancies himself some kind of hero taking on powerful forces at great personal cost, but it’s well documented that the powerful forces are actually some of Walker’s biggest fans. Call it what you will, but you can’t call it courage.

• The Institute on Taxation and Economic Policy talks back to the Wall Street Journal about its failure to cover the consequences of the new Kansas tax bill for the state’s working poor.

• Tomorrow Wisconsin Governor Walker will face a recall election. What’s his record on taxes? Taking from the poor and giving to the rich. 

• North Dakota Tax Commissioner Cory Fong comes out against a radical ballot initiative that would do away with the state’s property tax. The Commissioner writes that Measure 2 is risky, and will be destabilizing for North Dakotans. The vote is on June 12.

• Louisiana’s legislature appears to be nearing adjournment now that the House approved a nearly $26 billion budget for the next fiscal year. The budget, now sitting on Governor Jindahl’s desk, includes $270 million in “one-time money” scavenged from various programs to balance the budget.

• Read this op-ed in the Chicago Sun-Times from the CEO of the National Retail Federation calling for fairly taxing Internet sales and pointing out that “modern software, allowing sales taxes to be calculated as quickly and easily as shipping costs, renders” any remaining objections a so-called Amazon Tax obsolete.

• There’s a trend this year of Republican governors striking deals with Amazon.com to begin collecting sales taxes on purchases made by their states’ residents.  New Jersey’s Chris Christie penned a new agreement with the company that can be added to the list of similar deals struck in Indiana, Nevada, South Carolina, Tennessee, Texas, and Virginia.

• When the richest woman in Wisconsin (and the governor’s biggest donor) pays no income tax to the state in 2010, it gets people asking about loopholes in the tax code.

• We aren’t the only think tank taking issue with the Kansas tax bill recently signed into law.  The fiscally conservative Tax Foundation recently issued a report which says that provisions in the bill to exempt “pass through” business income are “problematic” and an invitation to tax avoidance.  

• With summer road tripping underway, it’s bad news for Iowans that the state’s Department of Transportation appears to be more than $200 million short. Governor Branstad was right to say the state gas tax should be increased next year (as should almost every state’s).

Photo of Governor Christie via Bob Jagendorf Creative Commons Attribution License 2.0

• The Institute for Research on Poverty at the University of Wisconsin-Madison released a report showing that Wisconsin poverty rates actually dropped between 2009 and 2010 – from 11.1 to 10.3 percent – thanks to safety net programs that were effective in keeping people out of poverty during the recession. The Institute’s director praised the earned income tax credit and food stamp programs saying that they “have done a fantastic job in this recession.”

• Rhode Island’s House Committee on Finance considered five bills this week that would raise income taxes on the wealthiest Rhode Islanders.  Read ITEP’s testimony to learn how these proposals are the best option for Rhode Island policymakers who want to both raise revenue and improve tax fairness.

• Massachusetts Governor Deval Patrick created a special Tax Expenditure Commission last year to examine the more than $26 billion in tax breaks the state hands out each year (which amounts to more money than the state is expect to take in this year!).  After months of meeting, the members unanimously approved a report that the Commission Chair referred to as a “comprehensive roadmap” to reforming the system.  Many of the Commission’s recommendations mirror those in CTJ’s recommendations for cleaning up state tax codes – and the process by which they are modified. The 8 formal recommendations in Massachusetts include: reducing the number and cost of current tax expenditures; periodically reviewing expenditures and including an automatic sunset every five years; and identifying and publishing clear policy purposes and outcomes for each expenditure.

• And this article is about a sales tax holiday for meals that’s been proposed as an actual piece of legislation in Massachusetts.  A week long sales tax holiday on meals purchased at restaurants? Sounds like a boondoggle of a loophole to us. Thankfully, commonsense prevailed and the idea was solidly defeated.

We’ve written a lot about plans to eliminate Missouri’s income tax and boost the sales tax instead, spearheaded by anti-tax mastermind Rex Sinquefield.  He had hoped to put this radical plan before voters this November but the initiative’s advocates aren’t sure they can use the signatures they’ve gathered because of legal challenges.  The awful policy implications of the Sinquefield plan aside, this article explains how the ballot initiative process in Missouri has gone kablooey in recent years.   The 22 versions of the anti-income-tax initiative filed with the Secretary of State is in some ways an indictment of Missouri’s elected officials who have repeatedly refused to participate in serious tax reform debates.

With tax day just around the corner, Wisconsin Budget Project reminds us that working Wisconsinites who qualify for the Earned Income Tax Credit will actually see fewer benefits this year thanks to draconian cuts in the credit passed in the 2011-13 budget.

Maryland’s Senate President says that lawmakers “have an agreement” on a package of progressive personal income tax increases, but that they simply ran out of time to pass that package before last night’s midnight deadline.  Gov. O’Malley is expected to call a special session so that the increases can be enacted, but he has not done so yet.

Here’s a great read from The American Prospect that talks about the need to reform regressive state and local tax structures, citing ITEP research.

Whatever comes of rumors that Governor Haley might face tax fraud charges, a modified income tax cut has passed out of South Carolina’s House Ways and Means Committee. Perhpas due to ITEP’s analysis, which found that the poorest South Carolinians would see their taxes increased under the legislation, it was modified to at least spare the poorest South Carolinians from new taxes.

Check out yesterday’s post from the Wisconsin Budget Project showing that diminishing revenues are a "purple problem" because taxes keep getting cut no matter who's in power.

The personal income tax has been under threat of repeal for most of this year in Oklahoma, but the Oklahoman reported yesterday that the Chair of the House Taxation and Revenue Committee says it’s unlikely full repeal will come to fruition.  A cut in the top tax rate, however, still appears likely so they’re still buying the economic snake oil.

Here is a commonsense editorial from the Kansas City Star advocating for the taxing internet purchases and the streamlined sales tax agreement.  

This week, Progressive Maryland came out with their compromise plan designed to bridge the gap between the personal income tax increases passed by the state House and Senate.  The plan was analyzed with the help of the Institute on Taxation and Economic Policy (ITEP), and would raise needed revenues while actually reducing the unfairness of the state’s regressive tax system.

In signing a new two-year budget, Wisconsin governor Scott Walker fattened corporate welfare programs while making cuts to just about every public service the working poor depend on, including healthcare, child care, higher education and transportation.  The Center on Wisconsin Strategy has correctly labeled the new budget a “Betrayal of Wisconsin Values.”

According to a release from the Center:

• Funding for Medicaid and BadgerCare, the programs that ensure that all children have access to healthcare, will be cut by $500 million;
• Funding for Child Care, the service that low-income workers depend on to take care of their children so they can go to work, will be cut by $15 million;
• Funding for the Property Tax Circuit breaker, the program that reduces property tax payments for low-income families (many elderly), will no longer be indexed to inflation and will be worth $13.6 million less;
• Funding for technical colleges, education that provides skills for new workers and retraining for displaced ones, will lose $71.6 million, or 25% of its total funding;
• Funding for Public Transportation, for many low-income workers the sole mean of getting to and from their job, will be cut by $9.2 million;
• Funding for the Earned Income Tax Credit (EITC), which provides the working poor with a tax credit to offset regressive payroll taxes, will be scaled back by $56.2 million.  The EITC has been championed by economists across the political spectrum for its significant work incentive and capacity to help the working poor pull themselves out of poverty. 

These and other cuts amount to $2 billion worth of support yanked out from underneath the working poor.  Yet, in his frenzy of service cuts, Governor Walker somehow found room for $2.3 billion in tax breaks over the next decade, in the form of a domestic productio

n activities credit, two different capital gains tax breaks, and a variety of new sales tax exemptions for priorities like snowmaking and snow grooming equipment.

Of all the factors that stimulate a state’s economy by attracting private sector business, corporate taxes are among the least significant.  A skilled workforce capable of getting to job sites is a much higher priority for virtually any smart business owner. Unfortunately, Governor Walker’s budget just put that asset in serious jeopardy.

Photo via Blue Robot Creative Commons Attribution License 2.0

 Two states — Nebraska and Utah — recently enacted new laws diverting a sizeable chunk of their state sales taxes to transportation.  Education, human services, and other vital programs are expected to suffer as a result of this diversion.  Instead of siphoning off much-needed revenues from other areas of the state budget, these states should have boosted their traditional transportation revenue sources, most notably the gas tax.

In Nebraska, Governor Heineman reluctantly signed a bill last week that will divert 0.25 percentage points of the state’s 5.5 percent sales tax to road repair and construction.  Just two months ago, Heineman had called the same proposal “risky” and “unwise,” though the state’s improved revenue picture apparently caused him to abandon this position. 

A wide range of people, including both opponents of the bill and the bill’s sponsor, have pointed out that the inadequacy of Nebraska’s gas tax is to blame for the state’s unmet transportation needs. 

However, given the lack of real interest in raising the gas tax, lawmakers ultimately decided to meet those needs by simply prioritizing roads over education, public safety, and other services.

In Utah, a very similar law was enacted earlier this month when the state’s legislature narrowly overrode Governor Herbert’s veto of a measure redirecting up to $60 million in sales tax revenue to transportation each year.  Herbert had vetoed the bill out of concern for its impact on education funding, and on the state’s ability to be flexible in dealing with future budgetary challenges. 

An increase in Utah’s gas tax, which hasn’t been raised in fifteen years despite rising transportation costs, could have precluded the need to redirect such a substantial sum of money away from vital public services.

Making matters worse, an analysis from Utah Voices for Children points out that a significant amount of general fund revenues in Utah are already earmarked for transportation.  These earmarks, as well as additional borrowing, have allowed transportation spending to swallow up an increasing share of the state budget over the last five years, with spending on education, health, and environmental quality suffering as a result.

Unfortunately, this decline in other areas of the budget may not be an accident.  The Utah bill’s original sponsor, Sen. Stuart Adams, has reportedly touted the siphoning-off of revenue from other areas of the state budget as a major benefit, since it shrinks the size of programs he tends to dislike. 

Given that basically every state levies a gas tax that won’t keep pace with transportation cost growth unless its rate is periodically raised, this argument (whether made explicitly or not) will no doubt remain powerful among conservative lawmakers for years to come. 

Raising transportation-specific taxes and fees, while not always the most progressive solution, is no doubt preferable to allowing other areas of state budgets to be gutted in order to fund road repair and construction.

*MAY 28 UPDATE* Wisconsin Republicans are also working hard to redirect revenue away from schools and toward transportation.  The legislature's budget committee recently voted, along party lines, to redirect $125 million in sales and income tax revenue to transportation in 2012, and to redirect 0.25% of such revenue to transportation in 2013 and each year thereafter.  It's important to note that Wisconsin's gas tax used to be indexed to inflation — which allowed it to grow alongside increases in transportation infrastructure costs.  Inflation indexing was eliminated in 2006.

California, Delaware, Michigan, New Jersey, Oregon, and Wisconsin have all experienced better than expected revenue growth over the past few months.  This is unambiguously good news, but for many lawmakers it’s unfortunately an excuse to ditch any restraint on tax-cutting.

California

In California, stronger-than-expected revenue growth has made the GOP even more vocal in opposing efforts to extend a variety of temporary income, sales, and vehicle tax increases.  Governor Jerry Brown’s continued push to extend these tax hikes is very sensible given that the unanticipated revenue boost was still quite small compared to the state’s total budget.  

Brown has behaved much less sensibly, however, in deciding to abandon efforts to end a variety of business tax credits.  As Jean Ross of the California Budget Project points out, “One of the virtues of the original budget was that there was some level of shared sacrifice.  But now, some businesses are going to come out ahead of where they were last year.”

Delaware

In Delaware, a surprise bump in revenue collections has inspired the state’s Democratic Governor, and a number of Republican legislators, to begin pushing for tax cuts.  

Specifically, the Governor has proposed cutting taxes for banks, businesses, and individuals with taxable incomes of over $60,000.  

In reference to the windfall that banks would receive under the Governor’s plan, Rep. John Kowalko argues that "They do pretty damn well with the federal handouts … I want to see a return on the investment before I will blindly vote on that."

Michigan

In Michigan, better-than-expected revenue growth in the current fiscal year may be used to reduce cuts in school spending that are currently under consideration.  

Any unexpected revenue growth in subsequent fiscal years, however, will be swallowed up by the massive business tax cuts that Michigan’s legislature passed last week.

New Jersey

In New Jersey, unanticipated revenue growth is expected to be used by Governor Chris Christie as yet another excuse for doling out billions in corporate tax breaks.
 
As New Jersey Policy Perspective points out, however, “the state remains stuck in a very deep hole … even with that growth, the state’s revenue collections would still be $3.4 billion less than was collected in FY2008, the year prior to the recession … the state must choose to invest these revenues wisely, using the money to restore the devastating cuts made to services and to pay into the state pension system.”

Oregon

In Oregon, unexpected revenue growth will likely be used to restore cuts to human services and public safety, at least in the short term.  By 2013, however, the state’s “kicker” law will probably require that some amount of revenue growth be dedicated to tax cuts.  

As Rep. Phil Barnhart points out, "Because this budget is so bad, we don't take care of schoolchildren, basic health issues and maintaining prisons — and we have a kicker at the end … We are stuck with this kicker law when we really need to spend some of this money on the budget."

Wisconsin

Finally, in Wisconsin, Governor Scott Walker has stubbornly refused to adapt to changing conditions on the ground.   If Walker gets his way, $1 billion will still be slashed from public schools, despite the state’s recently improved revenue picture.

In his recent budget address, Wisconsin Governor Scott Walker said, “The facts are clear: Wisconsin is broke and it’s time to start paying our bills today.” Perhaps the “facts” aren’t entirely clear for the Governor, given new improved revenue forecasts as well as more balanced revenue options that are available to lawmakers and described in a new report.

The Wisconsin Budget Project is reporting that the state’s revenue forecast has improved. The Legislative Fiscal Bureau released an updated revenue estimate saying that the state is likely to have an additional $636 million in revenue before the end of the 2013 fiscal year compared to earlier estimates. This breaks down into $233 million above current projections for the current fiscal year and $200 million more in each of the next two years.  

Even without this revenue boost, of course, there are ways to address budget gaps that don’t include union busting, cutting recycling programs, and massive cuts to education. The Institute on Wisconsin’s Future (IWF) recently released their updated Catalog of Reform Options for Wisconsin, which outlines a set of options for reforming the sales tax, business taxes, and personal income tax.

Wisconsin lawmakers will certainly find more useful ideas in IWF’s catalog than in Governor Walker’s proposals.

On Sunday the Milwaukee Journal Sentinel published an interesting article about the capital gains tax breaks that Governor Scott Walker is proposing in his biennial budget. The article’s title “Walker’s proposed capital gains tax break gets lukewarm backing” says it all. Capital gains tax breaks are costly and are extremely regressive because most capital gains income is received by the richest taxpayers.

Wisconsin already allows a tremendously generous 30 percent exclusion for capital gains income, which ITEP estimates cost more than $150 million in 2010. The Governor is proposing two changes to how capital gains are currently taxed: “a 100 percent exclusion for capital gains realized on Wisconsin-based capital assets held for five or more years and a 100 percent capital gains tax deferral for gains reinvested in Wisconsin-based businesses.”

If implemented, these changes would cost the state about $36 million over the next two fiscal years. At a time when the state is facing a $3.6 billion dollar shortfall, surely there are better ways that $36 million could be used.

For more on the ongoing budget debate, check out the Wisconsin Budget Project’s blog and the Institute for Wisconsin’s Future (IWF).

Last month, Wisconsin Governor Scott Walker introduced his budget plan to help balance Wisconsin’s books for the remainder of the current fiscal year. The most controversial piece of the budget repair bill calls for a reduction in benefits for public employees and the end of their collective bargaining rights.

However, the Wisconsin Budget Project reminds us that public employees in Wisconsin actually aren’t overcompensated for their work.  The New York Times opines, “Like many governors, he wants to cut the benefits of state workers. But he also decided a budget crisis was a good time to advance an ideological goal dear to his fellow Republicans: eliminating most collective bargaining rights for public employees.”

It’s worth noting that shortly after taking office, Governor Walker pushed through his own tax cuts, which will cost the state $117 million in the next biennium. This begs the question: If the Governor was really serious about balancing the state’s books, why is he passing more tax cuts that will need to be paid for in the future?  Governor Walker would likely say that passing these tax cuts are proof that he is fulfilling his campaign promise that “Wisconsin is open for business.” But we know that companies look for more than lower tax rates or special tax credits when deciding where to locate.

The debate about the budget repair bill rages on. Democratic Senators remain outside the state to prevent a quorum, and protestors are gathering in Madison every day.  With the unveiling of Governor Walker’s biennial budget Tuesday night, the debate is only going to heat up. The Governor's budget includes no fee or tax increases and reduces aid to local governments by over a billion dollars. In fact, overall spending is reduced by $4.2 billion under the Governor's plan.

The Governor’s proposed budget creates distinct winners and losers. In terms of tax policy, low-income folks are likely to be hit the hardest by this budget, but certain Wisconsin investors will come out ahead. 

For example, the Governor proposes to also eliminate indexing of the state’s homestead credit, which offers property tax relief specifically targeted to low-income Wisconsinites. Despite the Earned Income Tax Credit’s impressive track record of lifting people from poverty, the proposed budget will reduce the percentage of the federal credit that Wisconsin currently allows.

On the other hand, Wisconsin allows one of the most generous capital gains tax breaks, and the Governor is proposing to add a 100 percent capital gains exclusion for investors who invest in Wisconsin businesses and keep those investments for at least five years. 

The Governor is not making draconian cuts and moving against collective bargaining because it's necessary to balance the budget. He's making choices that reflect the priorities of businesses and anti-government activists. He could make other choices.

For example, instead of creating a new giveaway for investors, he could move in the opposite direction by reducing or eliminating the state's existing break for capital gains. Wisconsin is just one of eight states that offer special treatment for capital gains income. ITEP estimates that eliminating this regressive and costly exclusion could bring in more than $151 million.  Given the concentration of capital gains income among the very wealthiest taxpayers, the benefits of capital gains tax preferences are, of course, focused on the well-to-do. In fact, virtually all — 95 percent — of the tax reductions arising from Wisconsin’s 30 percent capital gains exclusion are realized by the richest 20 percent of taxpayers in the state. The remaining 80 percent of taxpayers collectively receive just 5 percent of the overall capital gains tax break.

This fierce budget debate presents a historic opportunity for all Wisconsinites to take a closer look at their state’s budget, tax structure, and tax credits and ensure that these important fiscal structures reflect the state’s values.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ill-conceived tax ideas are coming out of statehouses and governors’ mansions at a faster rate than we’ve seen in quite a while.  Here’s a quick summary on recent proposals receiving serious consideration in Arizona, Florida, Idaho, Maine, Michigan, Minnesota, New Jersey, Ohio, and Wisconsin.

Arizona: Business tax breaks and property tax breaks are being pushed by the Arizona Chamber of Commerce, and legislative leaders are taking them seriously.  The specifics have yet to be worked out, but expect at a minimum to see tax subsidies ostensibly aimed at boosting business hiring and investment.  As the Center on Budget and Policy Priorities (CBPP) has explained, however, states cannot stimulate their economies by cutting taxes.

Florida: Newly elected Governor Rick Scott continues to insist that “the way to get the state back to work is to cut property taxes and phase-out the corporate income tax, and we’re going to get that done.”  The state’s enormous budget gap has caused Senate President Mike Haridopolos to approach the issue more cautiously, though he still claims that “if we see some opportunities for tax relief that we feel absolutely confident will create more jobs and actually grow the economy, we’re open to them.”  Haridopolos is also pushing a “Taxpayer Bill of Rights” (TABOR) proposal similar to the one that decimated Colorado’s education funding stream.

Idaho: Legislators in Idaho — including the House majority leader — are preparing to revive an idea they first proposed toward the end of last year’s session: slashing the state’s corporate income tax rate from 7.6 percent to 4.9 percent.  Idaho legislators are also discussing cutting the state’s top personal income tax rate from 7.8 percent to 4.9 percent.  Each of these changes would drastically reduce the amount of revenue available to pay for vital state services, though by proposing that these changes be phased-in gradually over the course of the next decade, legislators are hoping to avoid having to spend too much time thinking about what state services will eventually have to be cut.

Maine: State Tax Notes (subscription required) reports that the chairman of Maine’s Senate tax committee plans to make cutting the state’s personal income tax rate his top priority.  Unlike the tax reform package that Maine voters recently rejected, this cut would be paid for not by broadening the state’s tax base, but by cutting spending and hoping for strong revenue growth.  Maine’s legislators are also apparently contemplating a constitutional amendment that would require supermajority support in the legislature in order to raise taxes.  A supermajority requirement of this type would result not only in lower state services, but also in more tax loopholes.  This is because such a requirement would prevent a simple majority of legislators from eliminating a tax loophole unless they also enlarged another loophole or lowered tax rates in a way that resulted in no net revenue gain.

Michigan: House and Senate leadership on both sides of the aisle in Michigan have inexplicably come to an agreement that the state’s EITC should be cut.  It’s unclear why tax increases on low-income families have suddenly become so popular in Michigan.  If Governor Rick Snyder gets his way, some of the revenue generated by taxing low-income families will likely to be used to pay for his proposed $1.5 billion cut in state business taxes.

Minnesota: The Republican leaders of Minnesota’s state legislature made clear this week that business tax cuts will be one of their top priorities.  One Senate leader has proposed cutting the state’s corporate income tax rate in half by 2017 and freezing statewide taxes on business property.  Fortunately, Minnesota Governor Mark Dayton is likely to vigorously oppose these cuts.

New Jersey: Democratic legislators are seriously considering a move to single sales factor apportionment for their corporate income tax.  The bill has already cleared the relevant committee, and will move to the full Senate soon.  See ITEP’s policy brief criticizing the single sales factor for state corporate income taxes.

Ohio: Ohio’s House and Governor have declared repealing the state's estate tax to be a top priority.  Local governments receive a majority of the revenue generated by Ohio’s estate tax, and therefore oppose its repeal.  Ohio’s House leaders would also like to create a business tax credit for hiring new employees.

Wisconsin: Governor Scott Walker has proposed a variety of business tax breaks and, as in Maine, the creation of a supermajority requirement to raise taxes.  More bad ideas are almost certain to come from Wisconsin in the weeks ahead, as Governor Walker made clear during last year’s campaign that he supports the outright repeal of Wisconsin’s corporate income tax.

Earlier this week ITEP released A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness. The report takes a hard look at the eight states that currently give special treatment to capital gains income including: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.

The report finds that the benefits of state capital gains tax breaks go almost exclusively to the very best off taxpayers. In fact, in the eight states highlighted, between 95 and 100 percent of the state tax cuts from these tax breaks goes to the richest 20 percent of taxpayers.

Capital gains tax breaks also come with a pretty large price tag.  In tax year 2010, these eight states will lose about $490 million due to these loopholes, with losses ranging from $14 million to $151 million per state. These revenue losses represent a substantial share of currently-forecast budget deficits in several of these states.

ITEP finds that these preferences are costly, inequitable, and ineffective, depriving states of millions of dollars in needed funds, benefitting almost exclusively the very wealthiest members of society, and failing to promote economic growth in the manner their proponents claim. State policymakers cannot afford to maintain these tax breaks any longer.

Like the federal and state governments, local governments are having a difficult time balancing budgets right now. One option is to close tax loopholes.

The Institute on Wisconsin’s Future recently released their report detailing how property tax exemptions are hurting local communities' ability to provide basic services. This helpful report urges a review of all 104 property tax exemptions currently on the books in Wisconsin.

While the authors admit, “There is no one silver bullet that repairs the entire system,” certainly we could all agree that “Property tax revenue is a major source of local operating funds. It is a time to be careful and efficient with this resource. It is time to close loopholes, be consistent and ensure that all groups pay their fair share.”

Tax increases on low-income working families hit hardest by the economic downturn are on the table in a handful of states, where lawmakers are considering eliminating or reducing their state Earned Income Tax Credits (EITC) as one small “solution” to their large budget shortfalls.  The proposal under consideration in Wisconsin is perhaps the most egregious, where governor-elect Scott Walker has also pledged to cut taxes for his state’s wealthiest households and corporations. 

In search of reasons to “examine” and potentially cut the credit, Wisconsin lawmakers have begun to voice concerns about the increased cost of their EITC program.  But the reason for this increase is obvious: millions of Americans are experiencing reduced work hours and wages, or are without a job at all, as a result of the lingering economic downturn.  This means that more families are in need of the additional income assistance the credit provides to help pay for food, housing, transportation, and other necessities. Proposals to cut state EITCs amount to kicking these vulnerable families while they're down.

Furthermore, the federal government recently recognized the hardship these families are facing and decided to expand the benefits of the federal EITC program.  Since state EITCs are calculated as a percentage of the federal credit, this translates into a very small increase in the cost of state EITCs.  Reducing these state EITCs now would essentially cancel out some of the much needed progress being made on this issue.

Unfortunately, state lawmakers will continue to grapple with significant budget dilemmas in 2011 and beyond.  But balancing their budgets on the backs of those families hit hardest by the recession should be a nonstarter.   When asked about the potential threat to Wisconsin’s EITC, Jon Peacock of the Wisconsin Council on Children said, “We would have to question the priorities of any politicians willing to cut the EITC while refusing to adjust the minimum wage for inflation and insisting on giving tax breaks to the wealthiest households."

State EITCs provide affordable, effective, and targeted assistance to the growing number of individuals and families living in poverty.  Rather than eliminating state EITCs, now is exactly the time for states to consider enacting more of these valuable programs, or expanding existing EITCs.

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.

Wisconsin Governor-elect Scott Walker and Ohio Governor-elect John Kasich want both of their states to stop any work on high speed rail projects that are funded with federal stimulus dollars. Yet, both newly elected governors seem to want the millions of dollars the federal government is offering. (For Ohio that amounts to about $400 million, and Wisconsin was slated to receive $810 million).

Neither governor wants to put the transportation money into high speed rail programs. Instead they want to use the money to fix roads and bridges. The newly elected Republican governors apparently like federal spending — when it means money they can spend as they please.  

It turns out that Ohio has already been given federal dollars to help with the transportation issues Kasich mentions. A letter from Transportation Secretary Ray LaHood reminded Kasich that Ohio has already received over $1 billion for road, bridge, and airport projects. As for the rail funding, LaHood clarified that, "none of those funds may be used for anything other than our high-speed rail program."   

On election night, Walker unveiled his new slogan “Wisconsin is Open for Business.” But shutting down the progress already made to produce a rail line connecting Madison to Milwaukee means that local employees at the company making the trains, Talgo Inc., fear for their jobs and plans to hire a total of 125 employees are on hold. Earlier this week three Wisconsin Congressman introduced a bill that would allow the state to return its federal high-speed rail money and put it toward federal deficit reduction. Of course, Wisconsin's share of the rail dollars is just a drop in the bucket compared to the deficit.

Not everybody is taking this same approach with the federal gift horse. Illinois officials seem ready to take the money and Talgo’s operations if no one else wants them. Illinois Governor Pat Quinn has said to Talgo that his office “stands ready to do whatever it can to make Illinois your new Midwestern home.”  The Illinois Transportation Secretary has said that if Wisconsin doesn’t want the money for high speed projects they will take it.  Local officials seem equally enthusiastic “Let’s get after it,” said one County Board Chairman. “I’m in line — what do I need to do? I don’t think I can do a back flip, but absolutely that would be fantastic.”

Wisconsin Republican gubernatorial candidate, Scott Walker, is in favor of repealing Wisconsin’s corporate income tax.  The state’s current corporate income tax brings in over $1.5 billion every two years to the state’s coffers. Walker says that eliminating this tax will boost the state’s economy. This seems an especially foolish position given the state’s budget shortfall, which according to the Wisconsin Budget Project totals about $3 billion.  Democrat Tom Barrett has sensibly pointed out that eliminating this revenue source will mean that the state won’t be able to provide as many services and ultimately this policy change will shift taxes onto the backs of middle class families.

Last weekend, Jon Peacock from the Wisconsin Budget Project wrote an op-ed in the Milwaukee Journal Sentinel that raised some important issues about the need to consider tax fairness in any tax reform discussions in Wisconsin. This issue is especially relevant given recent data from the Census Bureau showing that poverty rates are rising. (Read ITEP's most recent report on this issue.)

The op-ed cited findings in ITEP's Who Pays? that Wisconsin has a regressive tax structure. As the debate over tax reform continues, Wisconsin lawmakers should heed Peacock's advice and improve the state's tax collection process, ensure corporate tax loopholes remain closed, consider broadening the sales tax base, apply the sales tax to products purchased online, and capture a larger share of federal aid.

Taxes are also a hot issue in New Hampshire right now. A forum on tax issues was held by the Rockefeller Center at Dartmouth and the Granite State Fair Tax Coalition and featured panelists from non-profits, think-tanks, and local government. ITEP's Who Pays? data was discussed during the forum to make the case for real tax reform in the state.

Cathy Silber from the Granite State Fair Tax Coalition summed it up when she said, "We can cut back on services when the need goes up or costs rise, we can raise revenue sources, we can combine these two options, or we can do nothing."

The decision is important given what's happening to families in the state now. The New Hampshire Fiscal Policy Institute's (NHFPI) recent analysis of the new Census Bureau's data finds that in New Hampshire "the poverty rate appears to have climbed 1.8 percentage points over the course of the economic downturn."

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 an attempt to win votes, lots of gubernatorial candidates have been promising lots of tax cuts — despite the fact that many of their states face very bleak budgetary outlooks.  Here are examples from five states:

Rhode Island — John Robitaille won the Republican nomination for governor this past Tuesday on a platform that includes amending the state constitution to cap property tax increases at 2.5 percent per year.  Massachusetts's experience with a similar cap indicates that this proposal could have a very negative impact on local government services.

Wisconsin — Scott Walker was the winner of Wisconsin's Republican primary on Tuesday.  Walker is also running on an anti-tax platform, including a property tax "freeze" that would only allow revenue growth to the extent that new construction occurs.  Democrat Tom Barrett is also running on a campaign that heavily emphasizes cutting government spending, and enacting so-called "targeted" business tax cuts to create jobs.

Michigan — Republican gubernatorial candidate Rick Snyder's proposal to cut taxes on Michigan corporations by $1.5 billion received some attention in the media this week.  Specifically, Snyder would repeal the Michigan Business Tax and replace it with a much smaller corporate tax.  Recent polling indicates that Snyder holds a substantial lead over Democrat Virg Bernero.

Florida — Some of the most absurd tax proposals we've seen in a gubernatorial race this year have come from Florida Republican Rick Scott.  In his very first year in office, Scott wants to slash both school property taxes and the corporate income tax — to the tune of $2.1 billion total in tax cuts.  Unspecified cuts in government spending would then be made to keep Florida's budget in balance.  After this, Scott claims he would focus his energy on eliminating Florida's corporate income tax entirely. Thankfully, Democrat Alex Sink is opposed to cutting the corporate income tax, though she has jumped on the job-creation tax credit bandwagon.

Maine — Both Democrat Libby Mitchell and Republican Paul LePage are running on anti-tax platforms in Maine.  Neither is open to the idea of using tax increases to balance the state's budget.  Mitchell claims that "Maine's income tax is too high and I will continue the effort to lower it."  LePage has stated that "Reducing the overall tax burden for all Maine citizens and small businesses is my vision for tax reform."

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.

Shoppers and state governments are both likely still recovering from "Black Friday" and especially "Cyber Monday," but for very different reasons. Consumers may be able to get great deals online, but state governments are losing necessary revenue. As the New York Times recently opined, "Online retailers who do not collect sales tax enjoy a significant and unfair advantage over rivals who must add the tax to their prices. They also cost the states billions of dollars a year in lost sales tax revenue -- money that cash-starved states cannot afford to forgo."

Wisconsin's Department of Revenue estimated that the state is losing $150 million a year on items sold online and this number is only likely to grow. Consumers are required to pay sales tax on items purchased online when they file their state income taxes. But in reality most consumers don't bother, and the U.S. Supreme Court has found that the constitution bars states from requiring most out-of-state catalog and online retailers from collecting sales taxes. But the court also said that Congress could step in to give states permission to do this, as explained in ITEP's Policy Brief on efforts to collect sales taxes on internet purchases.

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.

Last Tuesday, Wisconsin Representative Cory Mason unveiled the Wisconsin Jobs Initiative to take advantage of a federal program proposed by President Obama to invest in technical colleges. Rep. Mason's proposal would raise the income tax on millionaires by one percentage point and is expected to raise $145 million annually and secure another $135 million in federal matching grants if the President's initiative is enacted. Mason said, "I want Wisconsin to be first in line for those grants."

If the state is able to raise the funds necessary and received the grant, it's worth noting that Wisconsin millionaires who pay more in taxes would likely not pay the full $145 million. Instead they would benefit from their ability to write off their state income taxes on their federal tax forms. (Read ITEP's brief on the federal offset.) 

This proposal would make the state's income tax more progressive, but some state lawmakers want to move in the opposite direction. Rep. Peter Barca and other legislators are championing a proposal that would partially repeal the recent reduction of the state's capital gains exclusion from 60 to 30 percent by allowing a 60 percent capital gains exclusion for assets held longer than five years under the guise of encouraging "businesses to make long term investments in the state." For more on why capital gains tax breaks aren't helpful in terms of economic development, read ITEP's report on the issue.

Wisconsin is facing the largest budget shortfall in state history. This week, debate started in the General Assembly on ways to fill the expected $6.6 billion gap . Only $1.6 billion of the state's shortfall was predicted just last month, demonstrating how quickly the fiscal situation has deteriorated.

The budget proposal being debated uses a combination of spending cuts and tax increases to balance the books and is based on the plan passed by the Joint Finance Committee in late May. The Joint Finance Committee's budget bill included cigarette tax increases, reductions in the state's capital gains exclusion from 60 percent of net capital gains income to 40 percent, and a new top income bracket for "very high" income earners. For a complete summary of the Joint Finance Committee's proposals, see the helpful report from the Wisconsin Council on Children and Families.

Legislative leaders seem confident a budget will be passed before the start of the new fiscal year on July 1. The first hurdle is for Democrats who control the Assembly by a slim margin (52-46) to rally the 50 votes they need to pass their proposed budget.

But even if Wisconsin lawmakers resolve this shortfall, their fiscal challenges are not over. They learned Tuesday from the Legislative Fiscal Bureau that the state will likely face a $2.2 billion shortfall by the middle of 2013.

As state policymakers craft their budgets for the upcoming fiscal year, they must confront a pair of daunting challenges, one fiscal, the other economic. The budget outlook for the states is, at present, the most dire in several decades. In this context, then, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families struggling to make ends meet nor additional distortions in the economy as a whole.

For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.

This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)

Read the report.

As we noted last week, up until now, New York has been the most encouraging example of a state considering a progressive approach to filling its budget gap. Now, with the unveiling of Wisconsin Gov. Jim Doyle's proposed budget, another state can be looked to by progressives as an example to be followed.

Gov. Doyle's budget includes two main progressive reforms. First, the income tax rate on income over $300,000 per year would be raised by one percentage point. Second, the state's unusual exemption of 60% of capital gains income would be lowered to 40%. While a 40% exemption is still unnecessary and regressive, this change would be a major first step toward taxing those who live off their wealth at a rate more similar to those who work for a living. Both of these changes would primarily affect the upper-income individuals most capable of making it through this economic storm.

More good news for tax fairness advocates comes from a recent poll of New York State voters conducted by Quinnipiac University. As the poll shows, it turns out that progressive solutions make sense not just on policy grounds, but on political grounds as well. The poll found that nearly 80% of New York voters support raising the income tax on income over one million dollars. That number falls only slightly when New Yorkers are asked if they support raising income taxes on income over $500,000. Additionally, proposals to raise tax rates on income over $250,000 enjoy well over 50% support in New York. Click here for the complete poll results.

Finally, in addition to the progressive reforms described above, the Wisconsin governor is also pushing a proposal to institute combined reporting of corporate income. Enacting such a proposal is an absolutely vital part of maintaining the viability of any state's corporate income tax.

At the state level, the usual response to recommendations that taxes be increased to preserve vital state services has generally been: "Now is not the time". The most notable exception to this trend so far has been with the cigarette tax, as we've explained before. Increasingly, however, policymakers appear to be coming around to the idea of boosting gas tax rates in order to raise the revenue needed to maintain our nation's infrastructure. Given that most state gas taxes haven't been increased for quite a few years, and that during that time inflation has significantly eroded the value of most gas tax rates, our only response can be, "It's about time."

In Maryland, for example, the Senate President recently expressed an interest in raising the gas tax, urging that "there's got to be an increase in the transportation trust fund somewhere, and there's got to be a way we can find people with the political will to make it happen". Numerous governors have echoed this call as of late, most recently in Massachusetts, and Idaho.

In Idaho, especially, the Governor was able to hit the nail on the head with his observation that, "[we last raised] the fuel tax... 13 years ago. And now here we are trying to accomplish 2009 goals with 1996 dollars. Everyone in this room or listening to me throughout Idaho today -- everyone who has a household budget or runs a business -- knows that just doesn't work".

In response to this problem, Idaho Governor "Butch" Otter has recommended bumping the gas tax upward by 2 cents in each of the next 5 years. Addressing the root of the problem even more directly, Wisconsin Governor Jim Doyle has proposed indexing the gas tax rate to inflation -- a practice that had existed in Wisconsin up until 2006. Maine and Florida continue to index their gas tax rates today, with very favorable results in terms of providing each state with a somewhat more adequate and sustainable source of transportation revenue.

Importantly, the federal gas tax is not indexed to inflation, meaning that the Federal Highway Trust Fund is suffering from many of the same problems we see plaguing the states mentioned above. The federal gas tax has not been increased in over 15 years. President Obama's new Energy Secretary, Steven Chu, has previously gone on the record as supporting raising the gasoline tax. The views of Transportation Secretary Ray LaHood are not yet clear. What is clear, however, is that something will have to be done at the federal, as well as the state level, if gas tax revenues are to be restored to their previous purchasing power.

Of course, the gas tax is not perfect. Aside from the long-term issues arising out of improved fuel efficiency (which we need to begin planning for now), the regressivity of the tax is very worrisome, especially in these difficult times. Fortunately, low-income gas tax credits, as we've advocated on multiple occasions, are very capable of remedying this shortcoming.

This week the Wisconsin Way coalition released a report called Blueprint for Change which outlines recommendations for change in three areas: economic development, tax reform, and government spending/management. Members of the coalition are quite diverse and include the Wisconsin Education Association Council, the Realtors Association, and the Wisconsin Counties Association. The group has been working for over a year, holding forums across the state and engaging folks in a "public conversation about modernizing and refining taxes and government." Wisconsin is one of many states facing a budget shortfall so efforts to engage the public on important fiscal issues are certainly laudable, but many of the specific proposals discussed in the report make us question whether or not the coalition and members of the public understand basic tax principles.

For example, one of the strategic initiatives on tax reform is to "enhance fairness and progressivity in the levying and collection of taxes," but later in the report "increasing reliance on income sensitive revenue sources like sales and consumption taxes" is suggested. Ironically, it is exactly because sales taxes aren't income sensitive that they are such a regressive funding option. Increasing the state's reliance on sales tax is no way to increase the fairness and progressivity of Wisconsin's tax structure.

Another contradiction in the report appears in the discussion about business development and job growth. The group purports to want to "enhance the ability of Wisconsin's tax structure to stimulate business development and expansion and job growth," but one of the action options they propose is to eliminate the state's corporate income tax. But there is solid evidence that state corporate taxes often aren't that important when companies are making decisions about where to locate.

We're puzzled by the Wisconsin Way report and wonder if a basic review of tax policy principles might be helpful for coalition members, who are welcome to look at a helpful ITEP policy brief on the issue. Despite the alleged input from 6,000 Wisconsinites, the Wisconsin Way so far seems to be exactly what Senate Majority Leader Russ Decker calls a "recipe for disaster for Wisconsin taxpayers."

Anybody following state politics recently knows that budget shortfalls are among the first issues that will have to be addressed when most state legislative sessions begin this January. In many cases, state policymakers have appeared heavily biased in favor of slashing services to remedy these gaps, usually based on the absurd assumption that raising taxes would somehow be more painful than stripping needed services from the nation's most vulnerable lower- and middle-income families. But Governor Jim Doyle of Wisconsin has recently set an intriguing example for other struggling states to follow by agreeing to consider an early revival of the state's temporarily suspended estate tax.

The estate tax is an incredibly progressive tax that only affects a few very wealthy families -- hardly the folks struggling most in our current economic crisis. As a recent CTJ report showed, less than 300 families paid any federal estate tax whatsoever in Wisconsin in 2007. This amounted to only 0.6% of Wisconsin estates. Nonetheless, even this relatively minor tax could result in enormous gains if the money is put back into the state's economy, such as by filling some of the 3,500 state jobs the governor has ordered be left vacant.

Last year around this same time we brought you word about the groundbreaking study from the Institute for Wisconsin's Future which found that two-thirds of companies filing 2003 Wisconsin income tax returns owed nothing in state taxes. This month the Institute issued another report that "highlights a $643 million shortfall in corporate income tax receipts in 2006 due to the use of tax loopholes."

The new report once again brings to light the number of Wisconsin companies that simply aren't paying any tax." Almost fifty thousand corporations filed tax returns with the Wisconsin Department of Revenue in 2005. Two out of three returns showed a bottom-line tax of zero dollars."

The study's shocking findings won't be allowed to collect bookshelf dust. Instead, the results have prompted a legislative response. On Wednesday Senator Hansen unveiled a creative corporate tax disclosure proposal that would, "require the large public corporations doing business in Wisconsin to submit publicly accessible annual disclosures of their income and all items that can be used to reduce their Wisconsin tax liability." Stay tuned into the new year for more developments on this important disclosure legislation.

At long last, the Wisconsin legislature approved a two-year $57.2 billion budget. The agreement comes 4 months after the budget deadline and is expected to be signed by the Governor Friday. A hospital tax and taxes on oil companies didn't make it into the final bill. But the bill did include a cigarette tax increase that will raise the tax on a pack of cigarettes from 77-cents to $1.77. The bill also includes additional school aid for low-income districts and children's health insurance expansion and eliminates the tax on Social Security benefits.

Wisconsinites may be relieved that the budget impasse is over. Advocates for tax fairness will find the budget compromise lacking. However, advocates seem pleased with the overall spending priorities set forth in the new budget. For more read this statement from the Wisconsin Council on Children and Families.

The budget clock is also ticking in Wisconsin as the Governor and the University of Wisconsin chancellors have both denounced the budget approved by the Assembly, saying that the budget cuts included would increase class sizes in universities and decrease class offerings. A conference committee is currently meeting to reconcile the Assembly budget with the Senate's which included tax increases and a health care plan. Senator Neal Kedzie says the state "could be in for a very long and bumpy ride."

The governors of both Pennsylvania and Wisconsin have proposed new taxes for oil companies. Governor Rendell would subject oil companies' gross profits in his state to a 6.17 percent tax in lieu of the state's corporate income tax. Governor Doyle would tax oil companies' gross receipts at 2.5 percent. It remains to be seen whether state governments can really ensure that the tax will be paid by the oil company shareholders, as both governors claim, rather than being passed onto consumers.

Probably the most important step a state can take to ensure that oil companies (and other businesses) are paying their fair share is to adopt combined reporting of corporate income for tax purposes. This prevents companies from shifting costs and profits (on paper) between subsidiaries in different states to get the lowest tax bill possible. Fortunately for Pennsylvania, Governor Rendell's tax on oil companies would be calculated using combined reporting. Experts like University of Wisconsin-Madison economist Andrew Reschovsky have suggested that Wisconsin needs to move in this direction as well. Reschovsky told the Milwaukee Journal Sentinel, "In my view, if the governor wants to raise more money from oil companies, and other multinational companies, the most effective thing he could do would be to urge the Legislature to adopt combined reporting."

Wisconsin's tax laws allow cities that rely heavily on tourism to levy a special "premium resort area" sales tax. Governor Jim Doyle's new budget would rewrite the tax laws to declare parts of Milwaukee a "premium resort area." This would give Milwaukee officials the authority to levy a half cent sales tax within the "resort" area of the city. If adopted by local officials, Doyle's idea would help to diversify the city's revenue structure ... but an equally welcome option would be reforming the taxes collected by the state government. As the Institute for Wisconsin's Future's Jack Norman documented last fall, two thirds of the corporations doing business in Wisconsin pay no corporate income tax right now.

Last year, Wisconsin Governor Doyle signed into law a bill completely eliminating all taxes on Social Security benefits by 2008. This week, Governor Doyle prepared a new budget, which includes a measure fast-forwarding the exemption by one year. The proposal comes at a time when the state is straining to fill a $1.6 billion shortfall. The proposed budget attempts to find new revenue by increasing vehicle registration fees, cigarette taxes, and the real estate transfer tax. The Legislative Fiscal Bureau estimated that the Social Security exemption alone would cost around $100 million per year. In his State of the State speech earlier this year, Governor Doyle said that Wisconsin had to learn to live within its means... advice that he should heed himself.