Last week we wrote about Governor Cuomo’s ill-conceived Tax-Free NY initiative.  We reserve judgment as to whether it’s politically motivated ( a New York Post column called him “Gov $uck-up”, for instance, and this column also questions the motivation) but we can be pretty sure it will cost more than it will benefit the people of New York, because this is what business tax credits do.

Still, since that post, the Governor has continued his promotional tour of New York campuses, so we spent some time digging into how actual businesses would fare under his plan. As it turns out, the Governor’s focus on rewarding new investment could end up arbitrarily discriminating against existing small businesses (and their employees) who are already doing the same things Cuomo’s plan will reward others to start doing.

Capraro Technologies, Inc. (CTI), for example, has been based in Utica (home to SUNY Institute of Technology) for almost two decades. The company shares the SUNY-IT mission of advancing the field of information technology through research and innovation, and appears to be a model of the kind of business the Governor hopes to attract. But CTI would be ineligible for any benefits under Tax-Free NY, and the company could find itself at a disadvantage relative to other firms who do qualify for the tax-free treatment.

To gain eligibility, CTI would need to “expand its New York operations while maintaining its existing jobs.” But such an expansion would need to take place within one mile from the SUNY-IT campus. Unless CTI were able to obtain a special waiver, this would mean having to open a new office about two miles down the road from its current location; hardly an example of economic efficiency.

CTI is only one of many existing companies throughout the state that could be placed at a disadvantage relative to new competitors. BlueRock Energy, a Syracuse-based company that helps customers lower their energy costs and environmental footprint and would be ineligible for Tax-Free NY benefits if it expanded at its current lots, is another case-in-point. Located about 2.5 miles away from the SUNY College of Environmental Science and Forestry, BlueRock Energy shares a common mission with SUNY-ESF.

And the list goes on. From mobile app creator miSoft Studios near SUNY Binghamton to software developer Wetstone Technologies near SUNY Cortland, existing local businesses across the state will all reap zero rewards for having already done exactly what the Governor will allegedly incentivize other businesses to do in the future.

And of course, you are not only out of luck if you started your business at the wrong time, but place matters, too. State tax expert David Brunori at Tax Analysts summed up one of Tax-Free NY’s absurdities by highlighting, “if you are in the community you don’t pay taxes. If you are outside, even by six inches, you do.”

Existing small businesses are not the only losers because the plan extends to employees, too. Professor John Yinger, an expert in fiscal policy from Syracuse University, says the Governor’s plan “means some businesses are getting lower taxes than others and in this case it means some people are getting much lower taxes than others, those are new sources of inequities.”

There are so many problems with Governor Cuomo’s idea for tax-free zones, it’s hard to know where to begin. But the Institute on Taxation and Economic Policy’s (ITEP) policy briefs library is a good place to look, and we invite the Governor to consider this guidance (all links are PDF’s).

Taxes and Economic Development 101: “Lawmakers are under intense pressure to create a healthy climate for investment. But the simplistic view that tax cuts are the best medicine can result in unintentionally making this climate worse. Unaffordable tax cuts shift the cost of funding public services onto every business that isn’t lucky enough to receive these tax breaks—and makes it harder to fund the public investments on which all businesses rely.”

Accountable Economic Development Strategies: “Some lawmakers are wising up to the idea that subsidies don’t work. But for policymakers who insist on offering incentives, there are some important, simple, and concrete steps that can be taken to ensure that subsidies aren’t allowed to go unchecked.”

Tax Principles: The principle of neutrality (sometimes called “efficiency”) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment.”

First it was the ill-advised TV campaign to lure new business to his state by bragging about tax cuts, and now New York  Governor Andrew Cuomo has launched his “Tax-Free NY” initiative which would turn many of the state’s public universities, private universities, and community colleges into tax-free havens. Providing a full complement of tax breaks, the Governor’s plan would exempt qualified businesses from paying any sales, property, and corporate taxes for a decade, and would exempt employees of those businesses from the personal income tax.

These no-tax zones include all state university campuses outside of New York City, some private colleges, up to 200,000 square feet in certain campus-adjacent zones, and 20 undisclosed “strategically located” state-owned properties. The Governor’s plan vaguely defines eligible businesses as companies with a relationship to the academic mission of the university and then includes: new businesses, out-of-state businesses that relocate to New York, and existing businesses that expand their New York operations.

Touting the plan as a way to revitalize the upstate economy, the Governor claims the free pass on taxes would “attract start-ups, venture capital, new business, and investments from across the world.” However, economists from across the political spectrum have their doubts (and so do we).

Professor John Yinger of Syracuse University said in response to Cuomo’s plan that: “In New York we have a dizzying array of tax breaks with no evidence they help, and now here’s a new version. You’d do much better improving our schools and infrastructure than giving tax breaks to businesses who would be in the state anyway.”

Others, such as Danny Donohue of the Civil Service Employees Association, argue the plan is another tax giveaway to businesses at the expense of local communities and the middle-class. Donohue says: “The governor doesn’t get the fact that more corporate welfare is no answer to New York’s economic challenges… it’s outrageous that the governor and legislative leaders think we can give away even more to businesses without any guarantee of benefit to taxpayers.”

In addition to creating little if any economic growth, the plan is likely to worsen the state’s already precarious fiscal situation. With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible.

To move the plan forward, the Governor will need legislative approval before the state’s legislative session ends on June 20^th. Quick – someone get this policy brief (PDF) up to Albany!

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.  
 

At 2:00am on Monday morning, Minnesota House members passed groundbreaking tax legislation that raises $2.1 billion over two years. The Senate then approved the legislation and Governor Dayton, long a champion of progressive tax reform, signed it yesterday. The bill increases income taxes on the top two percent of earners, raises the cigarette tax to $1.60, closes some corporate tax loopholes, and extends the sales tax to a handful of services primarily used by businesses, including warehouse storage and telecommunications equipment. Wayne Cox, with Minnesota Citizens for Tax Justice expects much from the legislation: “Shifting taxes from the middle class to those with highest incomes will help the economy.”

A helpful summary of the compromise legislation is available here from the Minnesota Budget Project. Revenues from the cigarette tax will be used to help pay for a new Vikings stadium. This is round two for stadium funding because gaming revenues that were supposed to pay the state’s share of the stadium came in below revenue projections (not surprisingly, PDF). Of course, cigarette taxes (PDF) aren’t very stable revenue sources either, and are likely to decline overtime.

Nan Madden, Director of the Minnesota Budget Project, said of the legislature’s work, “In past years, the response to budget shortfalls has been deep cuts to services and use of timing shifts to kick the problem down the road. This year’s tax bill and budget take a better approach, raising the revenues needed to balance the budget and invest in the future; and reforming our tax system so that we share the responsibility for funding public services more equally.”

So, kudos to Minnesota’s elected leaders for making some difficult decisions and finding a way to balance the state’s books and still provide for quality services into the future. It’s a model other states can learn from.

More than a month after Louisiana Governor Bobby Jindal “parked” his widely-panned proposal to repeal the state’s income tax, state policymakers now are returning to what should be a more straightforward tax reform issue. A new report (PDF) from the Louisiana Legislative Auditor critically evaluates the workings of the state’s film tax credit, which gives Louisiana-based film productions a tax credit to offset part of their expenses when they hire Louisiana workers or spend money on production expenses locally.

From a cost perspective alone, it makes sense to take a hard look at this provision: the state has spent over $1 billion on these Hollywood handouts in the past decade.

But the Auditor’s report is also a good reminder of just how little the state is getting in return for this massive outlay. The report estimates that after doling out almost $200 million in film tax breaks in 2010, the state enjoyed just $27 million in increased tax revenue from the film-related economic activity supposedly encouraged by this tax break.

This means a net loss to the state of about $170 million in just one year.

It’s hardly news that film tax credits offer little bang for the buck: last year the Louisiana Budget Project reported (PDF) that each new job created by the film tax credit is costing the state $60,000, and a recent report (PDF) from the Massachusetts Department of Revenue found that a huge chunk of that state’s film tax credits were going to wealthy taxpayers living in other states. Even when these credits create in-state jobs (and they do generate some economic activity), the transitory nature of film productions means those jobs probably will be gone when the production leaves town. And it’s virtually impossible for lawmakers to know whether they’re really attracting film productions to the state—or just rewarding moviemakers for doing what they would have done anyway (as “incentives” often do). Either way, Louisiana taxpayers are still doling out more than they are getting back.

But it’s not all bad, according to the Auditor’s report: the Louisiana credit does appear to be going largely to film productions that are technically eligible for it. So, as far as the Auditor can tell us, the film tax credit is simply ineffective and not an outright scam. Or at least, it wasn’t until this guy pleaded guilty to fraudulently claiming the credit, which is similar to what happened repeatedly in Iowa after that state’s disastrous experiment with Hollywood tax breaks.

After surviving the three-month train wreck that was the rollout of Governor Jindal’s tax plan, Louisiana lawmakers should find the film tax credit an easy problem to solve since they know how much it costs and just how little they’re getting in return. Right now they’re just tinkering around the edges, but pulling the plug on handouts to Hollywood should be high on policymakers’ to-do list.

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.

The Missouri House and Senate have hammered out a hybrid version of the tax bills each chamber recently passed, but with luck, it will never become law.  When the Senate passed its version in March, we wrote:

This package is billed as Missouri’s answer to the radical tax package passed last year by Kansas Governor Brownback. Its sponsor explained, “I’m trying to stop the bleeding. I’m trying to stop the businesses from fleeing into Kansas,” and then invokes the kind of magical thinking that almost always results in a deficit. According to the Associated Press, State Senator Kraus predicted his plan would “create an economic engine in our state” that would generate enough new tax revenues to make up for the losses.”

The bill the legislature will now send to Governor Nixon is a regressive income tax cut package that includes: a reduction in the corporate income tax rate, a 50 percent exclusion for pass-through business income, an additional $1,000 personal and spouse income exemption for individuals earning less than $20,000 in Missouri adjusted gross income, and a reduction in the top income tax rate from 6 to 5.5 percent.

In order for the legislation to become law, Governor Jay Nixon will have to give his okay, but he has signaled he’s going to veto the legislation. Recently he said, "Taking more than $800 million — literally the equivalent of what you spend on higher education, or literally more than you have for all of corrections or mental health — is not the fiscally responsible approach.”  He reiterated that message again this week.

Assuming Nixon, a Democrat, does veto this expensive tax package (its annual cost will be upwards of $700 million), the Republican-controlled legislature will put an override on their agenda when they return in September for a special veto session.

The Oklahoma legislature recently approved a cut to the state’s top personal income tax rate, at the urging of Governor Mary Fallin. When the plan is fully implemented in 2016, the state’s top tax rate will fall from 5.25 to 4.85 percent, at a cost to the state of $237 million per year.  While a slim majority (52 percent) of Oklahomans support the idea of an income tax cut in the abstract, that support evaporates (falling to 31 percent) once the plan is explained in more detail.

That detail is as follows. According to an analysis by our partner organization, the Institute on Taxation and Economic Policy (ITEP), roughly 4 in 10 Oklahomans—generally lower- and middle-income families—will receive no tax cut at all under the plan, while the average tax cut for a middle-income family will be just $30.  The wealthiest 5 percent of taxpayers, by contrast, will receive 40 percent of the benefits, with the state’s top 1 percent of earners alone taking home a tax cut averaging over $2,000 per year.

When these basic facts about the tax plan now on Governor Fallin’s desk were explained to a random sample of registered Oklahoma voters, 60 percent of them said they opposed it, with a full 47 percent describing themselves as “strongly opposed.”

Voters’ reaction was similar upon being informed that the plan will require reducing state services like education, public safety, and health care. This vital piece of information resulted in support for the tax cut dropping to just 34 percent, and opposition rising to 56 percent (with 44 percent “strongly opposed.”)

These polling results are backed up by interviews with Oklahoma citizens conducted by the state’s largest newspaper, The Oklahoman. One Oklahoma resident explains, for example, that “If [the tax cut] harmed education I don't want it. I have a niece that is a schoolteacher and I'd rather have more teachers than the little bit of money.” Another says that “It sounds like the rich are just getting richer.”

Meanwhile, the Oklahoma Policy Institute (OPI) explains that the plan isn’t just unpopular—it’s fundamentally irresponsible: “We have seen no evidence that Oklahoma will be able to afford a tax cut in [2015, when the first stage of the cut takes effect]. Indeed, we are already seeing signs of faltering revenue collections, with revenue falling below last year.” Concern about the sustainability of Oklahoma’s revenues is compounded by the possibility that “the state could be on the hook for as much as $480 million” in additional expenses if a court ruling against its tax break for capital gains is upheld. The Associated Press reports that when the impact of this court ruling is “combined with an estimated $237 million price tag for a tax cut approved by the Legislature this year and expected to be signed into law by Gov. Mary Fallin… the cost to the state could amount to 10 percent of the total state appropriated budget.”

Given these challenges, it’s hard to argue with OPI’s policy prescription: “Now that cuts are scheduled, the only responsible path forward is to pursue real tax reform that goes beyond the top income tax rate. To fund education and ensure a prosperous future for Oklahoma, we need real action to reign in unnecessary tax credits and exemptions that cost us hundreds of millions of dollars every year.”

The debate over how to effectively tax property in Iowa has raged for years. A new report from the Iowa Fiscal Project (IFP) compares and contrasts the property tax reform proposals put forward by the Iowa House and Senate. The report was described in this Des Moines Register editorial with high praise: “No matter which approach prevails, the Iowa Fiscal Partnership deserves credit for an unbiased examination of the impact of the competing property tax proposals on real businesses in Iowa.”

Currently, commercial property taxes are based on 100 percent of their actual values. Residential property is treated very differently. IFP reports that most recently residential property was assessed at just 52.8 percent of actual value. This disparity is something that Governor Branstad, the Iowa House and Senate are working to address. The Senate bill would create a property tax credit which would ultimately mean that some commercial property would be taxed like residential property. The House bill (which has the support of Governor Branstad) would ultimately tax commercial property at 80 percent of its actual value. In its report, IFP raises important questions about how local governments will be reimbursed for the resulting reductions in a significant local government revenue source should either bill become law. The Senate bill provides more targeted tax relief to corporations, whereas the House bill provides a property tax reduction to all businesses.

It could be that this issue gets put on hold for yet another year because Senator Joe Bolkcom (chair of the Ways and Means Committee) is vowing, as he has before, that no compromise on a tax bill will be reached until an increase in Earned Income tax Credit (EITC) is signed into law.

Good Jobs First (GJF) has a new in-depth report revealing how the most aggressively promoted and publicized measures of states’ “business climates” are nothing more than messaging tools “designed to promote a particular political agenda.”  According to the study’s co-author, PhD economist Peter Fisher, “When we scrutinized the business climate methodologies, we found profound and elementary errors. We found effects presented as causes. We found factors that have no empirically proven relationship to economic growth. And we found scores that ignore major differences among state tax systems.” Yet too often, such rankings are reported uncritically in the media and – worse – cited by lawmakers seeking to change policy. Of course, this is precisely the goal of the corporate-backed, ideologically driven organizations generating these simplistic reports.

Looking at indexes from the Tax Foundation, ALEC and other anti-tax groups, GJF finds that “the one consistent theme that the indexes harp on is regressive taxation, especially lower corporate income taxes, lower or flat or nonexistent personal income taxes, and no estate or inheritance taxes.”  While the biggest problem is that none of the indexes show any actual economic benefits from their policy prescriptions, GJF also spotlights a slew of methodological problems that in some cases border on comical:

The Tax Foundation’s State Business Tax Climate Index is compiled by “stirring together no less than 118 features of the tax law and producing out of that stew a single, arbitrary index number.” Since the Tax Foundation index gets sidetracked into trivial issues like the number of income tax brackets and the tax rate on beer, it should come as little surprise that their ranking bears no resemblance to more careful measures of the actual level of taxes paid by businesses in each state. GJF concludes that “it is hard to imagine how the [Tax Foundation] could do much worse in terms of measuring the actual amount of taxes businesses pay in one state versus another.”

The index contained in the American Legislative Exchange Council’s (ALEC) Rich States, Poor States report fails an even more fundamental test. After running a series of statistical models to examine how states that have enacted ALEC’s preferred policies have fared, GJF concludes that the index “fails to predict job creation, GDP growth, state and local revenue growth, or rising personal incomes.”

The Beacon Hill Institute’s State Competitiveness Report misses the purpose of these indexes entirely by assuming that things like the creation of new businesses and the existence of state government budget surpluses somehow cause economic growth—rather than being direct result of it. 

Finally, the Small Business and Entrepreneurship Council’s (SBEC) U.S. Business Policy Index has a somewhat more narrow focus: grading states based on policies that the SBEC thinks are important to entrepreneurship and small business development.  But GJF explains that “the authors apparently believe that there are in fact no government programs or policies that are supportable … State spending on infrastructure, the quality of the education system, small business development centers or entrepreneurship programs at public universities, technology transfer or business extension programs, business-university partnerships, small business incubators, state venture capital funding—none of these public activities is included in the [index].”  Unsurprisingly, then, GJF also finds that a state’s ranking on the SBEC index has no relation with how well it actually does in terms of variables like the prevalence of business startups and existence of fast-growing firms.

But while each index has its own problems, GJF also points out that when it comes to tax policy, there’s a much more fundamental flaw with what these organizations have tried to do:

State and local taxes are a very small share of business costs—less than two percent … State and local governments have a great deal of power to affect the other 98+ percent of companies’ cost structures, particularly in the education and skill levels of the workforce, the efficiency of infrastructure, and the quality of public services generally. … The business tax rankings examined here … are worse than meaningless – they distract policy makers from the most important responsibilities of the public sector and help to undermine the long run foundations of state economic growth and prosperity.

Read the report

Michigan’s former Treasurer, Robert Kleine, explains in a Detroit Free Press op-ed that “there is no evidence that … [a 2011 tax change] reducing business taxes by $1.7 billion has created new jobs in Michigan.”  Among other things, Kleine observes that “state business taxes are such a small part of a business’ costs that even large changes have a minor impact.”

Gas taxes remain a major topic of debate in the states.  Since publishing our mid-session update on state gas tax debates two weeks ago, Vermont Governor Peter Shumlin signed a gas tax increase into law, Iowa Governor Terry Branstad reiterated that a gas tax hike is still on the table in his state, and The Olympian reports that raising Washington State’s gas tax is “now widely seen as a topic for special session.”

New Jersey Governor Chris Christie has been traveling the state seeking support for his more than $2 billion tax cut proposal (once fully phased-in) ever since using Tax Day 2013 to announce his renewed push for the plan he first championed last year. An op-ed from the Better Choices for New Jersey Campaign says the proposal was “a bad idea then, and it remains one today.”  Why?  Simply put, the state cannot afford even the scaled-back tax cut the governor is proposing for 2013 without reducing spending.

A new report from the North Carolina Budget and Tax Center takes on two common myths about the state’s economy that policymakers often use to justify cutting or eliminating taxes: North Carolina’s economy is uncompetitive compared to neighboring states and high tax rates drive North Carolina’s high unemployment. The report found that North Carolina is actually either leading or in the middle of the pack in every major indicator of economic health except for unemployment.  And, the explanation for high unemployment? A decline in specific industries the state has long relied on – like textiles and furniture – that are highly vulnerable to offshoring, outsourcing and other global pressures, not high tax rates.

Anti-Taxer-in-Chief Grover Norquist recently travelled to Minnesota where he met up with Congresswoman Michele Bachmann to rally against taxes. Minnesota is actually one of the bright lights this year for tax justice advocates who are supporting House and Senate plans there that would raise taxes on the wealthiest Minnesotans.

The Missouri House and Senate have each passed their own versions of a “race to the bottom” tax plan in a misguided effort to keep up with neighboring Kansas, where a radical tax plan that is eviscerating the state’s budget might actually be followed up by another round of tax cuts (currently being debated by the legislature).

Both the Missouri Senate and House plans would reduce income tax rates, introduce a 50 percent exclusion for “pass-through” business income, reduce corporate income tax rates, and increase the sales tax. The Senate plan is summed up in this St. Louis Post-Dispatch editorial, Missouri Senate Declares Class War Against Citizens.

“The poorest 20 percent of Missourians, those earning $18,000 a year or less, will pay $63 a year more in taxes. Those earning between $18,000 and $33,000 a year will pay $129 more. The middle quintile — those earning between $33,000 and $53,000 a year — will pay $150 a year more. The fourth quintile ($53,000 to $85,000 a year) will pay $149 a year more. That’s a grand total of 80 percent of Missourians who will pay more and get less: crummier schools, higher college tuitions (because state aid will continue to fall) and less access to worse state services. The poor are used to this. It remains to be seen whether the middle class will put up with it.”

Despite the fact that similarly reckless tax proposals in other states have failed (Louisiana and Nebraska) or been scaled back (Ohio), it seems the proposals are moving forward in Missouri, thanks in large part to Americans for Prosperity. This national group uses state chapters to throw money at anti-tax, anti-government agendas its corporate funders like, and it has launched a “Bold Ideas Tour” to travel Missouri advocating for deep tax cuts as the state’s legislature approaches its closing date of May 17.

Governor Jay Nixon has vowed he will veto a tax cut bill of this magnitude, rightly saying, "Making a veteran with aches and pains pay more for an aspirin so that an S Corporation can get a tax cut does not reflect our values or our priorities. I have long opposed schemes like this one that would shift costs onto families because they reflect the wrong priorities and do not work.”

The Governor’s position is supported by multiple experts, including the Institute on Taxation and Economic Policy (ITEP), and it looks like Missouri could be a state where good information comes between the national anti-tax movement and their legislative agenda.

There’s been some confusion in recent days about whether the 258 members of Congress who have signed Grover Norquist’s “Taxpayer Protection Pledge” are allowed to vote in favor a bill that lets states collect sales taxes owed on purchases made over the Internet.  There is no reason for any confusion on this point.  Anybody with 15 seconds of free time and the ability to read the one sentence promise contained in the national pledge can see it’s completely irrelevant to the debate over online sales taxes:

I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Since federal income tax rates, deductions, and credits are altered exactly zero times in the online sales tax legislation set to be voted on by the Senate, Grover’s federal affairs manager is being less than truthful when she says that “there’s really not any way an elected official [who signed the pledge] can vote for this.”

There’s no doubt that Grover would be tickled pink to have gotten 258 of our elected officials to pledge opposition to improving states’ ability to limit sales tax evasion over the Internet.  For that matter, he would probably be even more excited to have gotten those officials to promise to vote against any increase in the estate tax, gasoline tax, or cigarette tax, as well as the creation of a carbon tax or a VAT.  But none of these things fall within the scope of the pledge, either, and it’s a shame that Grover and his spokespeople have shown no interest in being truthful on this point.

Tuesday, the Ohio House of Representatives approved their budget bill which included an across the board 7 percent reduction in income tax rates. Though the House tax plan is less costly than the Governor’s original proposal, Policy Matters Ohio, using Institute on Taxation and Economic Policy (ITEP) data, makes the point that this reduction will still benefit the wealthiest Ohioans. “For the top 1 percent, the tax plan would cut $2,717 in taxes on average. For the middle 20 percent, it would amount to a $51 cut on average. For the bottom 20 percent, it would result in $3 on average.”

This week the Minnesota Senate unveiled their tax plan which, (unlike Governor Dayton’s plan and the House plan wouldn’t create a new top income tax bracket,) would raise the current top rate from 7.85 to 9.4 percent. About 6 percent of taxpayers would see their taxes go up under the Senate plan. Both houses of the legislature and the Governor are committed to tax increases and doing the hard work necessary to raise taxes in a progressive way. Senator Majority Leader Tom Bakk recently said, "Some people are probably going to lose elections because we are going to raise some taxes, but sometimes leading is not a popularity contest."

We’d be remiss if we didn’t draw your attention to this study (PDF) by Ernst and Young for the Council on State Taxation which cautions state lawmakers about expanding their sales tax bases to include services purchased by businesses. Louisiana Governor Bobby Jindal’s failed attempt at income tax elimination included broadening the sales tax base to include a variety of services, including business-to-business services. Ironically, Ernst and Young was hired by the Governor to consult about his plan. Toward the end of the tax debate there, the AP pointed out the disparity between the Governor's consultants’ stance on taxing business-to-business services and what the Governor himself was proposing.

Rhode Island analysts are urging lawmakers to take a closer look at the $1.7 billion the state doles out in special tax breaks each year.  A new report from the Economic Progress Institute recommends rigorous evaluations of tax breaks to find out if they’re working. It then recommends attaching expiration dates to those breaks so that lawmakers are voting whether to renew them based on solid evidence about their effectiveness. These goals are also reflected in a bill (PDF) under consideration in the Rhode Island House -- Representative Tanzi’s “Tax Expenditure Evaluation Act.”

We’ve criticized Virginia’s new transportation package for letting drivers off the hook when it comes to paying for the roads they use, and now the Commonwealth Institute has crunched some new numbers that make this very point: “Currently, nearly 70 percent of the state’s transportation revenue comes from driving-related sources ... But under the new funding package, that share drops to around 60 percent ... In the process the gas tax drops from the leading revenue source for transportation to third place; and sales tax moves into first.”

By now you've probably heard that the U.S. Senate is close to approving a bill that would allow the states to collect the sales taxes already owed by shoppers who make purchases over the Internet.  Currently, sales tax enforcement as it relates to online shopping is a messy patchwork, with retailers only collecting the tax when they have a store, warehouse, headquarters, or other “physical presence” located in the same state as the shopper.  In all other cases, shoppers are required to pay the tax directly to the state, but few do so in practice.  The result of this arrangement is both unfair (since the same item is taxed differently depending on the type of merchant selling it) and inefficient (since shoppers are given an incentive to shop online rather than locally).

Unsurprisingly, two of the strongest proponents of a federal solution to this problem have been traditional “brick and mortar” retailers that compete with online merchants and state lawmakers struggling to balance their states’ budgets even as sales tax revenues are eroded by online shopping.  But this issue has also turned anti-tax advocates, states without sales taxes, and even online retailers against one another in surprising ways, for reasons of ideology and self interest. 

Ideological Frenemies, Norquist and Laffer

Supply-side economist Arthur Laffer recently argued in the pages of the Wall Street Journal that states should be allowed to enforce their sales taxes on online shopping as a basic matter of fairness, so that “all retailers would be treated equally under state law.”  We completely agree with this point, but Laffer makes clear that his larger aim is to shore up state sales taxes in order to make cuts to his least favorite tax—the personal income tax. It’s no secret that Laffer wants states to shift toward a tax system that leans heavily on regressive sales taxes, but it’s harder to advocate for such a shift if the tax can be easily avoided by shopping online.

Grover Norquist of Americans for Tax Reform stands in direct opposition to Laffer on this issue.  Norquist has been “making the case on the House side of either seriously amending it or even stopping” federal efforts to allow for online sales tax enforcement.  But Norquist reveals his fundamental misunderstanding of the issue when he argues that out-of-state retailers should be free from having to collect sales taxes because “you should only be taxing people who can vote for you or against you.”  In reality, retailers aren’t being taxed at all—they’re simply being required to do their part in making sure their customers are paying the sales taxes already owed on their purchases.

Delaware vs. The Other No-Sales-Tax States

Four states levy no broad-based sales tax at either the state or local level: Delaware, Montana, New Hampshire, and Oregon and Senators from these last three states are generally not interested to helping other states enforce their sales tax laws. After all, why vote for a “new tax” if there’s no direct benefit to their own states’ coffers?

But Delaware’s senators see the issue differently, as both Sen. Carper and Sen. Coons voted in favor of the bill.  In fact, Carper introduced his own bill for collecting tax on e-purchases years ago, explaining it this way: “The Internet is undermining Delaware's unique status” because “part of Delaware's attraction to tourists is that people can come and shop until they drop and never have to pay a dime of sales tax.”

Amazon vs. Other Internet Retailers

It shouldn’t come as a surprise that online retailers as a group have opposed legal requirements that their customers pay sales taxes on their purchases since it means these e-retailers would have to charge and collect that tax.  Some companies, however, like Netflix, have long collected (PDF) those sales taxes, even without a legal requirement to do so. But most have clung to online sales tax evasion as a way to undercut traditional retailers by up to 10 percent (or more, depending on the sales tax rate levied where the buyer is located).

One recent exception is eBay, which appears to have seen the writing on the wall and has pivoted from opposing the bill to watering it down – and it’s deploying its 40 million users as an army of online lobbyists to that end.

But it is Amazon that stands apart from other online retailers in fully supporting a federal solution to the patchwork of state laws and the growing number of deals it has finally had to strike with states. The company’s reason is likely two-fold.

First, Amazon has a “physical presence” in a growing number of states and plans to continue its expansion in order to make next-day-delivery a reality for more of its customers. As a result, Amazon will be legally required to remit sales taxes in more states in the future and will find itself at a competitive disadvantage if other online retailers remain free from sales tax collection requirements.  Second, Amazon processes a large number of sales for other merchants through its website and collects sales taxes on behalf of some of them – for a fee.  Amazon’s sales tax collection services could become much more lucrative in the future if more of the merchants it partners with are required to collect sales taxes.

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

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

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

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

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

In a stark departure from the last few years, one of the most debated state tax policy issues in 2013 has been the gasoline tax (PDF).  Until this February, it had been almost three years since any state’s lawmakers approved an increase or reform of their gasoline tax.  That changed when Wyoming Governor Matt Mead signed into law a 10 cent gas tax hike passed by his state’s legislature.  Since then, Virginia has reformed its gas tax to grow over time alongside gas prices, and Maryland has both increased and reformed its gas tax.  By the time states’ 2013 legislative sessions come to a close, the list of states having improved their gas taxes is likely to be even longer.

Massachusetts appears to be the most likely candidate for gas tax reform.  Both the House and Senate have passed bills immediately raising the state gas tax by 3 cents per gallon, and reforming the tax so that its flat per-gallon amount keeps pace with inflation in the future (see chart here).  In late 2011, the Institute on Taxation and Economic Policy (ITEP) found that Massachusetts is among the states where inflation has been most damaging to the state transportation budget—costing some $451 million in revenue per year relative to where the gas tax stood in 1991 when it was last raised.  Governor Deval Patrick has expressed frustration that legislators passed plans lacking more revenue for education—in sharp contrast to his own plan to increase the income tax—but he has also signaled that there may be room for compromise.

Vermont lawmakers are also giving very serious consideration to gas tax reform.  At the Governor’s urging, the House passed a bill increasing the portion of Vermont’s gas tax that already grows alongside gas prices.  The bill also reforms the flat-rate portion of Vermont’s gas tax to grow with inflation.  The Senate is now debating the idea, and early reports indicate that the package may be tweaked to rely slightly more on diesel taxes in order to reduce the size of the increase on gasoline.

Pennsylvania Governor Tom Corbett has also proposed raising and reforming his state’s gasoline tax.  While Pennsylvania’s tax is technically supposed to grow alongside gas prices, an obsolete tax cap limits the rate from rising when gas prices exceed $1.25 per gallon.  Corbett would like to remove that cap in order to improve the sustainability of the state’s revenues, and members of his administration have been traveling the state to explain how doing so would benefit Pennsylvanians.  While the legislature has yet to act on his plan, the fact that it has the backing of the state’s Chamber of Business and Industry is likely to help its chances.

In New Hampshire, the Governor has said she is open to raising the state gas tax and the House has passed a bill doing exactly that.  But there are indications that lawmakers in the state Senate might continue procrastinating on raising the tax, as the state has done for over two decades.

Nevada lawmakers are discussing a gas tax increase following the release of a report showing that the state’s outdated transportation system is costing drivers $1,500 per year.  ITEP analyzed a gas tax proposal receiving consideration in the Nevada House and found that even with the increase, the state’s gas tax rate (adjusted for inflation) would still remain low relative to its levels in years past.

Iowa lawmakers have been debating a gas tax increase for a number of years, and there may be enough support in the legislature to finally see one enacted into law.  The major stumbling block is that Governor Branstad will only agree to raise the gas tax if it’s part of a larger package that cuts revenue overall—particularly revenues from the property tax.  As we’ve explained in the past, such a move would effectively benefit the state’s roads at the expense of its schools.

Earlier this year, Washington State House lawmakers unveiled a plan raising the state’s gas tax by 10 cents per gallon and increasing vehicle registration fees.  Senate leaders are reportedly less excited about the idea of a gasoline tax hike, though there are indications they would consider such an increase if it were to pass the House.  While talk of a 10 cent increase has since quieted down, there are rumors that a smaller increase could be enacted.

Unfortunately, some states where the chances of gas tax reform once appeared promising have since begun to move away from the idea.  In Michigan, while the Governor and the state Chamber of Commerce have voiced strong support for generating additional revenue through the gas tax, neither the House nor the Senate appears likely to vote in favor of such a reform this year.  Meanwhile, the chances for a gas tax increase in Minnesota seem to have faded after the Governor came out against an increase and the House subsequently unveiled a tax plan that leaves the gas tax untouched.

Overall, 2013 has already been a significant year for state gas tax reform.  Both Maryland and Virginia have abandoned their unsustainable flat gas taxes in favor of a better gas tax that grows over time, just like construction costs inevitably will.  Hopefully, within the next few months, more states will have followed their lead.

Last week we brought you news that Louisiana Governor Bobby Jindal was abandoning his plan to eliminate the state personal and corporate income taxes and replace the revenue with an expanded sales tax. Instead, the Governor asked the legislature to “Send me a plan to get rid of our state income tax.” But now the legislature is denying the Governor’s request.

House Ways and Means Committee Chair Representative Robideaux has asked his colleagues to “defer” the bills they already had in the works to repeal the state income tax, and he’s said that he won’t allow hearings on any income tax repeal bill, closing the door on any attempt to eliminate the state’s income tax. Robideaux said, “I think it’s probably dead for the session, right now, there’s probably income tax fatigue.”  Importantly, he also asks, “Is there a constituent base out there demanding repeal of the income tax?” The answer is that two thirds of Louisianans actually opposed the Governor’s plan for this tax swap, which happens to be about the same percentage of Louisianans who stand to lose the most if any such tax plan gets implemented.

Jindal’s failure is a victory for tax justice advocates and a may serve as a lesson for lawmakers in other states entertaining similarly radical tax ideas.

The St. Louis Post Dispatch, for instance, editorialized, “Louisiana's lawmakers realize what Missouri's don't: Income tax cuts are suicidal.” Missouri lawmakers are debating their own draconian tax plan that would roll back income taxes. The Post Dispatch continues, “What Louisiana has recognized is that the supposed benefits of cutting state income taxes are vastly overstated. The impact of service cuts is vastly understated. The effect is that rich people and corporations get richer. Everyone else gets poorer.”  

In another state, Georgia, income tax elimination has been debated for years, but this columnist with the Atlanta Journal Constitution is hopeful that the tax justice victory in Louisiana will lead to Georgia lawmakers reconsidering their own proposal, which eliminates the personal and corporate income tax for no good reason.

Tax plans similar to Jindal’s have hit road blocks in Nebraska and Ohio this year. Among the many reasons these plans fail, it seems, is that when people realize that they amount to unwarranted tax cuts for the rich that raise taxes for everyone else and probably bust the budget, too, common sense prevails and these ideas are defeated. 

We know that Louisianans dodged a bullet when the Governor’s plan fell apart.  And while it’s good news that a big reason was widespread concern over its fundamental unfairness, the fact is Bobby Jindal is not the only supply-sider committed to eliminating the income tax. So we savor the victory, yes, but also prepare for the next battle as similar plans are winding their ways through other state capitals.

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.

Idaho Senate leadership took a difficult stand on a high-profile issue in favor of good tax policy by refusing to give the Girl Scouts a special tax break on their famous cookies. Their counterparts in the Idaho House, however, weren’t nearly as principled, bowing to the pressure of some of the nation’s youngest tax policy lobbyists and voting 59-11 in favor of the special break. The Girl Scouts plan to return to the statehouse next year in hopes of convincing the Senate to support the new tax subsidy, which is like any other (PDF) subsidy.

Nevada lawmakers are debating whether they should join Maryland and Wyoming as the third state to raise its gasoline tax this year.  The Institute on Taxation and Economic Policy (ITEP) provides some important context with a new chart showing that even if the state’s gas tax were raised by 20 cents over the next 10 years (as the Senate is considering), the rate would still be below its historical average in value.

Texas business owners are pushing state lawmakers to repeal the state’s largest business tax, trotting out familiar arguments about the economic benefits of tax cuts. Fortunately, as the Austin American Statesman reports, “a $1.2 billion annual price tag ... appears to have doomed the effort.”

Massachusetts House lawmakers set up a showdown with Governor Patrick over transportation funding in the Bay State with the passage of their less ambitious revenue package this week. Governor Patrick’s budget includes almost $2 billion in new revenues to boost transportation and education spending raised primarily through increasing the personal income tax. The Governor’s plan also includes a sharp reduction in the state’s sales tax. The House package, by contrast, raises just over $500 million through increases in fuel and cigarette taxes as well as a few business tax changes. Governor Patrick threatened to veto any tax package from the House or Senate that does not raise significant revenue for both transportation projects and education.

(Photo courtesy Bitterroot Star)

In a speech to the Louisiana Legislature yesterday, Governor Bobby Jindal announced that he would “park” his tax plan. There is no doubt this is a huge blow to supply-side advocates and Arthur Laffer enthusiasts who tout false claims that tax cuts will ultimately pay for themselves and increase economic development.

The Governor’s controversial plan would have repealed the state’s personal and corporate income and franchise taxes and then paid for these tax cuts by increasing the sales tax. The sales tax changes included increasing the state tax rate from 4 percent to 6.25 percent, and expanding the base of the tax to include a wide variety of previously untaxed services and goods. ITEP found that the Governor’s plan would have raised taxes on the bottom 60 percent of Louisianans, as tax swaps tend to do.

The Governor’s plan met enormous resistance “in recent weeks as business groups and advocates for the poor have assailed its effects and think tanks have questioned whether the math in the proposal adds up.” Now the Governor is backing away from his proposal and urging the legislature to send him its own bill – one that would also eliminate the personal income tax – leaving “tax reform” up to the state legislature.

The key fact to bear in mind for Louisiana is that aside from raising the sales tax, there is really no way for the state to replace nearly $3 billion in revenue that will be lost if the income tax is eliminated. Lawmakers would do better to stay away from supply-side theories and instead close corporate tax loopholes, reverse the regressivity of the state’s tax structure and invest in public infrastructure because that is what real reform looks like.

Earlier this year, Kansas Governor Sam Brownback proposed another round of personal income tax cuts (on top of those he signed into law last year that are creating a massive hole in the state’s budget). Read ITEP’s analysis of that proposal here.  Now the Kansas House and Senate have each responded with their own tax cut plans, and are expected to reconcile their differences soon.

To date, much attention has been given to the major difference between the House and Senate plans — the Senate bill includes permanently preserving a temporary sales tax rate hike while the House plan would allow the hike to expire. What the two plans have in common, however, is what should be of paramount concern to all Kansans because both plans eventually lead to the elimination of the state’s personal income tax – which would grow the hole in the state’s coffers by another $2.2 billion.  

Policymakers have not proposed a way to pay for this tax cut. Instead they are making an explicit assumption that income tax repeal will at least partially “pay for itself.” Kansas’ balanced-budget requirement means that the state will be forced to offset at least some portion of the revenue loss from income tax repeal, and it’s a sure bet that further increases in the state sales tax will be the primary remaining revenue-raising mechanism lawmakers would look to.

ITEP’s latest analysis runs some scenarios that show the impact on Kansas taxpayers of using a sales tax increase to replace various percentages of the revenue currently raised through the personal income tax.  For example, if 50 percent of the revenues were made up with sales tax hikes, the poorest 40 percent of Kansans would see a net tax increase from this change and the state sales tax rate would have to be raised from 6.3 to 9.11 percent, pushing the statewide average state/local rate up to 10.86 percent.

Read ITEP’s full report here.

Kansas is one of several states contemplating a “tax swap” of some sort, but no state can meet its fiscal needs fairly and sustainably without an income tax -- especially in the absence of extraordinary natural resources (like Alaska’s oil), for example, or out-of-state consumer dollars to tax (like Nevada’s tourism).

Since January, we’ve brought you updates as best we could about Louisiana Governor Bobby Jindal’s controversial tax swap plan, but details remained elusive. Finally, late last week, the Governor released enough information – including a newly calculated, bigger sales tax rate increase – and the Institute on Taxation and Economic Policy (ITEP) was able to complete a full analysis of the Governor’s tax plan. The centerpiece of the Jindal plan is the outright repeal of the state’s personal and corporate income and franchise taxes. These tax cuts would be paid for primarily by increasing the state sales tax rate from 4 percent to 6.25 percent, and expanding the base of the tax to include a wide variety of previously untaxed services and goods.

ITEP’s analysis shows that, if fully implemented in 2013, the plan would increase taxes on the poorest sixty percent of Louisianans overall, while providing large tax cuts for the best-off Louisiana taxpayers. In fact, ITEP found that the poorest 20 percent of Louisianans would see a net tax increase averaging $283, or 2.4 percent of their income, while the very best-off Louisianans would see a tax cut averaging almost $30,000, or 2.5 percent of this group’s total income.

Louisiana Department of Revenue (DOR) Executive Counsel Tim Barfield continues to insist that all Louisianians will be better off under the Governor’s plan. But, as ITEP’s report points out, DOR’s estimates are flawed: they only include the impact of taxes paid directly by individuals and they ignore the impact of taxes paid initially by businesses. This approach presents an incomplete picture of how the Jindal plan would affect Louisianans, though, because a substantial share of the current sales tax, and the large majority of the expanded sales tax base the Governor proposes, would be paid initially by businesses. Economists generally agree that these business sales taxes are ultimately passed on to consumers in the form of higher prices.

Louisianans themselves aren’t buying the Governor’s numbers either. His tax swap plan has the support of only 27 percent of Louisianans – and that was before he upped the sales tax increase even further.

Read ITEP’s full analysis of Govenor Jindal’s tax plan here.

Just in time for Tax Day 2013, our quarterly newsletter Just Taxes is arriving in mailboxes this week. This edition features original articles discussing the fallacies of anti-tax legislation in state legislatures, Facebook's tax avoidance schemes, the release of ITEP's new report, Who Pays? and highlights of ITEP and CTJ's recent press coverage. Starting this year, we are putting back issues of Just Taxes online, and you can now browse editions from the past nine years.  

Just Taxes is a provided as a service to our current donors – who make our work possible – so we’re not making this special content available until six months after publication. (The current issue, for example, will be posted in October.) So to make sure you receive the most up-to-date edition, please make a contribution to CTJ or you can choose to make a tax-deductible contribution to ITEP.  And thank you for all the ways you show support for our work.

Are economically disadvantaged families in the US likely to reverse their fortunes anytime soon? Not according to a new report by the Brookings Institution, which found that growing economic disparities between Americans are becoming increasingly permanent and irreversible. In other words, the study confirms that disadvantaged Americans are finding it increasingly difficult to move up the income ladder, while at the same time the position of the well-off is increasingly secure.

Brookings also found that between 1987 and 2009 the US tax system only “partially mitigated” the increase in income inequality and that it was not enough to “sufficiently alter its broadly increasing trend.” This result is not all that surprising given that the overall (combined state and federal) tax system is barely progressive, meaning that it can only have a small redistributive impact.

While many countries have taken dramatic steps to reduce income inequality, the US has allowed income inequality to grow so extreme that it now has the fourth highest level of income inequality in the developed world. Looking at the low end of the scale, the US Census Bureau found that over 46 million (PDF), or 1 in 6, Americans were below the poverty line in 2011 (the most recent year for which data is available).

But don’t expect a revolution just yet. Most Americans are wholly unaware of how off track our economic system has gotten. For example, as the viral video “Wealth Inequality in America” explains, there is a huge disconnect between the actual distribution of wealth, the distribution of wealth as the public perceives it, and the distribution that the public believes is desirable.

According to the study (PDF) on which the video was based, Americans believe that the top 20 percent hold only 58 percent of the country’s wealth and that under an ideal system, the top 20 percent would own just 32 percent of the wealth. The reality, however, is that the top 20 percent actually own about 84 percent of the country’s wealth. Consider, for example, that the heirs to the Wal-Mart fortune alone own as much wealth as the bottom 40 percent of Americans combined.

One of the best ways to combat rising economic inequality and increase economic mobility would be to enact progressive tax reforms and use the additional revenue raised to pay for critical investments in education, healthcare, and other areas that are needed to improve the economic mobility of lower and middle income Americans.

Here’s some happy news: a recent poll finds that just 27 percent of Louisianans support Governor Bobby Jindal’s tax swap, and that’s before the Institute on Taxation and Economic Policy (ITEP) released its latest analysis showing that the poorest 60 percent of taxpayers in Louisiana would see a tax hike as a result of the Governor’s plan.

A robotics company based in Nevada recently decided to abandon the state’s allegedly “business friendly” environment in favor of Silicon Valley in California, where there are better trained employees and plenty of deep pocketed investors. Nevada does not levy a personal or corporate income tax, but as Romotive founder Keller Rinaudo explains: "It was not a short-term economic decision ... We have to find experienced roboticists, and that really only exists in a few places in the world, and California is one of them."

Maryland’s gas tax will be increased and reformed starting July 1 under a bill just sent to Governor Martin O’Malley by the state’s legislature.  This year’s increase will be something less than 4 cents per gallon, but the tax will now rise each year alongside inflation and gas prices, as recommended by ITEP. ITEP showed that even with the increase, Maryland’s gas tax rate will still remain below its historical average and be less than the state probably needs.

Here’s an interesting story in the Minnesota Star Tribune about how Governor Dayton’s tax plan would impact the wealthiest Minnesotans. While opponents resort to the usual tax-hikes-kill-jobs refrain, Wayne Cox of Minnesotans for Tax Justice notes, “Economists believe keeping teachers and firefighters on the payroll is at least three times more helpful to the economy than keeping income tax rates at the top the same.”

Tax cuts for opposite ends of the income spectrum are getting opposite treatment in Maine and Arkansas. This week, Maine lawmakers rejected a bill that would cut taxes on capital gains (which heavily benefits wealthy taxpayers) and approved an increase in the state’s Earned Income Tax Credit (EITC) (PDF), which amounts to a tax cut to low- and moderate-income families. But last week in Arkansas, a House panel approved a cut in taxes on capital gains while passing up an opportunity to enact a state EITC.

Idaho lawmakers have opted for a dramatically scaled back tax cut on business equipment.  Rather than repealing the business personal property tax entirely as Governor Butch Otter had proposed, the House and Senate have sent him a bill that exempts the first $100,000 of property from the tax.  This change eliminates the tax for 90 percent of Idaho businesses while costing the treasury a fraction of the amount of outright repeal.

Even with the bill’s $20 million price tag, the Associated Press (AP) reasonably described it as a victory for counties and schools that would have been hit hard if the tax were repealed.  The AP also called it a “setback” for big businesses’ major lobby—the Idaho Association of Commerce and Industry (IACI).  IACI has pledged to continue lobbying for full repeal next year.

Had the business personal property tax been repealed in full, the biggest winner would have been Idaho Power, which would have seen its tax bill drop by anywhere from $10.5 to $15.3 million per year. Our partner organization, the Institute on Taxation and Economic Policy (ITEP), helped put this property tax cut into context with a report explaining that Idaho Power already pays nothing in state corporate income taxes.  Looking at nationwide state corporate tax payments, ITEP showed that from 2007 to 2011, the company actually collected a $7 million state tax rebate despite earning $623 million in profits. That amounts to an overall effective tax rate of negative 1.1 percent.

While it’s discouraging that lawmakers prioritized cutting taxes this session on the heels of last year’s regressive income tax cut, the decision to keep the business personal property tax on the books is a welcome bit of fiscal sanity.

Oklahoma Governor Mary Fallin’s proposal to repeal the state’s top personal income tax bracket is “gaining traction,” according to The Oklahoman.  The plan has already passed the House, and has the support of the state Chamber of Commerce. But the Oklahoma Policy Institute explains that this cut is stacked in favor of high-income residents: “the bottom 60 percent of Oklahomans would receive just 9 percent of the benefit from this tax cut, while the top 5 percent would receive 42 percent of the benefit.”  

Texas and Washington State are continuing to search for ways to make it easier to identify and repeal tax breaks that aren’t worth their cost.  The Texas Austin American-Statesman reports on a bill that “would put the tax code under the microscope, examining tax breaks in a six-year cycle similar to the Sunset process that evaluates whether state agencies are performing as intended.”  And the Washington Budget and Policy Center explains in a blog post how “all three branches of state government have taken, or are poised to take, actions that could greatly enhance transparency over the hundreds of special tax breaks on the books in Washington state.”

This Toledo Blade editorial gets it right about Ohio Governor Kasich’s plan to broaden the sales tax base to include more services: “There is merit, in theory, to expanding the sales tax to include more services. But the experience in states such as Florida — which broadened its tax base, then abandoned the effort as unworkable — suggests it should be done slowly and for the right reasons.” Broadening the sales tax base is good policy, but the Kasich plan is bad for Ohioans because overall the plan (according to an Institute on Taxation and Economic Policy analysis) increases taxes on those who can least afford it while cutting taxes for the wealthy.

ITEP is waiting for full details of Louisiana Governor BobbyJindal’s tax swap plan, but already clergy and ministers in the state are weighing in against the Governor’s plan to eliminate state income taxes and replace the revenue with a broader sales tax base and a higher rate. In this commentary, the Right Rev. Jacob W. Owensby, (bishop of the Episcopal Diocese of Western Louisiana), worries: “It is difficult to see how increased sales taxes will pass the test of fairness that we would all insist upon. Our tax system has lots of room for improvement. But relying on increased sales tax will not give us the fair system we need. Raising sales taxes will increase the burden on those who can least afford it.”

Actor John Cleese, most famous for his central role in the British comedy group Monty Python, has decided to move back to Great Britain from Monaco, after concluding that the tax benefits of moving to the tax haven last year were not worth it after all. The actor’s return to Great Britain provides a high profile counterpoint to the false narrative that “high” taxes are driving wealthy people to migrate to low-tax jurisdictions, like Florida in the United States, or like Monaco, Russia or Bermuda for the globe trotting set.

The quest for a lower tax rate has not proven to be as much of a factor for wealthy individuals as anti-tax advocates would have you believe. Several studies confirm this, including a recent academic analysis based on actual tax returns that concludes the effect of tax rates on migration is “negligible” between the different tax jurisdictions in the United States.

What anti-tax advocates ignore is the fact that taxes actually play a very small role in an individual’s decision where to live, especially compared to factors like employment opportunities, family and friends, housing and even weather. In addition, lower taxes may actually discourage migration if they result in lower quality government services (a well-funded Ministry of Silly Walks  maybe especially close to John Cleese’s heart for example). What wealthy person wants to move to a jurisdiction with poor public schools, dirty streets and parks, and inadequate law enforcement?

The real lesson is that non-tax benefits of living in a location usually outweigh higher taxes, even in cases where the individual could save substantial sums of money by moving elsewhere. A recent case in point? The billionaire hedge-fund manager John Paulson’s decision not to move to Puerto Rico, despite the fact that doing so would have allowed him to avoid billions of dollars in capital gains taxes. In other words, Paulson has indicated that he’d just as soon keep paying billions more in taxes for the advantages of living in New York City. Colorful anecdotes and threats aside, the holy grail of tax codes ends up being the one that allows for a quality of life worthy of millionaires – and everybody else.

New Mexico lawmakers recently approved a cut in the corporate income tax rate and special tax breaks for manufacturers and filmmakers. State officials estimate that the bill will eventually cost (PDF) the state about $55 million in lost revenue per year, but they admit that they’re not especially confident in their estimates.  The Santa Fe New Mexican explains how the vote in the House literally came down to the final seconds of the legislative session, and says that House Speaker Kenny Martinez “acknowledged that some [House] members may not have been familiar with [the bill] at all.”

The largest single tax cut contained in the bill is a reduction in the corporate income tax rate from 7.6 to 5.9 percent, phased-in over five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recently found that the corporate income tax is one of New Mexico’s few progressive taxes in a tax system that is sharply regressive overall.  On top of this cut, lawmakers voted to give manufacturers the option to use a tax break known as single sales factor (PDF) that only benefits businesses selling most of their products out-of-state.  The package also expanded tax giveaways for filmmakers that are widely understood to offer little economic benefit.

To pay for a portion of the cost of these cuts, the bill raises sales taxes on manufacturers, cuts aid to local governments (though it lets them raise their own sales taxes), trims some existing tax credits, and limits the tax avoidance opportunities available to some “big box” retailers through the adoption of mandatory “combined reporting” (PDF) for those companies.

Overall, however, the corporate tax rate cut represents a case of misplaced priorities in a state whose tax system is fundamentally unfair and where funding for things like higher education has been slashed in recent years.

A story in the Arkansas News show why all citizens should be concerned about the bad design (PDF) of state gasoline taxes. Arkansas’ gas tax hasn’t been raised in over a decade, during which time it has lost about a quarter of its value due to rising construction costs alone. In order to offset those losses, lawmakers are debating a bill that would transfer $2.3 billion away from other areas of the state budget in order to pay for roads and bridges over the next 10 years.  At a rally protesting the idea, Rich Huddleston of Arkansas Advocates for Children and Families ticked off just some of the state services that would have to be cut: “education, higher education, Medicaid and health services for vulnerable populations, services for abused and neglected children, juvenile justice services for kids … public safety and corrections and pre-K and child care for our youngest populations.”

Girl Scouts in Idaho are seeking out a special sales tax loophole for selling their cookies so that they can keep an extra 22 cents on every box sold. There is no tax policy reason to exempt Girl Scout cookies from the sales tax. If enacted, this break would be a true “tax expenditure” -- a state spending program grafted onto the tax code (PDF) in a way that exempts it from the normal processes used to manage state spending year in and year out.

Minnesota Governor Mark Dayton is traveling the state on a “Meetings with Mark” tour to discuss his budget and tax plans with voters. Last week the Governor unveiled a revised tax plan, but minus the sales tax base expansion from his original proposal.  Wayne Cox of Minnesota Citizens for Tax Justice supports the new proposal as it retains two crucial pieces of the original – an income tax hikes for wealthy Minnesotans and a cigarette tax hike. “Gov. Mark Dayton’s new budget is a blueprint for fairer taxes and a brighter future for Minnesota families.  His reforms pave the way for new jobs, healthier lives and a better-educated workforce. Education and health experts around the state have praised Gov. Dayton’s reforms. Future economic growth depends on these changes.”

In response to Ohio Governor John Kasich’s regressive proposal to expand the state sales tax base and lower income taxes, Policy Matters Ohio (using ITEP data) released a paper reminding Ohioans how beneficial an Earned Income Tax Credit (PDF) could be to low-income families hit hardest by an increased sales tax.

Here’s a powerful column from the Atlanta Journal Constitution citing ITEP data. Advocating against a state Senator’s proposal to raise the Georgia sales tax and freeze revenues into the future, Jay Bookman writes: [h]e has proposed two amendments to the state constitution that, if approved by voters, would lead to significantly higher taxes on the vast majority of Georgia households, while sharply reducing taxes on the wealthiest. That ought to be controversial under any circumstances. As it is, lower- and middle-income Georgia households already pay a significantly higher percentage of their income in state and local taxes than do the wealthy. The Shafer amendments would make that disparity considerably worse.”

UPDATE: As of March 29, 2013 this plan has passed both the House and Senate and is expected to be signed into law by the Governor.

This week, the Maryland House will vote on a plan to raise and reform the state’s gasoline tax. The plan is very similar to one proposed by Governor Martin O’Malley that our partner organization, the Institute on Taxation and Economic Policy (ITEP), analyzed when it was released two weeks ago.

An updated chart from ITEP shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not raise the gas tax, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years. Only in 1922 and 1923 did Maryland levy a lower gas tax.

Moreover, the gas tax increase under consideration in the House, like the one proposed by the Governor, is actually very modest. The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 12 cent increase by 2015. That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised. Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the House plan is enacted, the inflation-adjusted rate over the next decade would average just 32.8 cents.

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

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

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

Positive Developments

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

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

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

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

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

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

Negative Developments

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

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

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

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

Need further proof that the poor are often taxed more heavily than wealthier folks? Take a look at this recent New York Times piece by sociologist Katherine Newman based on her book. She writes that “tax policy is particularly regressive in the South and West, and more progressive in the Northeast and Midwest. When it comes to state and local taxation, we are not one nation under God. In 2008, the difference between a working mother in Mississippi and one in Vermont — each with two dependent children, poverty-level wages and identical spending patterns — was $2,300.” Newman concludes with suggestions for offsetting the regressive impact of state taxes.

The Atlanta Journal Constitution is doing an investigative series on tax breaks and incentives, and here’s their latest article – a look into “the Georgia Agricultural Tax exemption program, [designed] to allow farmers and companies that produce $2,500 in agricultural services or products a year to receive sales tax breaks on equipment and production purchases.” What they found, however, is that construction firms, mineral companies, horse ranches and even dog kennels have applied for the breaks, along with hundreds of out-of-state businesses, with addresses as far afield as Texas and Colorado.” The newspaper found very few requests for this tax break were being rejected, and the governor is imploring businesses to police themselves. The newspaper concludes that it was the absence of clear criteria and lack of resources for screening and evaluating applications that’s resulted in the fiscal and logistical chaos.

Washington State lawmakers are trying to get a better handle on the numerous special tax breaks (PDF) being added to the state’s tax code every year. Under a bill that passed the state senate unanimously, new tax breaks would have to include a statement of purpose against which to judge their subsequent success, and an expiration date that would force lawmakers to vote on them again after a certain number of years.  Both of those reforms (along with others) have been recommended by our partner organization, the Institute on Taxation and Economic Policy (ITEP).

Massachusetts Governor Deval Patrick cited a recent report from ITEP’s “Debunking Laffer” series while testifying in favor of his proposed income tax increase: “Last month, the non-partisan Institute on Taxation and Economic Policy issued a report evaluating the economic growth per capita of several states. The report compared nine states with relatively high income taxes to nine states with low or no income tax. The analysis made clear that the nine states with “higher” income taxes actually saw considerably more economic growth per capita than the nine states with low or no income tax. The states with no income tax have seen a decline in median income.”

The Missouri Senate preliminarily approved legislation that would slash the state’s revenues because it is stacked with tax cuts. Though a preliminary legislative step, it’s worth noting that if the law does get implemented, restoring the lost revenues would be nearly impossible given Missouri’s constitutional amendment restricting tax increases. The bill, originating in the state Senate, cuts the top personal income tax rate, reduces corporate income taxes, offers a tax deduction for pass-through business income and increases the personal exemption. The only tax increase is in the sales tax, which is any state’s most regressive revenue source.  

This package is billed as Missouri’s answer to the radical tax package passed last year by Kansas Governor Brownback. Its sponsor explained, “I’m trying to stop the bleeding. I’m trying to stop the businesses from fleeing into Kansas,” and then invokes the kind of magical thinking that almost always results in a deficit. According to the Associated Press, State Senator Kraus predicted his plan would “create an economic engine in our state” that would generate enough new tax revenues to make up for the losses.”

But the revenue losses -- which are certain -- are not justified. A report from the Missouri Budget Project, Racing to the Bottom: Senate Gives Initial Approval to Extreme Tax Cut Bill Which Would Devastate Missouri Services, Infrastructure, and the State’s Economy, using Institute on Taxation and Economic Policy (ITEP) data helps show that the biggest beneficiaries of this tax package are the wealthiest 1 percent who have an average income of over $1 million, and who will see an average tax cut of $8,253 if the legislation becomes law. Middle income families would generally break even, but lower income Missourians would experience a tax increase.  

The Missouri Budget Project points out the obvious: “To truly compete with Kansas and other states, Missouri must invest in its quality of life and what families and businesses need to thrive: strong schools to educate our children and provide a skilled workforce, quality transportation to get to school and work and bring companies’ products to market, and safe, stable communities.”

Conspicuously absent from New Jersey Governor Chris Christie’s new 2014 fiscal year spending plan were the across-the-board personal income tax cuts he defended so vehemently just last year.  Governor Christie now wants Garden State residents to believe Democrats in the legislature are to blame for the lack of promised tax relief.  But, the facts are that the state cannot afford a tax cut this year any more than it could last year, the Governor’s overly optimistic revenue growth projections notwithstanding.  

A new editorial from the New Jersey Star Ledger calls Governor Christie’s rhetoric “pure fantasy” and lays out the facts:

“Gov. Chris Christie knows that New Jersey can’t afford a tax cut right now, so he didn’t include one in his budget plan.

But he also knows he can’t admit this if he wants to win a Republican presidential primary in 2016. So he made clear during his budget address Tuesday that he intends to campaign on the merits of an income tax cut this year anyway.

“I am content to let the voters decide this in November,” he warned Democratic legislators.

Here we go again. The governor even promised Democrats that if they agree to cut taxes this year, he will find a way to pay for it.

That’s a remarkable claim. Because he says he can’t afford to rescind the tax hike he imposed on the working poor, or restore the funding for the six Planned Parenthood clinics he shut down. He can’t afford to restore property tax rebates, as promised. He can’t afford to provide adequate funding for state colleges and universities, among the most starved in the nation. And he can’t replenish the fund for open-space purchases…

So the governor’s suggestion that he has a secret vault with enough money to finance a tax cut is pure fantasy. The income-tax cut he proposed would cost $1.4 billion a year when phased in, with the wealthiest 1 percent claiming almost half the benefit.

If the governor really campaigns on this, understand that is pure show. It is a pitch designed for national TV, where gullible hosts who don’t know New Jersey will no doubt bobble their heads some more. It is an act for the national audience, and New Jersey is his prop…”

If an unexpected revenue bump does come along, Christie’s tax cuts for the wealthiest cannot be where it gets spent. Instead, it should be used to reverse the Governor’s previous cuts to the Earned Income Tax Credit, to restore property tax rebates he gutted and generally reinvest in programs that have been revenue starved since the Great Recession began.

Maryland Governor Martin O’Malley recently unveiled his plan to raise and reform his state’s gasoline tax.  Local TV stations predictably responded by interviewing drivers unhappy with the high price of gas, while (also predictably) failing to explain that Maryland’s gas taxes are not to blame for those high prices.

A new chart from our partner organization, the Institute on Taxation and Economic Policy (ITEP) shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not act on the Governor’s recommendation, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years.  Only in 1922 and 1923 did Maryland levy a lower gas tax.

Moreover, the gas tax increase proposed by the Governor is actually very modest.  The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 9 cent increase by 2014.  That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised.  Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the Governor’s plan is enacted, the inflation-adjusted rate over the next decade would average just 31 cents.

PetersonPyramid.org

The Center for Media and Democracy (CMD), creator of the indispensible wiki, SourceWatch, recently launched a new wiki resource allowing users to explore the funding, leadership, partner groups and lobbyists that make up the Campaign to Fix the Debt. This resource reveals Fix the Debt for what it really is: another coordinated push by large corporations and billionaire Pete Peterson to force Congress to pass large and unneeded cuts to Social Security and Medicare.

We’d be remiss if we failed to also mention Fix the Debt’s naked duplicity in pushing for massive cuts to critical programs while simultaneously pushing for additional tax breaks for its many corporate backers.  Using data from Citizens for Tax Justice (CTJ), CMD exposes the audacity of some of 151 corporate backers of Fix the Debt by showing that many of them, such as Boeing, General Electric and Verizon, are already paying less than nothing in taxes.

Biz Vizz

371 Productions, the creator of the PBS documentary, “As Goes Janesville,” has launched a corporate transparency website and iPhone app called BizVizz, which provides consumers with easy access to financial information about America’s largest corporations. BizVizz uses CTJ’s corporate tax data to reveal that our broken corporate tax system allows the makers of many of our everyday products to get away with paying little – or sometimes nothing – in income taxes. One especially cool feature of the app allows the user to snap a picture of a product logo and get instant information on how much the company paid in federal taxes.

BizVizz includes other data, too. It shows how major corporations obtain their low tax rates because it includes data from the Sunlight Foundation on how much each corporation gave to politicians in campaign contributions. The other category of data BizzVizz includes is from Good Jobs First, listing subsidies corporations get from state and local governments – subsidies that come straight out of the tax dollars the rest of us pay in.

Lawmakers looking for an excuse to cut their personal income taxes regularly claim that doing so will trigger an economic boom.  To support this claim, many cite an analysis by supply-side economist Arthur Laffer that our partner organization, the Institute on Taxation and Economic Policy (ITEP), exposes as deeply flawed.

In States with “High Rate” Income Taxes are Still Outperforming No-Tax States, ITEP explains that Laffer uses cherry-picked data and simplistic comparisons to claim that the nine states without income taxes are outperforming states with “high rate” income taxes.  He goes on to suggest that the alleged success of those no-tax states can be easily replicated in any state that simply repeals its own personal income tax.

But ITEP shows that residents living in states with income taxes—including those in states with the highest top tax rates—are experiencing economic conditions as good, if not better, than in the no-tax states.  In fact, the states with the highest top income tax rates have seen more economic growth per capita and less decline in their median income level than the nine states that do not tax income.  Unemployment rates have been nearly identical across states with and without income taxes. 

As ITEP explains, Laffer’s supply-side claims rely on blunt, aggregate measures of economic growth that are closely linked to population changes, and the unsupported assertion that tax policy is a leading force behind those changes. Laffer chooses to omit measures like median income growth and state unemployment rates in his comparisons of states with and without income taxes, even as he cites these very same measures in his other studies, when the story they tell fits his preferred narrative.

Even more fundamentally, Laffer’s work falls far short of academic standards in that it completely excludes non-tax factors that impact state growth, including variables like natural resources and federal military spending (variables that Laffer himself has admitted to be important).  In the text of his reports, Laffer concedes that “the drivers of economic growth are many faceted.”  And yet when he constructs analyses designed to show the harm of state income taxes, somehow every non-tax “facet” happens to get left out.  Of course, more careful academic studies often conclude that income tax cuts have little, if any, impact on state economic growth.

Read ITEP’s report.

Front Page Photo of Arthur Laffer and Rick Perry via Texas Governor Creative Commons Attribution License 2.0

A new talking point from tax cut snake oil salesman Arthur Laffer is making the rounds. It’s been seen in the pages of The Wall Street Journal and cited by Indiana Governor Mike Pence, Iowa House Majority Whip Chris Hagenow, and Tim Barfield, Governor Jindal’s point man for income tax elimination in Louisiana.   

As the Journal put it: A new analysis by economist Art Laffer for the American Legislative Exchange Council finds that, from 2002 to 2012, 62% of the three million net new jobs in America were created in the nine states without an income tax, though these states account for only about 20% of the national population.

But as they’ve done with many of Laffer’s previous analyses, the Institute on Taxation and Economic Policy (ITEP) explains why this talking point is all rhetoric and no substance. Laffer’s research is like a house of cards, depending on data selected and placed precisely to help reach the conclusion he wanted, as ITEP details:

1) Most of the states without income taxes contributed just one percent or less to the nation’s job growth over the period Laffer examines.  Laffer’s claim has nothing to do with the “nine states without an income tax,” and everything to do with one of those states: Texas.

2) Texas’ economy differs from that of other states in many significant ways, and comparing its job growth to the rest of the country provides no insight into the economic impact of its tax policies.  This is particularly true of the time period Laffer examines, since it includes the housing crisis that Texas largely avoided for reasons unrelated to tax policy.

3) Looking beyond the specific Recession-dominated time period chosen by Laffer, Texas’ job growth has otherwise generally been in line with its rate of population growth.

The four-page report with graphs and footnotes is here.

UPDATE: On April 3, 2013 Governor McDonnell signed the package described below with only minor changes.  Those changes are discussed at the end of this article.

If Governor Bob McDonnell signs the transportation bill just passed by his state’s legislature, as he is expected to do, Virginia will join Wyoming as the second Republican-led state in less than a month to raise taxes to pay for transportation.  Virginia Delegate David Albo, one of Grover Norquist’s no tax pledge signers, explained his vote in favor of the bill by saying, “I looked at every single way to raise money for roads, and it is literally impossible to do without raising revenue.”

But as encouraging as it is to see opposition to taxes waning in some circles, the tax bill passed by Virginia’s legislature is far from perfect. The bill will shift the responsibility for paying for roads away from the drivers who use them most, and its reliance on sales taxes will shift Virginia’s already regressive (PDF) tax system even more heavily toward lower-income families.  Here’s a quick rundown of the bill’s major components:

Gasoline tax:  The 17.5 cent per gallon gasoline tax will be cut, at least in the short-term, by replacing it with a tax based on 3.5 percent of the wholesale price of gasoline.  At the current wholesale price of $3.30 per gallon, the new tax should be about 11.5 cents—the lowest in the country outside of Alaska—but it will rise over time as the price of gas climbs. Virginia will become the 15^th state to levy a gas tax that grows automatically over time, which allows the tax to better keep pace with the rising cost of construction.  But wholesale gas prices will have to rise to $5.00 per gallon before the tax returns the 17.5 cent level that Virginians have been paying for the last quarter century.  The bill amounts to a gas tax cut that lets frequent and long-distance drivers off the hook for paying for the transportation enhancements that benefit them the most.

Diesel tax:  Taxes on diesel fuel will increase both in the short- and long-term, as the 17.5 cent per gallon tax is replaced by a 6 percent tax based on the wholesale price of diesel.  Diesel prices are generally higher than gasoline prices, so at a wholesale price of $3.50, for example, the new tax should equal 21 cents per gallon and will grow over time as diesel prices rise. 

Remote sales tax:  The bill assumes that Congress will enact legislation empowering Virginia to require online retailers to collect the sales taxes owed by their customers (PDF), but it also puts in place a stopgap measure in case that doesn’t happen.  If Congress hasn’t acted by 2015, the wholesale gasoline tax rate will rise from 3.5 percent to 5.1 percent.  At current prices, this would bring the gas tax to16.8 cents per gallon.  Virginia should raise its wholesale gas tax rate to at least this level, regardless of the outcome of the federal debates over taxing online purchases.

Sales tax:  The largest single revenue-raiser in the bill is an increase in the state sales tax rate from 5 percent to 5.3 percent in most parts of the state. In the densely populated and congested areas of Northern Virginia and Hampton Roads, residents will see their sales tax rates rise to 6 percent, and will be forced to dedicate the additional revenue to transportation.

General fund raid:  Following the unfortunate precedent set by Michigan, Nebraska, Oklahoma, Utah, Wisconsin and the federal government, the bill also prioritizes roads over other areas of government by shifting $200 million away from the general fund every year.  The Roanoke Times previously blasted a similar proposal from Governor McDonnell by pointing out: “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.”

Motor vehicle sales tax:  The sales tax break on motor vehicle purchases will be reduced, but not eliminated.  The rate will rise from 3 percent to 4.3 percent – still short of the 5.3 percent general sales tax rate.

Hybrid tax:  Hybrid and alternative fuel vehicles will have to pay an additional $100 in registration taxes every year.  So, while drivers of gas-guzzling vehicles are receiving a break in the form of a lower gas tax, fuel-efficient hybrid owners will actually pay more.

Low-income offsets: The state and local sales taxes used to raise the bulk of new road funding under this plan will hit lower- and moderate income families hardest.  And yet, the bill lacks any kind of targeted tax relief for those families.  In-state analysts urged the creation of a sales tax rebate or the enhancement of the state’s Earned Income Tax Credit (EITC), but the final bill did not include either of these measures.

UPDATE: The version of this package that was signed into law is slightly different than the one originally passed by the legislature: the motor vehicle sales tax is raised to 4.15 percent instead of 4.3 percent, the hybrid tax is $64 per year instead of $100, miscellaneous local tax increases in northern Virginia were scaled back, and technical changes were made to local taxes in order to avoid a constitutional challenge.

After a year in which tax issues dominated national policy debates, President Barack Obama has signaled that immigration issues will be at the forefront of his legislative agenda in 2013. With immigration reform evidently gaining momentum, some old tax-related bugaboos are sure to resurface as the debate gets underway: in particular, some have argued that undocumented immigrants pay no taxes to states or to the federal government.

A couple of years ago, the Institute on Taxation and Economic Policy (ITEP) worked with the Immigration Policy Center to assess the truth of this claim. Our finding? Far from being tax avoiders, undocumented families pay many of the same regressive taxes that hit all low-income families at the state and local level. We estimated that nationwide, undocumented families paid about $11 billion in state and local taxes in 2010.

The main reason for this is that the sales and excise taxes that fall most heavily on low-income taxpayers don't depend on your citizenship status. Anytime you buy a cup of coffee, a pair of jeans or fill up your tank up with gas, you're paying state and local sales and excise taxes. There are also property taxes, including for renters, who pay them indirectly because landlords frequently pass some of their property tax bills on to their tenants in the form of higher rents. And, many undocumented taxpayers have state income taxes withheld from their paychecks each year.

The bottom line? Even if there were 47 percent of the population paying no taxes (and there isn’t), undocumented immigrants would not be among them. In fact, to find people who don’t pay taxes, take a closer look at the wealthiest among us.

Note to Readers: This is the fifth of a six part series on tax reform trends in the states, written by The Institute on Taxation and Economic Policy (ITEP).  Previous posts in this series have provided an overview of current trends and looked in detail at “tax swaps,” personal income tax cuts and progressive tax reforms under consideration in the states.  This post focuses on one of the most debated tax issues of 2013: raising state gasoline taxes to pay for transportation infrastructure improvements.

States don’t tend to increase their gas tax rates very often, mostly because lawmakers are afraid of being wrongly blamed for high gas prices.  The result of this rampant procrastination is that state gas tax revenues are lagging far behind what’s needed to pay for our transportation infrastructure.  Until last week, the last time a state gas tax increase was signed into law was three and a half years ago—in the summer of 2009—when lawmakers in North Carolina, Oregon, Rhode Island, Vermont, and the District of Columbia all agreed that their gas tax rates needed to go up, albeit modestly in some cases.  (Since then, some state gas taxes have also risen due to provisions automatically tying the tax to gas prices or inflation.)

But Wyoming was the state that ended the drought when Governor Matt Mead signed into law a 10 cent gas tax increase passed by the state’s legislature.  And Wyoming is not alone.  In total, lawmakers in nine states are seriously considering raising (or have already raised) their gas tax in 2013: Iowa, Maryland, Massachusetts, Michigan, New Hampshire, Pennsylvania, Vermont, Washington, and Wyoming. And until recently, Virginia appeared poised to increase its gas tax, too.In addition to Governor Mead, Republican governors in Pennsylvania and Michigan and Democratic governors in Massachusetts and Vermont have proposed raising their state gas taxes despite the predictable political pushback that such proposals seem to elicit.  The plans under discussion in these four states are especially reform-minded since they would not just raise the gas tax rate today, but also allow it to grow over time as the cost of asphalt, concrete, machinery, and everything else the gas tax pays for grows too.

In New Hampshire, meanwhile, Governor Hassan has said that the state needs more funding for transportation and is open to the idea of raising the gasoline tax, among other options.  The state House is debating just such a bill right now.  The situation is similar in Maryland where Governor O’Malley, who pushed for a long-overdue gasoline tax increase last year, recently met with legislators to discuss a gas tax increase proposed this year by Senate President Mike Miller.  Washington State Governor Jay Inslee has also not ruled out an increase in the gas tax—an idea backed by the state Senate majority leader and the House Transportation Committee chair.  And in the Hawkeye State, Governor Branstad once described 2013 as “the year” to raise Iowa’s gas tax (which happens to be at an all-time low, adjusted for inflation), although he has since said that he would support doing so only after lawmakers cut the property tax.

Other states where gas tax increases have gotten a foothold so far this year include Minnesota, Texas, West Virginia, and Wisconsin, though it’s not yet clear how far those states’ debates will progress in 2013.

Across the country, no state has received more attention this year for its transportation debates than Virginia, where Governor Bob McDonnell kicked off the discussion by actually proposing to repeal the state’s gasoline tax.  But while Governor McDonnell’s idea was certainly attention-grabbing, it also failed to gain traction with most lawmakers, and the Virginia Senate responded by passing a bill actually increasing the state gasoline tax and tying it to inflation.  Since then, the preliminary details of an agreement being negotiated between House and Senate leaders are just now emerging, but early indications are that the legislature will try to cut the gas tax in the short-term, but allow the tax to rise alongside gas prices in the future.  The size of the cut will also depend on whether Congress enacts legislation empowering Virginia to collect the sales taxes owed on online purchases.

It’s good to see Virginia lawmakers looking toward the long-term with reforms that will allow the gas tax to grow over time.  But asking less of drivers through the gas tax today—when the state is facing such serious congestion problems—is fundamentally bad tax policy.  For more on the merits of the gas tax and the reforms that are needed to improve its fairness and sustainability, see Building a Better Gas Tax from the Institute on Taxation and Economic Policy (ITEP).

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

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

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

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

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

Note to Readers: This is the fourth 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” and personal income tax cut proposals.  This post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax reform proposals are not all bad news this year.  There are some good faith efforts underway that would fix the structural problems with state tax codes, rather than simply dismantling or eliminating entire revenue sources and calling it “reform.”  Proposals in Minnesota, Kentucky, Utah, and Massachusetts would improve the fairness, adequacy and sustainability of those states’ tax systems through various combinations of base broadening, tax breaks for low- and moderate-income families, and increases in the share of taxes paid by wealthy households. Other states to watch include Nevada, California, New York and Hawaii, though the specific proposals that will be considered in these states have yet to be fully fleshed out.

Minnesota Governor Mark Dayton recognizes that his state’s tax structure is in need of an overhaul and is looking at long-term solutions that will set the state’s revenues on a sustainable path now and in the future.  As he sees it, the current system is fraught with problems. It does not reflect the modern economy in many ways. It has shifted the responsibility for funding government to those with the least ability to pay. It is out of balance due to its heavy reliance on property taxes.  And, it is riddled with expensive and ineffective tax breaks that make the state’s revenues less sustainable.  Out of all the high-profile state tax reform plans unveiled this year, Governor Dayton has put forth the best example of a comprehensive and progressive tax reform proposal.  It will make Minnesota’s tax code more fair, adequate, and sustainable.  The Governor’s plan includes: broadening the sales tax base to services and using some of the additional revenue to lower the state’s sales tax rate; reducing property taxes; adding a new personal income tax bracket for the state’s wealthiest taxpayers; and closing corporate tax loopholes.  The plan also raises more than $1 billion a year to boost investments in public education and restore structural balance to the state’s budget.

Kentucky Governor Steve Beshear signaled his support for overhauling the Bluegrass State’s tax code in his State of the State address in early February and indicated he would be looking to the recommendations from his appointed Blue Ribbon Tax Commission as a starting point for a proposal.  With a few exceptions, the Commission’s recommendations (released in December) were courageous and forward-looking, including a proposal to expand the sales tax base to services (PDF) while simultaneously adopting an Earned Income Tax Credit (EITC) (PDF) to offset the impact on low-income working families.  The recommendations also included broadening the personal income tax base by limiting itemized deductions for wealthy households, lowering the very large exclusion for pension income (and phasing it out for high wealth retirees), and lowering personal income tax rates.  Like the Minnesota plan, if taken as a whole, the Kentucky Tax Commission’s recommendations would shore up state revenues over the long term and more immediately raise revenue for current needs.

Utah lawmakers are looking at a proposal to raise the sales tax rate applied to groceries and couple that change with two new refundable credits to offset the impact on low- and moderate-income families: a food credit (PDF) and a state EITC (PDF).  While less comprehensive than the proposals under consideration in Minnesota and Kentucky, an ITEP analysis found that the Utah plan would reduce the regressivity of Utah’s tax code (PDF).  In other words, low-income working families would ultimately pay less of their income in taxes while upper-income families would pay slightly more.  Simply exempting food from state sales taxes (or taxing it at a lower rate) is a poorly targeted and costly policy that narrows the tax base and extends the break to wealthier taxpayers who don’t need it. Therefore, refundable credits of the kind Utah is considering are a smart, less costly alternative that can be designed to reduce taxes for specific groups of taxpayers in need of relief.

Massachusetts Governor Deval Patrick’s FY14 budget included a tax package that will boost revenues now and in the future and make slight improvements to the fairness of the state’s tax system. While many governors this year are looking to replace progressive income taxes with regressive sales taxes, Governor Patrick wants the Bay State to do the reverse and rely more on the personal income tax and less on the sales tax.  His plan would raise the state’s flat personal income tax rate from 5.25 to 6.25 percent, double the personal exemption, and eliminate more than 40 personal income tax breaks that tend to benefit the wealthiest families.  The sales tax rate would drop from 6.25 to 4.5 percent and computer software, soda, and candy would be newly subject to the tax.  He also recommends a $1 increase to the cigarette tax. Governor Patrick’s plan would raise close to $2 billion when fully phased in. The Campaign for Our Communities coalition praised the proposal, saying that it “creates growth and opportunity through long-term investments in education, transportation and innovation funded by making our tax system simpler and fairer.”

For months, Idaho lawmakers have been seriously considering repealing the personal property tax on business equipment.  If enacted, repeal would cost local governments and public schools over $140 million a year, and would likely force cuts in public services and increases in property taxes on other taxpayers.

The single biggest winner under repeal would be Idaho Power, held by IDACorp, which will reportedly see its taxes fall by $10.5 to $15.3 million per year if repeal is enacted.  A new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), helps put this costly tax proposal into perspective by looking at the state income taxes being paid (or not) by the plan’s largest beneficiary.

According to IDACorp’s financial disclosures, the company earned $623 million in U.S. profits over the last five years (2007-11) but paid nothing in state income taxes to the states in which it operates.  In fact, the company’s effective state income tax rate across all states was actually negative.  IDACorp received $7 million in tax rebates from the states between 2007 and 2011, giving it an effective tax rate of negative 1.1 percent for the five year period as a whole.

The proposed repeal of the personal property tax in Idaho would leave the state corporate income tax as the main means by which companies like IDACorp contribute to the public investments that allow them to do business and generate profits. Before lawmakers take such a step, they should at least know whether the state corporate tax is working to begin with. In Idaho and virtually every other state, however, neither elected officials nor the tax-paying public have access to this kind of information. Obviously, they should (PDF).

Read the report

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.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP) is continuing to generate a lot of publicity in the states for its recent Who Pays? report examining the fairness (or lack thereof) of every state’s tax system.  The Tennessean explains, for example, that: “Tennessee is often championed as a low-tax state. But for struggling families, it might not be among the fairest.”

In Pennsylvania, meanwhile, Sharon Ward of the Pennsylvania Budget and Policy Center explained ITEP’s report to CBS Philly by saying that: “We are in a club we don’t want to be in — one of the ‘Terrible Ten States’ that has the most regressive tax systems. And really, we got here for a very important reason: we have a flat income tax that fails to offset the more regressive taxes: sales and property taxes.”

And in Wyoming, the Equality State Policy Center (ESPC) is using ITEP’s new Who Pays? data to make the case for enacting a state Earned Income Tax Credit (EITC).  ESPC explains that the credit could make a long-overdue increase in the state’s gasoline tax much fairer by mitigating its impact on low-income families.

We recently profiled the four states looking most seriously at “tax swaps” that would offset big income tax cuts with a regressive sales tax hike -- Kansas, Louisiana, Nebraska, and North Carolina.  New Mexico can now be added to that list.  Two lawmakers there say they would like to expand the sales tax to apply to "virtually everything that happens" in the state and then repeal the personal and corporate income taxes.  But economists in New Mexico say that the plan is “pretty much guaranteed to be regressive and shift the tax burden.”

Bipartisan legislation in Texas would remedy the state’s “astounding deficit of knowledge when it comes to tax expenditures” -- or special tax breaks (PDF). The report proposes a number of smart reforms recommended by ITEP.  Those reforms include rigorous reviews aimed at determining whether tax breaks have fulfilled their goals, and “sunset provisions” designed to force a vote on special tax breaks that would otherwise continue on autopilot for years or decades on end.

Comprehensive New 50-State Study Provides Detailed Profiles and Comparisons of Tax Systems and Distribution Including “Terrible Ten” Most Regressive States

State tax systems take a much larger share from middle- and low-income families than from wealthy families, according to the fourth edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” released today by the Institute on Taxation and Economic Policy (ITEP).  Combining all of the state and local income, property, sales and excise taxes state residents pay, the average overall effective tax rates by income group nationwide are 11.1 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.6 percent for the top one percent. The report is online at www.whopays.org.

The ten states whose tax systems are tilted most heavily towards high earners (from most to least regressive) are Washington, Florida, South Dakota, Illinois, Texas, Tennessee, Arizona, Pennsylvania, Indiana, Alabama. In these states, middle-income families pay up to three times as high a share of their income as the wealthiest families; low-income families pay up to six times as much.

“We know that governors nationwide are promising to cut or eliminate taxes, but the question is who’s going to pay for it,” said Matthew Gardner, Executive Director of ITEP and an author of the study. “There’s a good chance it’s the so-called takers who spend so much on necessities that they pay an effective tax rate of 10 or more percent, due largely to sales and property taxes.  In too many states, these are the people being asked to make up the revenues lost to income tax cuts that overwhelmingly benefit the wealthiest taxpayers.” State consumption tax structures are particularly regressive, with an average 7 percent rate for the poor, a 4.6 percent rate for middle incomes and a 0.9 percent rate for the wealthiest taxpayers nationwide.

The income tax in particular is being targeted for elimination by self-described tax reformers across the country, and Who Pays? shows that of the ten most regressive states, four do not have any taxes on personal income, one state applies it only to interest and dividends and the other five have a personal income tax that is flat or virtually flat across all income groups.  “Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside down tax system even more so,” Gardner stated.

The data in Who Pays? also demonstrates that states commended as “low tax” are often high tax states for low- and middle- income families.  The ten states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington. Noted Gardner, “When you hear people brag about their low tax state, you have to ask them, low tax for who?"

The fourth edition of Who Pays? measures the state and local taxes paid by different income groups in 2013 (at 2010 income levels including the impact of tax changes enacted through January 2, 2013) as shares of income for every state and the District of Columbia.  The report is available online at www.whopays.org.

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

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

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

Read the full ITEP report

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

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

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

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

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

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

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

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

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

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

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

Note to Readers: This is the first of a six part series on tax reform in the states.  Over the coming weeks, CTJ’s partner organization, 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.

Following an election that left half the states with veto-proof legislative majorities, 37 states with one-party rule and more than a dozen with governors who put tax reform high on their agendas, 2013 promises to be a big year for changes to state tax laws.

The scrutiny lawmakers will be giving to their state and local tax systems presents an extraordinary opportunity to assess and address structural flaws and ensure that states have the necessary revenue to provide vital public services now and in the future. Yet, it is already clear that “tax reform” for some state lawmakers may be little more than a vehicle for ideological goals like shrinking government spending or cutting taxes for profitable corporations and the wealthy.

Lawmakers in more than 30 states will take on taxes in some shape or form this year – at least 15 states are expected to consider a major tax overhaul (CA, IA, KS, KY, LA, MN, MO, NC, NE, NY, OH, OK, OR, VA, WI) and the list seems to grow by the week.

In the past week, Governors’ proposals in Louisiana, Kansas, Nebraska, Ohio and Wisconsin have been taking shape and what we are seeing is not pretty. Tax cutting and wholesale elimination of the progressive personal income tax is high on these governors’ agendas, and North Carolina is likely to be the next state to join this list.

As a historic number of states gear up for major tax changes, we know that Grover Norquist, Arthur Laffer, and other anti-tax advocates will be making their case for less taxes, smaller government and a higher reliance on the sales tax.  There needs to be a real policy discussion in the states that helps people understand there’s a smart way to do tax reform, that it can’t just mean cuts or eliminating revenue sources, and that reform has wide ranging, long term consequences.

Enter the Institute on Taxation and Economic Policy (ITEP), CTJ's partner organization. ITEP is closely monitoring tax reform proposals as they develop and will run them through the microsimulation model to see how proposed changes get distributed across different groups of taxpayers – who benefits and who doesn’t and by how much.

ITEP has identified several emerging trends and this series will examine and explain these five major kinds of proposals anticipated this year:

1) Proposals that would sharply reduce or eliminate one or more taxes and replace some or all of the lost revenue by expanding or increasing another tax (“Tax Swaps”)

2) Proposals that would significantly reduce the personal income tax paid by individuals or businesses

3) Proposals to revamp gas taxes

4) Real tax reform- proposals that fix tax codes’ structural flaws rather than dismantling or eliminating taxes

5) Other tax reform ideas including reducing or eliminating property taxes and cutting business taxes

Following an election that left half the states with veto-proof legislative majorities, 39 states with one-party rule and more than a dozen with governors who put tax reform high on their agendas, 2013 promises to be a big year for changes to state tax laws, and that could end up being a good thing. From the National Governors Association to the State Budget Crisis Taskforce, there is widespread consensus that most states have been patching and punting for too long and their tax systems are no longer able to provide adequate and sustainable revenue to deliver services that citizens rely on.

But it could also be a bad thing. As an historic number of states gear up for major tax changes, we know that Grover Norquist is targeting the states and Arthur Laffer is getting some new clients. There needs to be a real policy discussion in the states that helps people understand there’s a smart way to do tax reform, that it can’t just mean cuts, and that reform has wide ranging, long term consequences.

Enter the Institute on Taxation and Economic Policy (ITEP), CTJ's partner organization. They hosted a phone briefing on December 19, 2012 outlining challenges and solutions with a focus on state tax fairness, and going into greater depth on fifteen states most likely to undertake major tax overhauls in 2013 (CA, IA, KS, KY, LA, MN, MO, NC, NE, NY, OH, OK, OR, VA, WI). As the new legislative sesions get underway, ITEP will be monitoring proposals as they develop and will run them through the microsimulation model to see how their costs and benefits get distributed across different groups of taxpayers.

Right now, however, you can read over the briefing materials and listen to the 30 minute presentation from ITEP's state policy experts. It's all at this link.

We’ve known for a while that government subsidies and tax breaks for sports stadiums are a raw deal for taxpayers. But a new book by Harvard University urban planning professor Judith Grant Long reveals that the costs are worse than we thought. According to Long’s book, Public/Private Partnerships for Major League Sports Facilities, taxpayers spent over $31 billion in tax or direct subsidies for the 121 sport facilities in use in 2010, which is $10 billion more than the cost estimated by the industry itself.

Most of the difference between Long’s and industry calculations is explained by the industry’s failure to fully account for the cost of land, infrastructure, operations, and lost property taxes as part of the cost of stadium construction deals. When all factors are taken into account, cities bore, on average, 78 percent of the cost of the public-private (so-called) partnership stadium construction deals. Long found in some particularly egregious cases, such as Indianapolis’s Lucas Oil Stadium and Paul Brown Stadium in Cincinnati, the public’s share of the cost actually surpassed the entire cost of building the stadium because of these unaccounted for external costs to the city.

What do taxpayers get in return for the billions they have to pay in subsidies? Not all that much, frankly. As the watchdog group Good Jobs First has chronicled, the costs of new stadiums do not pay off in terms of economic growth or job creation. The primary reason for this is that these entertainment venues tend to redirect consumer spending from other activities rather than generating entirely new economic activity. Even if you accept that new stadiums do generate some jobs (rather than just shifting those jobs from other industries), they aren’t any bargain considering that they can cost taxpayers as much as $200,000 per job “created.”

Just this week, the Miami Marlins reinforced every bad stereotype of sports teams acting in bad faith when it traded away its best players – and its National League competitiveness – in order to reduce salary costs. The trades were made in spite of the explicit promise by the team’s owner that he would spend whatever it took to build a power house team as part of a sweetheart deal that will end up costing taxpayers an astounding $2.4 billion.

With the case against subsidizing stadiums with public dollars growing ever stronger, lawmakers need to finally put a stop to this ludicrous form of corporate welfare.