Personal Income Taxes News



Norquist-Backed Tax Cut for the Rich Fails in Tennessee



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Grover Norquist’s Americans for Tax Reform, along with the Tax Foundation and Koch brothers-backed Americans for Prosperity all tried to convince Tennessee lawmakers that the state’s wealthiest investors need a tax cut.  Fortunately for Tennesseans, their elected officials rejected that idea this week.

 At issue was the state’s “Hall Tax,” a 6 percent levy on stock dividends, certain capital gains, and interest.  Tennessee does not tax wages, business income, pensions, Social Security, or virtually any other type of income imaginable.  But for anti-tax groups, even the state’s narrow income tax on investors was too much to stomach.

The Tax Foundation put out an alert claiming Tennessee could improve in its (highly questionable) tax climate ranking by repealing the tax, while Grover Norquist traveled to Tennessee to urge repeal and Americans for Prosperity ran a series of radio ads doing the same.

The state’s comptroller got in on the action as well, bizarrely suggesting that the Hall Tax is bad policy because it is not primarily paid by large families or low-income people lacking health insurance.

But ultimately, sensible concerns that repeal would require damaging cuts in state and local public services eventually won out, and the bill’s sponsor dropped his plan.

This is good news for people concerned with the fairness and adequacy of state tax systems.  As our colleagues at the Institute on Taxation and Economic Policy (ITEP) explained in a report picked up by The Tennessean, these cuts in public investments would have come with no corresponding tax benefit for the vast majority of households:

“Nearly two-thirds (63 percent) of the tax cuts would flow to the wealthiest 5 percent of Tennessee taxpayers, while another quarter (23 percent) would actually end up in the federal government’s coffers. Moreover, if localities respond to Hall Tax repeal by raising property taxes, some Tennesseans could actually face higher tax bills under this proposal.”

Tennesseans can breathe a sigh of relief that this top-heavy tax repeal plan didn’t make it into law this year.  But you can bet that Grover et al. will try again soon as they attempt to set in motion a national trend away from progressive income taxes.



Either Way - Reducing Ohio's Top Income Tax Rate to 4 or 5 Percent is a Bad Idea



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Ohio Governor John Kasich is expected to unveil his latest tax cut proposal soon and it doesn’t take a deep understanding of Ohio politics to know that the Governor’s plan will likely include large across the board income tax rate reductions. Last week he mentioned wanting to lower the top income tax rate to below 4 percent after persistently advocating in recent months for reducing the top rate to less than 5 percent (the current top income tax rate is 5.333 percent).

In anticipation of the governor’s latest proposal, Policy Matters Ohio (PMO) released a new report, using ITEP data,“Income-tax cut would favor well-to-do”, which shows the impact of an across the board income tax rate reduction that lowers the top income tax rate to just under 5 percent. The biggest beneficiaries of this proposal are by far the wealthiest Ohioans. In fact, 69 percent of the benefits go to Ohioans in the top 20 percent of the income distribution.

We often don’t get to talk about tax policy as it relates to pizza, but PMO finds “that the across-the-board cut in rates needed to [get the top rate to below 5 percent] may allow low-income Ohioans to buy a slice of pizza a year, on average. Middle-income Ohioans could purchase a cheap pizza maker. For the state’s most affluent taxpayers, on average it would cover round-trip airfare for two to Italy, with some money left over to pay the hotel bill and buy some real Italian pizza.”

If the Governor aggressively pushes getting the top rate below 4 percent the benefits to the wealthy will be even greater and could mean a second trip to Italy with a stop over in France to pick up a bottle of wine. Either way, reducing the top income tax rate below 4 or 5 percent would enhance the unfairness already apparent in Ohio’s tax structure and makes it more difficult for the state to fund necessary services.



Say it Ain't So: Kentucky's Missed Opportunity



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Kentucky Governor Steve Beshear has unveiled a 22-point tax reform plan that includes a new refundable state earned income tax credit (EITC), limits on the generous $41,110 pension exclusion and expanding the sales tax base to include a wider range of services. The plan is based in part on the recommendations of the Governor’s Blue Ribbon Commission on Tax Reform, which were released in 2012. Beshear’s plan also includes a cut in the personal and corporate income tax rates and an increase in the cigarette tax. In total the proposal increases state revenues by $210 million a year.

The proposal is a mixed bag.  While it raises much needed revenue and includes several reform-minded options, it falls short of improving the fairness of the state’s tax structure. The introduction of an EITC and limiting the current pension exclusion are a good start, but changing the corporate income tax apportionment formula to single sales factor and lowering personal and corporate income tax rates are costly ideas that benefit wealthier Kentuckians.

The Kentucky Center for Economic Policy (KCEP) issued a brief containing an Institute on Taxation and Economic Policy (ITEP) analysis showing that Governor Beshear’s proposal doesn’t improve tax fairness in any meaningful way. KCEP concludes that “the combined impact of the tax increases and tax cuts in Governor Beshear's reform proposal would not help improve the regressive nature of Kentucky’s tax system.”  This is because the new revenue raised from the Governor’s plan comes almost entirely from regressive changes to the sales tax base and hiking cigarette taxes.

Governor Beshear deserves some credit for proposing tax reform despite this being an election year, but he missed an opportunity to truly reform the state’s tax structure by making it more fair and adequate. Let’s hope that Kentucky legislators follow KYCEP’s advice and “build on the good parts of the plan while making improvements.”



State News Quick Hits: Transformers and Tax Breaks for the Rich in Disguise



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Editorial boards at the Milwaukee Journal Sentinel and the Wisconsin State Journal have both (rightly) responded to Governor Walker’s property and income tax cut proposals by encouraging lawmakers to instead curb the state’s growing structural deficit, or put any surplus revenue toward serious problems like poverty reduction and enhancing K-12 education. Perhaps the editorial boards were persuaded by Institute on Taxation and Economic Policy (ITEP) findings that wealthier folks benefit more from the tax cuts than low-and middle-income families. For more on ITEP’s analysis read this Milwaukee Journal Sentinel piece.

Idaho’s House Speaker has proposed dramatically scaling back the state’s grocery tax credit in exchange for a regressive $70-80 million cut to the individual and corporate income tax rates. But economist Mike Ferguson of the Idaho Center for Fiscal Policy points out that the Speaker’s plan would amount to a giveaway to the rich, while further squeezing the middle class.  An Idahoan making $50,000 per year, for example, could expect to see about $305 tacked on to their state tax bill under this change. Governor Butch Otter has been saying the right things about taking a break from tax cuts (kind of) and instead making education spending a priority this year. But the Governor recently said he was open to the Speaker’s idea, and the Idaho Statesman provided a partial endorsement. Idaho legislators should tread carefully: raising taxes on the middle class to pass another trickle-down tax cut is bad public policy and even worse politics.

A Wichita Eagle editorial, “Pressure on sales tax”, shares our concerns about one of the major consequences of the tax cuts and “reforms” enacted in Kansas over the past two years.  With the gradual elimination of the state’s personal income tax and pressure on local governments to raise revenue, it is inevitable that the state’s sales tax rate will continue to rise at the detriment of low- and moderate-income working families who are stuck footing the bill. And, in order to have sufficient revenue to fund services over the long-run, Kansas lawmakers will need to make the politically difficult decision to broaden the sales tax base, something they’ve shown little stomach for so far. The editorial states, “as Kansas strains to deal with declining tax collections and reserves according to Brownback’s plan to become a state without an income tax, the sales tax will be one of the only places to go for more revenue.”

Indiana lawmakers want to get a better handle on whether their tax incentives for economic development are actually doing any good.  Last week, the House unanimously passed legislation that will require every economic development tax break to be reviewed ov

er the course of the next five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recommends that all states implement these kinds of ongoing evaluations.

Illinois Governor Pat Quinn is pushing back against a string of bad publicity regarding film tax credits. Quinn says that an entertainment boom is occurring in Illinois in part because of the Illinois Film Services Tax Credit, an uncapped, transferable credit that was extended in 2011. What Governor Quinn fails to mention, however, is how much taxpayers lost in the process. The credit costs roughly $20 million a year, requiring higher taxes or fewer public services than would otherwise be the case. Research from other states indicates that only a small fraction of that amount would be recouped via higher tax receipts. Moreover, film subsidies often waste money on productions that would have located in the state anyway and are unlikely to do much good in the long-term since the industry is so geographically mobile. Indeed, one of the producers of Transformers 3 admitted that he would have filmed in Chicago even without the credit, which cost taxpayers $6 million. Instead, the decision was based on “the skyline, the architecture and the skilled crews here, among other factors.”



Beware of the Tax Shift (Again)



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Note to Readers: This is the second of a five-part series on tax policy prospects in the states in 2014. Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on tax shift proposals.

The most radical and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate state income taxes and replace some or all of the lost revenue by expanding or increasing consumption taxes. These “tax swap” proposals appeared to gain momentum in a number of states last year, but ultimately proposals by the governors of Louisiana and Nebraska fell flat in 2013. Despite this, legislators in several states have reiterated their commitment to this flawed idea and may attempt to inflict it on taxpayers in 2014. Here’s a round-up of where we see tax shifts gaining momentum:

Arkansas - The Republican Party in Arkansas is so committed to a tax shift that they have included language in their platform vowing to “[r]eplace the state income tax with a more equitable method of taxation.” While the rules of Arkansas’ legislative process will prevent any movement on a tax shift this year, leading Republican gubernatorial candidate Asa Hutchinson has made income tax elimination a major theme of his campaign.  

Georgia - The threat of a radical tax shift proposal was so great in the Peach State that late last year the Georgia Budget and Policy Institute published this report (using ITEP data) showing that as many as four in five taxpayers would pay more in taxes if the state eliminated their income tax and replaced the revenue with sales taxes. This report seems to have slowed the momentum for the tax shift, but many lawmakers remain enthusiastic about this idea.

Kansas – In each of the last two years, Governor Sam Brownback has proposed and signed into law tax-cutting legislation designed to put the state on a “glide path” toward income tax elimination.  Whether or not the Governor will be able to continue to steer the state down this path in 2014 may largely depend on the state Supreme Court’s upcoming decision about increasing education funding.

New Mexico - During the 2013 legislative session a tax shift bill was introduced in Santa Fe that would have eliminated the state’s income tax, and reduced the state’s gross receipts tax rate to 2 percent (from 5.125 percent) while broadening the tax base to include salaries and wages. New Mexico Voices for Children released an analysis (PDF) of the legislation (citing ITEP figures on the already-regressive New Mexico tax structure) that rightly concludes, “[o]n the whole, HB-369/SB-368 would be a step in the direction of a more unfair tax system and should not be passed by the Legislature.” We expect the tax shift debate has only just started there.

North Carolina - North Carolina lawmakers spent a good part of their 2013 legislative session debating numerous tax “reform” packages including a tax shift that would have eliminated the state’s personal and corporate income taxes and replaced some of the revenue with a higher sales tax. Ultimately, they enacted a smaller-scale yet still disastrous package which cut taxes for the rich,hiked them for most everyone else, and drained state resources by more than $700 million a year. There is reason to believe that some North Carolina lawmakers will use any surplus revenue this year to push for more income tax cuts.  And, one of the chief architects of the income tax elimination plan from last year has made it known that he would like to use the 2015 session to continue pursuing this goal.

Ohio - Governor John Kasich has made no secret of his desire to eliminate the state’s income tax. When he ran for office in 2010 he promised to “[p]hase out the income tax. It's punishing on individuals. It's punishing on small business. To phase that out, it cannot be done in a day, but it's absolutely essential that we improve the tax environment in this state so that we no longer are an obstacle for people to locate here and that we can create a reason for people to stay here." He hasn't changed his tune: during a recent talk to chamber of commerce groups he urged them “to always be for tax cuts.”  

Wisconsin - Governor Scott Walker says he wants 2014 to be a year of discussion about the pros and cons of eliminating Wisconsin’s most progressive revenue sources—the corporate and personal income taxes. But the discussion is likely to be a short one when the public learns (as an ITEP analysis found) that a 13.5 percent sales tax rate would be necessary for the state to make up for the revenue lost from income tax elimination. 



What to Watch for in 2014 State Tax Policy



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Note to Readers: This is the first of a five-part series on tax policy prospects in the states in 2014.  This post provides an overview of key trends and top states to watch in the coming year.  Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals and take a deeper look at the four key policy trends likely to dominate 2014 legislative sessions and feature prominently on the campaign trail. Part two discusses the trend of tax shift proposals. Part three discusses the trend of tax cut proposals. Part four discusses the trend of gas tax increase proposals. Part five discusses the trend of real tax reform proposals.

2013 was a year like none we have seen before when it comes to the scope and sheer number of tax policy plans proposed and enacted in the states.  And given what we’ve seen so far, 2014 has the potential to be just as busy.

In a number of statehouses across the country last year, lawmakers proposed misguided schemes (often inspired by supply-side ideology) designed to sharply reduce the role of progressive personal and corporate income taxes, and in some cases replace them entirely with higher sales taxes.  There were also a few good faith efforts at addressing long-standing structural flaws in state tax codes through base broadening, providing tax breaks to working families, or increasing taxes paid by the wealthiest households.

The good news is that the most extreme and destructive proposals were halted.  However, several states still enacted costly and regressive tax cuts, and we expect lawmakers in many of those states to continue their quest to eliminate income taxes in the coming years.  

The historic elections of 2012, which left most states under solid one-party control (many of those states with super majorities), are a big reason why so many aggressive tax proposals got off the ground in 2013.  We expect elections to be a driving force shaping tax policy proposals again in 2014 as voters in 36 states will be electing governors this November, and most state lawmakers are up for re-election as well.

We also expect to see a continuation of the four big tax policy trends that dominated 2013:

  • Tax shifts or tax swaps:  These proposals seek to scale back or repeal personal and corporate income taxes, and generally seek to offset some, or all, of the revenue loss with a higher sales tax.

    At the end of last year, Wisconsin Governor Scott Walker made it known that he wants to give serious consideration to eliminating his state’s income tax and to hiking the sales tax to make up the lost revenue.  Even if elimination is out of reach this year, Walker and other Wisconsin lawmakers are still expected to push for income tax cuts.  Look for lawmakers in Georgia and South Carolina to debate similar proposals.  And, count on North Carolina and Ohio lawmakers to attempt to build on tax shift plans partially enacted in 2013.  
  • Tax cuts:  These proposals range from cutting personal income taxes to reducing property taxes to expanding tax breaks for businesses.  Lawmakers in more than a dozen states are considering using the revenue rebounds we’ve seen in the wake of the Great Recession as an excuse to enact permanent tax cuts.  

    Missouri
    lawmakers, for example, wasted no time in filing a new slate of tax-cutting bills at the start of the year with the hope of making good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year.  Despite the recommendations from a Nebraska tax committee to continue studying the state’s tax system for the next year, rather than rushing to enact large scale cuts, several gubernatorial candidates as well as outgoing governor Dave Heineman are still seeking significant income and property tax cuts this session.  And, lawmakers in Michigan are debating various ways of piling new personal income tax cuts on top of the large business tax cuts (PDF) enacted these last few years.  We also expect to see major tax cut initiatives this year in Arizona, Florida, Idaho, Indiana, Iowa, New Jersey, North Dakota, and Oklahoma.

    Conservative lawmakers are not alone in pushing a tax-cutting agenda.  New York Governor Andrew Cuomo and Maryland’s gubernatorial candidates are making tax cuts a part of their campaign strategies.  
  • Real Reform:  Most tax shift and tax cut proposals will be sold under the guise of tax reform, but only those plans that truly address state tax codes’ structural flaws, rather than simply eliminating taxes, truly deserve the banner of “reform”.

    Illinois and Kentucky are the states with the best chances of enacting long-overdue reforms this year.  Voters in Illinois will likely be given the chance to convert their state's flat income tax rate to a more progressive, graduated system.  Kentucky Governor Steve Beshear has renewed his commitment to enacting sweeping tax reform that will address inequities and inadequacies in his state’s tax system while raising additional revenue for education.  Look for lawmakers in the District of Columbia, Hawaii, and Utah to consider enacting or enhancing tax policies that reduce the tax load currently shouldered by low- and middle-income households.
  • Gas Taxes and Transportation Funding:  Roughly half the states have gone a decade or more without raising their gas tax, so there’s little doubt that the lack of growth in state transportation revenues will remain a big issue in the year ahead. While we’re unlikely to see the same level of activity as last year (when half a dozen states, plus the District of Columbia, enacted major changes to their gasoline taxes), there are a number of states where transportation funding issues are being debated. We’ll be keeping close tabs on developments in Iowa, Michigan, Missouri, New Hampshire, Utah, and Washington State, among other places.

Check back over the next month for more detailed posts about these four trends and proposals unfolding in a number of states.  



How to Understand New York Governor Andrew Cuomo's Proposed Tax Cuts



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Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Taking his tax cut efforts one step further this election year, Cuomo is now proposing to expend the entirety of his state’s hard-won budget surplus on more than $2 billion in annual tax cuts.

While the term "budget surplus" may make it sound like that there is extra money lying around in Albany, the reality is that the surplus is the product of five consecutive years of austerity budgets and a budget plan that would continue this austerity for years to come. In other words, rather than using the surplus to restore funding to state and local services that have taken a hit over the past years, Cuomo is insisting that the money be used for tax cuts (many permanent) instead.

Unfortunately, tax cutting has become a pattern during Cuomo's time as governor. In June 2011, Cuomo pushed through a property tax cap, which severely limited the ability of cash-strapped local governments to raise enough revenue to fund basic services. In December of the same year, Cuomo further starved the state of much needed revenue by killing efforts to fully extend a millionaire's surtax, and instead pushing through a scaled back surcharge that raised half as much revenue as the original. Just last year, Cuomo pushed through a program of unproven and expensive corporate tax breaks, which a CTJ investigation found could actually harm many existing New York companies.

Even worse, to defend his past and newest tax cut proposals, Cuomo has embraced the cringe-worthy rhetoric of anti-tax governors like Kansas Governor Sam Brownback in arguing that ending "high taxes" and enacting corporate tax breaks will make the state more "business-friendly" and help improve New York's economy. The problem, of course, is that taxes are crucial to funding what really drives economic development: a highly educated workforce, good infrastructure and quality healthcare.

Cuomo's anti-tax approach is in direct contrast to the newly-elected New York City Mayor, Bill de Blasio, who ran and won a landslide victory on a campaign platform of addressing growing income inequality primarily through hiking taxes on the rich to provide universal citywide pre-kindergarten classes. De Blasio's call for higher taxes has proven not only popular in New York City, but also garnered the support of 63% of New York voters statewide. What de Blasio's election proves is that a significant majority of New Yorkers, unlike Cuomo, are not only willing to forgo tax cuts, but are actually willing to support higher taxes in order to help fund critical public services.

Cuomo's Tax Proposal a Mixed Bag in Terms of Tax Fairness

While many of Cuomo’s past tax proposals have offered little or nothing to those in need, Cuomo's new plan does includes a few potentially good ideas as well as few a very bad ones. On the good side of things, Cuomo proposes to substantially expand the state's property tax circuit breaker and create a renters credit, which could potentially provide a well-targeted income boost to low-income families. While the proposals sound good, their effectiveness will really depend on their details, which are yet to be released.

Regrettably, Cuomo is also proposing a significant cut in the state's corporate income and estate taxes, which will almost exclusively go to only a very small portion of the richest New Yorkers. Considering the recent series of tax cuts already passed by Cuomo and the years of budget cuts, piling on these additional tax breaks for the rich is simply unconscionable and would make an already unfair tax system (PDF) even worse.

 



Will Basic Constitutional Rights Be the Next Casualty of Kansas' Supply-Side Experiment?



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Almost every American would agree that education is a fundamental right. Any serious commitment to the notion of “equal opportunity” means ensuring that kids have an opportunity for a quality education—and that this opportunity should be as available to the very poor as it always has been to the very rich. As it happens, every state’s constitution includes a provision guaranteeing a basic education to its residents. But as an excellent op-ed in today’s New York Times notes, if some Kansas policymakers have their way, that state’s constitutional guarantees may be the latest victim of Governor Sam Brownback’s income tax cuts.

It’s worth reviewing how Kansas lawmakers found themselves talking about jettisoning fundamental constitutional rights. In 2012, Governor Brownback pushed through huge tax cuts for the affluent based, in part, on the argument that these tax cuts would be largely self-financing. (Brownback was apparently influenced heavily by the half-baked supply-side claims of Arthur Laffer that cutting income taxes will automatically spur economic growth.) Rather than requiring harmful cuts in state and local public investments, Brownback argued, his tax cuts would be “a shot of adrenaline into the heart of the Kansas economy,” generating new economic activity that would actually boost tax collections.  But as the Center on Budget and Policy Priorities notes, it hasn’t worked out that way. State lawmakers were forced to enact substantial spending cuts across the board, and per-pupil funding plummeted from nearly $4,500 less than a decade ago to $3,838 last year. After a group of Kansas parents brought suit against the state, a lower state court ruled (PDF) that these cuts were an unconstitutional violation of the state’s basic education guarantees—and prescribed a remedy that returns per-pupil funding to the levels achieved in the last decade.

In response to the court’s finding (which is now being reviewed by the state Supreme Court), policymakers in the Brownback administration have argued that the court’s mandate for more school spending prevents them from adjusting spending levels to reflect economic downturns. As the state’s solicitor general argued last year, “The Legislature has to deal with the real world…the constitution shouldn't be a suicide pact." But this argument is ludicrous: as the court sensibly pointed out in its ruling, state lawmakers gutted education spending at the same time that they were pushing through huge tax cuts, making it “completely illogical” to argue that the unconstitutional education cuts are anything other than “self-inflicted.” Notwithstanding this, some policymakers have called for amending the state constitution to modify or even eliminate the guarantee of a basic education in response to this ruling. In other words, when the state constitution conflicts with supply-side tax cuts, it must be the constitution’s fault.  

The good news is that most other states have, so far, resisted the siren call of Laffer’s calls for huge income tax cuts. But in Kansas, some policymakers are so enamored with the Brownback tax cuts that they appear to be willing to write off their most basic constitutional guarantees. 



State News Quick Hits in Wisconsin, Illinois, Kentucky and Oklahoma



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The LaCrosse Tribune gets it right in this editorial titled, “Don’t Conduct Tax Talks in Private.” As we told you last week , Wisconsin  Governor Scott Walker asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Unfortunately, the first invitation-only discussion happened behind closed doors. We couldn’t agree more with the Tribune that, “true tax reform deserves feedback and input from all Wisconsin citizens because while we may not all contribute to political candidates or align ourselves with political parties, we all pay taxes.” Now we hear that the Governor is interested in  income tax repeal. Let’s hope this debate doesn’t happen behind closed doors.

 

Illinois Governor Pat Quinn has come out in favor of reviewing tax breaks given to businesses over the last several years in order to see if they really had a positive impact on the state’s economy.  We’ve been critical of the Governor for offering such tax incentives to specific companies.  Reviewing those giveaways for effectiveness is long overdue.

 

In more good news for those of us concerned with the “race to the bottom” in which states are doling out massive tax incentives to businesses with little oversight, Archer Daniels Midland is set to announce that they will move their headquarters to Chicago without receiving any state or city incentives in return.


Kentucky Governor Steve Beshear is (again) committing himself to tax reform. He recently said in 

an interview, “Tax reform remains a top priority of mine, and I am hopeful that we can address it in some way in the upcoming session.”

The Oklahoma Supreme Court recently struck down a regressive and unpopular cut to the state’s top income tax rate that Governor Mary Fallin signed into law earlier this year.  According to the court, the bill containing the tax cut violated a provision in the Oklahoma constitution requiring each bill to be focused on a “single subject.”  In addition to cutting the state’s income tax, the bill would have also provided funding to repair the state’s Capitol building. 



Hey, Hey, Ho, Ho, Tax Simplicity Has Got to Go, says Iowa Governor



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Iowa Governor Terry Branstad is reportedly interested in implementing an alternative income tax structure for the Hawkeye State’s wealthiest taxpayers.

The state’s income tax rate structure is a bit deceptive because Iowa is one of just six states offering a deduction for federal income taxes paid. ITEP has written a whole report on this costly and regressive loophole available here (PDF). The ability of Iowans to write off all of their federal income taxes on their state income tax forms means that the state needs higher income tax rates in order to raise necessary revenue. The state’s top personal income tax rate is 8.98 percent—and some elected officials believe this makes it difficult to attract businesses to the state. But, Iowans pay an effective tax rate far lower than 8.98 percent because of the generous deduction for federal income taxes paid.

In order to combat this public relations problem, Governor Branstad is considering proposing an alternative income tax that has lower rates and no deduction for federal income taxes paid. Iowans would be allowed to file their taxes either way, but of course, most taxpayers would compute their income tax bills twice to determine which results in lower tax liability. In other words, the proposal completely disregards the tax policy principle of simplicity. It’s also likely that offering this “optional” income tax would cost the state in terms of revenue, since most people will choose it only if it saves them money.

The Governor’s proposal has come under scrutiny from some in the legislature and from various advocacy groups. Iowa Citizens for Community Improvement released a statement saying, “Iowa’s wealthiest citizens need to pay their fair share in taxes. They don’t need more options for how to pay less.”

The track record for proposals of this type isn’t very good. One need only look to the 2008 presidential campaign and Senator John McCain’s tax proposal. During the campaign Citizens for Tax Justice analyzed the Senator’s alternative “simplified” tax and found that in 2012 alone, the alternate tax “would cost $98 billion, and 58 percent of this would go to the richest five percent of taxpayers.” Let’s hope Governor Branstad’s proposal falls the way of McCain’s.



State News Quick Hits: Wisconsin Tax Policy Round Tables, Unpopular Tax Cuts in Kansas, and More



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Governor Scott Walker says that one of his goals is to lower taxes for all Wisconsinites. He’s asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Regrettably, transparency clearly isn’t another one of the Governor’s goals as the first roundtable discussion was closed to the public (and press) and only business leaders were invited.

In “race to the bottom” news, Missouri lawmakers approved a 23-year, $1.7 billion package of tax cuts for Boeing in an attempt to lure the manufacturer to the state. Missouri is one of twelve states vying for the opportunity to make the new 777X passenger jets. As we have explained, Missouri seems eager to repeat the mistakes of of Washington State, which recently provided Boeing with the largest state tax cut in history, at $8.7 billion.

It turns out that Kansas’ recent tax cuts aren’t just 
bad policy.  They’re also unpopular.  The income tax cuts, sales tax hikes, education cuts, and social service cuts that resulted from Governor Brownback’s tax plan are all opposed by a majority of Kansans, according to polling highlighted in The Wichita Eagle.

Due to the extensive changes to North Carolina’s personal income tax starting in 2014, the state’s Department of Revenue has 
asked all employers to distribute new state income tax withholding forms to their employees.  The need for a new form has unfortunately led to a lot of confusion and some really inaccurate press coverage on the regressive and costly tax “reform” package enacted this year.  Some articles mistakenly reported that everyone will get an income tax cut (and thus a little more money in their paychecks next year), but we know this is not the case.  The loss of the state’s Earned Income Tax Credit, personal exemptions (despite a higher standard deduction), and numerous other deductions and credits will negatively impact many working North Carolina families and seniors living on fixed incomes.  And, these stories all failed to point out that while income taxes may be going down for some, sales tax on items including movie tickets, service contracts and electricity will be going up in 2014.



Scott Walker's Tax Record Will Be on the Wisconsin Ballot Next Year



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Voters in 36 states will be choosing governors next year.  Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where we expect taxes to be a key issue. Today’s post is about the race for the Governor’s mansion in Wisconsin.

To many Wisconsinites, it may seem like yesterday that Governor Scott Walker survived a recall election against Milwaukee Mayor Tom Barrett. But in less than a year, he’ll be up for reelection. This time Mary Burke, a Trek Bicycle Corp. executive and state Commerce Department secretary, is the Democrat hoping to unseat him.  During the campaign, Walker will most certainly tout his record of cutting taxes, but anyone who’s paid attention knows his record is nothing to be proud of.

This year alone he signed legislation that both cut property taxes and reduced income tax rates in a way that does little for Wisconsin’s neediest residents – the opposite, actually. In fact, the budget he introduced in 2011 was called a betrayal of Wisconsin values by the Center on Wisconsin Strategy and other public interest groups because he ultimately approved legislation that reduced the Earned Income Tax Credit (EITC), thus increasing taxes on the state’s poorest working families. That budget also included $2.3 billion in tax breaks over a decade, in the form of a domestic production activities credit, two different capital gains tax breaks for the rich, and a variety of new sales tax exemptions, including for snowmaking and snow grooming equipment.

Challenger Mary Burke is being cautious and has yet to put out her own tax plan. She recently told the Milwaukee Journal Sentinel, however, that she would not take a pledge to not increase taxes, saying, “I'd want to look at the totality. We collect revenue in a lot of different ways. I certainly wouldn't look at raising (taxes), but I'd also want to look at it in the context of our finances, our budgets …” When we learn more about her plan, we’ll review it for you here.

 



New Analysis: Replacing Flat Tax Would Improve Colorado's Tax System



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In less than a month, Colorado voters will decide whether to abandon the state’s flat-rate income tax in favor of a more progressive, graduated rate tax.  The main purpose of this reform is to raise nearly $1 billion in new revenue each year to offset the disastrous effects that strict constitutional limits on tax collections (i.e. TABOR) have had on the state’s K-12 education system.  But a new analysis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), shows that the proposal would have another benefit: improving the fairness of Colorado’s regressive tax system (PDF).

According to ITEP’s Who Pays? report, the poorest 20 percent of Coloradans currently spend 8.9 percent of their income paying state and local taxes, while the wealthiest 1 percent pay just 4.6 percent of their income in tax.  One reason for this gap is that unlike most states, Colorado’s income tax uses a single flat rate, and therefore doesn’t live up to its potential for offsetting the steep regressivity of sales and excise taxes.

The proposal being voted on in November (Amendment 66) would change this by giving Colorado a fairer, two-tiered income tax.  Specifically, the Amendment would raise the state’s income tax rate from 4.63 percent to 5 percent on incomes below $75,000, and from 4.63 percent to 5.9 percent on incomes over that amount.  If approved by voters, the gap in overall tax rates paid by Coloradans at different income levels would be reduced.  The wealthiest 1 percent would see taxes rise by 0.8 percent relative to their incomes, while lower-income taxpayers would see just a 0.1 percent increase.

Amendment 66 asks the most of those taxpayers currently paying the lowest effective tax rates.  While most families would see a modest increase in their income tax bills under the amendment, just 16 percent of the revenue raised by Amendment 66 would come from the bottom 80 percent of earners.  The bulk of the revenue (63 percent) would come from the wealthiest 20 percent of Coloradans.  And the remainder (21 percent) would not come from Coloradans, but rather from the federal government as Coloradans reap the benefits of being able to write-off larger amounts of state income tax when filling out their federal tax forms.

As the Colorado Fiscal Institute points out, that 21 percent federal contribution is a big deal.  If Coloradans reject Amendment 66 this November, they’ll essentially be turning down $200 million in federal dollars that their K-12 education system could put to very good use.

Read the report

 



States Praised as Low-Tax That Are High-Tax for Poorest Families



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Annual state and local finance data from the Census Bureau are often used to rank states as “low” or “high” tax states based on state taxes collected as a share of personal income. But focusing on a state’s overall tax revenues overlooks the fact that taxpayers experience tax systems very differently.  In particular, the poorest 20 percent of taxpayers pay a greater share of their income in state and local taxes than any other income group in all but nine states.  And, in every state, low-income taxpayers pay more as a share of income than the wealthiest one percent of taxpayers.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP) took a closer look at the Census data and matched it up with data from their signature Who Pays report which shows the effective state and local tax rates taxpayers pay across the income distribution in all 50 states.  ITEP found that in six states— Arizona, Florida, South Dakota, Tennessee, Texas, and Washington —  there is an especially pronounced mismatch between the Census data and how these supposedly low tax states treat people living at or below the poverty line. 

See ITEP's companion report, State Tax Codes As Poverty Fighting Tools.

The major reason for the mismatch is that these six states have largely unbalanced tax structures.  Florida, South Dakota, Tennessee, Texas and Washington rely heavily on regressive sales and excise taxes because they do not levy a broad-based personal income tax.  Since lower-income families must spend more of what they earn just to get by, sales and excise taxes affect this group far more than higher-income taxpayers.  Arizona has a personal income tax, but like the no-income tax states, the Grand Canyon state relies most heavily on sales and excise taxes.

To learn more about how low tax states overall can be high tax states for families living in poverty, read the state briefs described below:

Arizona has the 35th highest taxes overall (9.8% of income), but the 5th highest taxes on the poorest 20 percent of residents (12.9% of income).  The top 1 percent richest Arizona residents pay only 4.7% of their incomes in state and local taxes.

Florida has the 45th highest taxes overall (8.8% of income), but the 3rd highest taxes on the poorest 20 percent of residents (13.2% of income).  The top 1 percent richest Florida residents pay only 2.3% of their incomes in state and local taxes.

South Dakota has the 50th highest taxes overall (7.9% of income- making it the “lowest” tax state), but the 11th highest taxes on the poorest 20 percent of residents (11.6% of income).  The top 1 percent richest South Dakota residents pay only 2.1% of their incomes in state and local taxes.

Tennessee has the 49th highest taxes overall (8.3% of income), but the 14th highest taxes on the poorest 20 percent of residents (11.2% of income).  The top 1 percent richest Tennessee residents pay only 2.8% of their incomes in state and local taxes.

Texas has the 40th highest taxes overall (9.1% of income), but the 6th highest taxes on the poorest 20 percent of residents (12.6% of income).  The top 1 percent richest Texas residents pay only 3.2% of their incomes in state and local taxes.

Washington has the 36th highest taxes overall (9.7% of income), but the 1st highest taxes on the poorest 20 percent of residents (16.9% of income).  The top 1 percent richest Washington residents pay only 2.8% of their incomes in state and local taxes.



Census Says Poverty Persists, Here's What States Can Do About It



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This week, the Census Bureau released new data showing that the share of Americans living in poverty in 2012 remained high, despite other signs of economic recovery.  While the national poverty rate (15%) and the rates in most states are holding steady, the number of people living in poverty today is much greater than in 2007, prior to the start of the recession.

The good news is that policy makers have at their disposal several affordable, targeted and effective tax policy tools to alleviate economic hardship and help families escape poverty.  An updated report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), “State Tax Codes as Poverty Fighting Tools,” provides a comprehensive view of anti-poverty tax policies state-by-state, surveys tax policy decisions made in the states in 2013, and offers recommendations tailored to policymakers in each state as they work to combat poverty. As ITEP lays out in its signature Who Pays report, virtually every state and local tax system is regressive, contributing to the challenges of America’s low-income families; State Tax Codes as Poverty Fighting Tools details some options for reversing that.

See ITEP's companion report, Low Tax for Who?

In most states, truly remedying tax unfairness would require comprehensive tax reform. Short of this, lawmakers should consider enacting or enhancing four key anti-poverty tax polices explained in the report: the Earned Income Tax Credit, property tax circuit breakers, targeted low-income tax credits, and child-related tax credits. (Each of these provisions is also described in an ITEP stand-alone policy brief.) Unfortunately lawmakers in a number of states have moved in the wrong direction this year (North Carolina, Ohio and Kansas are top of the list), pursuing massive tax shifts that would hike taxes on their poorest residents while unjustifiably reducing them for the wealthiest individuals and profitable corporations. 

Given the persistence of poverty in the states as documented by the new Census data, policy makers should be focused on finding ways to boost the incomes of low- and moderate-income families rather than taxing them deeper into poverty in order to provide tax breaks to the well- heeled.

 



Tax Plans for Wisconsin Go From Bad to Worse



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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.  
 



Rich States, Poor States and Fake Research: "Business Climate" Rankings Mislead Lawmakers by Design



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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



Missouri's Kansas-Envy is Self-Destructive



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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.



Earned Income Tax Credits in the States: Recent Developments, Good and Bad



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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.


National Anti-Tax Group vs. Indiana



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The nation is watching Indiana’s tax debate, according to Tim Phillips, national president of the anti-tax group Americans for Prosperity.  But the outcome that Phillips is looking for —a regressive cut in the state’s personal income tax—is facing an uphill battle. The Indiana House, under supermajority Republican control, chose not to include Governor Pence’s proposed tax cut in its budget. Senate leadership has yet to embrace the tax cut either, and the state’s largest newspaper recently editorialized against the plan, explaining: “What holds back faster economic growth now is less about taxes than the lack of a well-educated workforce and higher than average business costs associated with Hoosiers’ poor health.”

But despite all this resistance, Americans for Prosperity is determined to gin up some interest in cutting Indiana’s income tax rate. The Indiana chapter of the group announced that it will spearhead a major TV, radio, online advertising, and door-to-door campaign.  As Phillips explained, “In Washington, it’s gridlock and really that’s not where the action is.” 

There's reason to hope this campaign doesn’t pressure lawmakers into enacting a tax cut against their better judgment, though. In a letter to state GOP officials, House Speaker Brian Bosma recently made a compelling case against the cut and offered a warning about the dire consequences that could arise from following Kansas as it staggers and stumbles down its own tax-cutting path (excerpt below):

“With respect to the Income Tax cut proposal, legislative leaders have expressed caution on this issue for a variety of reasons, which I want you to understand.  First, in 1998, the last time the state had a $2 billion surplus, a series of Income Tax and Property Tax cuts coupled with an unexpected downturn in the economy turned that surplus into a $1.3 billion deficit in a short six year period.  When Republicans regained the majority in 2004, our first order of business was to fill that hole through cuts (and not tax increases), and we did it.  It was painful and difficult, but we knew that the most important job of state government is to be lean, efficient, and most importantly, sustainable in the long run, avoiding wild shifts in one direction or another.  That uncertainty of big shifts leads to uncertainty for business investment and family security.  With pending sequestration, looming federal mandates and an uncertain national economy on the horizon, caution is certainly advisable.

“Finally, the Governor cites the recent experience of Kansas in cutting income taxes last year under the leadership of Governor Sam Brownback.  I would encourage you to get online and see what is going on in Kansas right now, as news reports abound of projected deficits, delays in proposed tax cuts, and lawsuits for underfunding public education.  This is just the type of economic unpredictability and unsustainability that we hope to avoid here in Indiana.”

 



States with "High Rate" Income Taxes Are Still Outperforming No-Tax States



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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



New from ITEP: Laffer's Latest Job Growth Factoid is All Rhetoric



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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.

 

 



State News Quick Hits: Myth of the Tax-Fleeing Millionaire, and More



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In 2011, Michigan lawmakers enacted a huge “tax swap” that cut taxes dramatically for businesses and raised them on individuals – especially lower-income and elderly families. Given that many of these changes went into effect at the beginning of 2012, and that many Michiganders are just now beginning to file their 2012 tax forms, the Associated Press provides a rundown of the ways in which the tax bills of typical Michiganders will look different from previous years. Our partner organization, the Institute on Taxation and Economic Policy (ITEP), estimated (PDF) that changes in the personal income tax would result in tax increases of $100 for a poor family, $300 for a middle income family and $7 from a rich one.

South Carolina is considering jumping onto a bandwagon heading the wrong way: supplementing the state’s transportation revenues by taking money away from schools and other state services. If enacted, the plan under consideration would raid $80 million from the state’s general fund every year and use it for roads instead. ITEP estimated, however, that South Carolina could raise more than $400 million for transportation every year just by updating its stagnant gasoline and diesel taxes to catch up to over two decades of inflation.

There’s some good news on the gas tax issue in Iowa. This week, an ad hoc transportation lobby will rally to support the “It’s Time for a Dime” campaign. These builders, farmers and contractors are urging lawmakers to raise the state’s gas tax to pay for needed infrastructure repairs. The Institute on Taxation and Economic Policy’s (ITEP) Building a Better Gas Tax concludes that Iowa hasn’t raised its gas tax in over two decades and has lost 43 percent of its value since the last increase.

In case you missed it, here’s a great read from the New York Times about how we shouldn’t be so quick to assume that millionaires are ready to pack up their bags and move at the slightest increase in their tax bills. In “The Myth of the Rich Who Flee From Taxes,” the Times cites ITEP’s work on the Maryland millionaire tax: “a study by the Institute on Taxation and Economic Policy, a nonprofit research group in Washington, found that nearly all the decline in millionaires was the result of a drop in incomes largely attributable to the stock market plunge and recession, and not to migration — “down and not out,” as the study put it.”



"Middle Class Tax Cut" Could Send Wisconsin Down Slippery Slope



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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.



Anti-Tax Credo Keeps Texas Kids In Underfunded Schools



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Earlier this week, a district court in Texas ruled for a second time that the state’s system of paying for schools is unconstitutional, both because it fails to provide enough revenue to deliver an adequate education for Texas children and because it creates huge inequities in the quality of education enjoyed by richer versus poorer districts. The lawsuit prompting this decision was brought by hundreds of school districts in the wake of a 2011 decision by the state legislature to dramatically cut state aid to local schools. The state of Texas is expected to appeal, in which case it goes to the Texas Supreme Court.

As the Texas Center for Public Policy Priorities (CPPP) notes (PDF), the 2011 spending cuts came after a misguided decision by the 2006 legislature to replace local property tax revenue with revenues from cigarette taxes (of all things) and a new, untested approach to taxing business income. CPPP finds that the tax hikes in that 2006 “tax swap” have paid for only about a third of the lost property tax revenue, leaving a gaping $10 billion hole in the state’s 2011 budget. This probably also helps account for what the 600 school districts in the lawsuit say is a $43,000 gap between rich and poor classrooms, too.

The choice to pay for the growing cost of education using a flat-lining tax such as the cigarette tax (whose returns are famously diminishing, PDF) reflects the limited options available in a state that refuses to levy a tax on personal income.

Texas is one of only a handful of states with no income tax, and its current Governor has made a big show of his intention to keep it that way. At a time when a number of states’ elected officials are expressing a desire to restructure their tax systems to more closely resemble the Texas tax system (usually by simply repealing their personal income tax), this week’s court decision is a harsh reminder that the short term politics of tax cuts has long term consequences for citizens. Texas, for example, has abysmal numbers on education and its poverty rate continues to rise.

So when someone like Kansas Governor Sam Brownback crows “Look out Texas. Here comes Kansas!” it might be he didn’t read the brochure before planning this particular trip. It’s not the first time he – like other political leaders – has talked up the Texas tax structure.  But given the Lone Star State’s track record, and the budget havoc tax cuts are causing in Kansas, all lawmakers should think twice before embarking on the no-income-tax path.

Photo courtesy Texas Tribune.



Beware The Tax Swap



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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.”



Rush Limbaugh Pilfers Our Research, Deception Ensues



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While we’re not regular listeners to Rush Limbaugh’s radio program, we caught the fact that Limbaugh cited data from our partner organization, the Institute on Taxation and Economic Policy (ITEP), during his monologue the other day. Not surprisingly, Limbaugh both misconstrues ITEP’s analysis and ignores basic economic realities.

Echoing a talking point circulating in conservative media that the tax code has no role in mitigating income inequality (and that somehow immigrants cause it), Limbaugh argued that, therefore, higher taxes on the rich cannot reduce income equality.  He said this is proven by simply making “a quick comparison of state inequality data and their corresponding tax codes.” He went on to assert that because California and New York have two of the most progressive tax systems but also some of the highest levels of income inequality, this means progressive taxes do nothing to reduce income inequality.

Honestly, it’s hard to know where to even start with breaking down this nonsense.

For one, Limbaugh must have overlooked the central conclusion of ITEP’s Who Pays report, which is that ALL state tax systems are regressive, meaning that even the most “progressive” state tax systems in the US still exacerbate income equality. Even in California, which Limbaugh claims has one of the most progressive tax systems (it doesn’t), 10.2 percent of family income for those in the bottom 20 percent is spent on state taxes, whereas only 9.8 percent of the top 1 percent’s income goes toward state taxes.

Another critical problem with Limbaugh’s monologue is that he did not actually do much analyzing, but instead opted to cherry-pick New York and California off the list of states with high levels of income inequality. By doing this, Limbaugh ignores the fact that Arizona and Texas have two of the most regressive tax systems and – what? – also happen to top of the income inequality list. To actually support his point, Limbaugh would have had to compare the relative progressivity of different tax systems with their level of income inequality, an impossible task considering that ITEP does not actually rank the states according to progressivity. In addition, Limbaugh does not even consider the myriad of factors (besides immigration) that contribute to income inequality, such as  government safety net and income supports, the types of jobs available and their wage levels, or the presence of industries, like finance, that generate unusually high wealth.

One last fatal flaw is that Limbaugh utterly ignores the reality that progressive taxes straightforwardly take more money from the wealthy and redistribute that money more evenly to the population through government services, which, for obvious reasons, affects income inequality. The fact is that basic economic logic and decades of economic analysis have shown that lower taxes on the rich directly increase income inequality. As a definitive study by the non-partisan and widely respected Congressional Research Service (CRS) puts it, “lowering top marginal tax rates has the effect of further increasing the disproportionate amount of income earned by the wealthiest of the wealthy.” Similarly, the OECD’s economic analysis of the US earlier this year found that our failure to implement a more progressive federal tax code was a critical factor in making the US the fourth most unequal country in the developed world and that this must be reversed in order to stave off even high income inequality.

Next time Rush Limbaugh wants to use ITEP numbers, he should check with us first – we’d be happy to enlighten him!



Evidence Continues to Mount: State Taxes Don't Cause Rich to Flee



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There’s been a lot of good research these past few years debunking claims that state taxes – particularly income taxes on the rich – send wealthy taxpayers fleeing from “unfriendly” states.  CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP), took a lead role in disproving those claims in Maryland (PDF), New York, and Oregon (PDF), for example. CTJ has also been covering the controversy in several states and in the media.

Some particularly thorough research on this topic has come out of New Jersey, where researchers at Princeton and Stanford Universities were granted access to actual tax return data, which is not available to the public, in order to investigate the issue in more detail. The resulting paper (PDF) found a “negligible” impact of higher taxes on the migration patterns of the wealthy.

And now, for the further benefit of lawmakers seeking to become better informed about tax policy, those same Princeton and Stanford researchers were recently granted access to similar confidential taxpayer data in California. Unsurprisingly, the findings of their newest paper (PDF) were similar to those out of New Jersey: “the highest-income Californians were less likely to leave the state after the [2005] millionaire tax was passed… [and] the 1996 tax cuts on high incomes … had no consistent effect on migration.”

That’s right.  California millionaires actually became less interested in leaving the state after the tax rate on incomes over $1 million rose by one percentage point starting in 2005.

Another important finding: migration is only a very small piece of what determines the size of a state’s millionaire population.  “At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population,” they explain.  The other 98.8 percent is due to yearly fluctuations in rich taxpayers’ income that moves them above or below the $1 million mark.  

This finding (which is not entirely new) defeats the very logic that anti-tax activists use to argue their “millionaire migration” case. Here’s more from the researchers:

“Most people who earn $1 million or more are having an unusually good year. Income for these individuals was notably lower in years past, and will decline in future years as well. A representative “millionaire” will only have a handful of years in the $1 million + tax bracket. The somewhat temporary nature of very-high earnings is one reason why the tax changes examined here generate no observable tax flight. It is difficult to migrate away from an unusually good year of income.”

But for every new piece of serious research on this issue, there are just as many bogus studies purporting to show the opposite.  Of particular note is a September “study” from the Manhattan Institute, recently torn apart by Sacramento Bee columnist Dan Walters.

Somewhat surprisingly for a right-wing organization’s study of this topic, the Manhattan Institute report actually concedes that other variables, things like population density, economic cycles, housing prices and even inadequate government spending on transportation, can motivate people to leave one state for another.  But while the Institute doesn’t claim that every ex-Californian left because of taxes, regulations, and unions, it does, predictably, assign these factors an outsized role. But their “analysis” of the impact of taxes spans just six paragraphs and is, in essence, nothing more than an evidence-free assertion that low taxes are the reason some former Californians favor states like Texas, Nevada, Arizona – even, oddly, Oregon, where income tax rates are similar to California’s.

Obviously, the guys looking at the actual tax returns have a better idea of what’s actually going on, and state lawmakers need to listen.



New From ITEP: Maryland Tax Bill Would Improve Tax Fairness and Revenue



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May 16, 2 PM UPDATE: The House has passed SB1302 and it now heads to Gov. O’Malley’s desk, where he is expected to sign it.

Maryland lawmakers are on the verge of bucking a national trend.  While most of the biggest state tax debates in 2012 have focused on proposals that would cut taxes and tilt state tax systems even more heavily in favor of the wealthy, Maryland appears poised to do exactly the opposite.  On Tuesday, the state Senate voted to raise tax rates and limit tax exemptions for single Marylanders earning over $100,000 and for married couples earning over $150,000 per year.  The House is expected to follow suit by passing the same bill (SB1302) as early as Wednesday.

If enacted into law, these changes will allow the state to avoid a variety of cuts to vital public services, as detailed by the Maryland Budget and Tax Policy Institute.  But in addition to improving the adequacy of Maryland’s tax system, a new analysis from our sister-organization, the Institute on Taxation and Economic Policy (ITEP), shows that the income tax changes contained in SB1302 would also lessen the unfairness of a regressive tax system that allows Maryland’s wealthiest residents to pay less of their income in tax than any other group.  Among ITEP’s findings:

  • Because the income tax changes are limited to taxpayers earning over $100,000 or $150,000 per year, only 11 percent of Maryland taxpayers would face an income tax increase in 2012 as a result of SB1302.  (It’s worth noting, however, that increases in tobacco taxes, fees, and other provisions would affect additional taxpayers—though these increases make up just 3 percent of the bill’s total revenue.)
  • 54 percent of the income tax revenue raised by SB1302 would come from the wealthiest 1 percent of state taxpayers—a group with an average income of nearly $1.6 million per year.  87 percent of the revenue would come from the top 5 percent of taxpayers.
  • The changes in families’ income tax bills—even at the top of the income distribution—would be very modest.  After considering the "federal offset" effect, the tax increase faced by the top 1 percent of taxpayers would equal just 0.16 percent of their total household income, and taxpayers outside of the top 1 percent would face an even smaller increase.  Given the small size of these tax changes, Maryland’s tax system would undoubtedly remain regressive overall.
  • The progressive nature of SB1302 means that it’s well suited to take advantage of the “federal offset” effect mentioned above, whereby wealthier taxpayers write-off their state tax payments and receive a federal tax cut in return.  17 percent of the revenue raised by SB1032—or $28 million in tax year 2012—would come not from Marylanders, but from the federal government in the form of new federal tax cuts for Maryland taxpayers.

See ITEP’s full analysis here.

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