Tax Basics News



The Tax Foundation's Summary of Economic Growth Studies is Misleading



| | Bookmark and Share

Whenever it’s trying to justify cutting taxes (or not raising them), the Tax Foundation likes to direct readers toward one of its reports from 2012, in which it concluded that “nearly every empirical study of taxes and economic growth published in a peer reviewed academic journal finds that tax increases harm economic growth.”  As it turns out, this conclusion is simply wrong.

In a new report just released this week, the Center on Budget and Policy Priorities (CBPP) digs more deeply into the literature and finds that “12 of the 26 studies that the Tax Foundation cites do not support its flat assertion that tax increases harm growth.”  To take just one example, the Tax Foundation selectively cited a 1997 study in order to obscure its finding that tax increases could actually improve economic growth if they were used to fund education or deficit reduction.

Equally damning is CBPP’s finding that the 26 studies the Tax Foundation cited are hardly the only research on this topic, noting that “the Tax Foundation’s review omitted dozens of relevant studies published in major journals or edited compilations since 2000.”  This is a serious shortcoming given that the Tax Foundation claims to possess insights into the findings of “nearly every empirical study of taxes and economic growth,” and that it says it’s discovered a “consensus among experts” about the negative economic impacts of taxes.

Unsurprisingly, many of the studies omitted by the Tax Foundation contradict its claims about the disastrous effects of higher taxes—and some directly contradict the exact studies that the Tax Foundation chose to cite.

This CBPP study, as well as an earlier one looking just at the state-level studies included in the Tax Foundation report, reveal that the Tax Foundation’s so-called “literature review” is more spin than substance.



What to Watch for in 2014 State Tax Policy



| | Bookmark and Share

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.  



Inequality for All, Starring ITEP Board Member Robert Reich, Opens Today



| | Bookmark and Share

Professor Robert Reich is a former Secretary of Labor, the star of a new documentary generating all kinds of buzz, and he is also a member of the board of our partner organization, the Institute on Taxation and Economic Policy (ITEP).  His new movie, "Inequality for All," examines the scale and causes of the economic inequality that plagues the United States (including, argues Reich, our democracy). Watch the trailer!

Here at our blog we track new reports and research on the interaction of tax policy and income inequality. We write about the unequal treatment the tax code gives to investment income in contrast to the ordinary income most Americans take home. We tell anyone who will listen there are no freeloaders when it comes to paying taxes – unless you’re talking about the super rich or big corporations.

In a recent interview, Professor Reich explained,

There’s a lot of confusion about inequality. People know that inequality is surging. Many people have a feeling the game is rigged. But they don’t really understand why, how it’s happened and why it is dangerous. Or what they can do about it. This film also provides a kind of guide to people. There’s a social action movement that is connected to the film. We hope that the film really spurs not just a different discussion in this country, but also a movement to take back our economy and democracy.

Click here to find out when "Inequality for All" is coming to a city near you.

And…. If you are in the DC area, join us Monday! After a screening of "Inequality for All" on October 1 at 7:15 PM at E Street Cinema, ITEP's Executive Director Matt Gardner will join a panel to discuss how what should be done to reverse the growth of income inequality locally and nationally.

The Facebook event has the details – see you there!



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



| | Bookmark and Share

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



| | Bookmark and Share

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.

 



Governor Cuomo's Tax-Free Zones Scheme Is More Cost than Benefit



| | Bookmark and Share

Earlier this summer, we tracked New York Governor Andrew Cuomo’s state-wide promotional tour where he touted the benefits of his beloved “START-UP New York” (originally called “Tax Free NY”) – a plan to turn college campuses throughout the state into enterprise zones where new businesses would be exempt from all state taxes. The Governor claimed this would be an innovative way to revitalize the up-state economy while costing the state nothing. We, however, found these claims unwarranted at best, showing they were only a call for more of the same unproven corporate tax breaks that would cost the state millions while putting existing local businesses at an extreme disadvantage.

Nonetheless, Governor Cuomo ignored our warning (and the warnings of others) and rapidly pushed the plan through the legislature where it was introduced, approved, and subsequently signed by him, all in the course of a few weeks in June.

Now, less than two months after its passage, a new analysis shows just how poorly conceived START-UP NY really is. This time, however, the analysis comes directly from the Governor’s own budget office – and its findings are in stark contrast to what the Governor promised during his promotional tour.

While Cuomo campaigned on the notion that his tax-free campus scheme wouldn’t cost the state a nickel, the budget office’s projections (PDF) show the plan will cost $323 million in lost revenue over its first three years alone (projections only go through Fiscal Year 2017, and show costs rapidly ballooning over this period of time).

And in a cartoonesque twist, this lost revenue is not from businesses that will move to New York because the START-UP program incentivized them to do so. According to the report, the $323 million in lost revenue is the result of companies that would have come to New York and paid full taxes anyway, but are now exempt thanks to the Governor’s tax-free program.

With projected budget gaps of $1.74 billion in FY 2015 and $2.9 billion in both FY 2016 and FY 2017, START-UP NY has exacerbated the state’s poor fiscal health – making it even more difficult to invest in government services that are proven to grow the economy, like education and infrastructure. Calling START-UP NY an overpriced gimmick, one assemblyman has announced his plan to repeal the program altogether – a move we think should be taken as soon as possible.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), has shown in detail how rolling back business and corporate taxes is not an effective economic development tool and that public investment in schools, transportation systems, public safety, etc. are the real keys to development. Even in practice, enterprise-zone programs like START-UP NY have demonstrably failed to create jobs while costing states billions.

Thus far, Governor Cuomo has demonstrated an unwillingness to listen to experts or look at the evidence. Will he also ignore his own budget team’s assessment and move forward with his plan? If so, it would be hard to conclude that his governing agenda is anything but reckless and self-serving.

Front page Photo via  Governor Andrew Cuomo Creative Commons Attribution License 2.0



ITEP to Legislators: Business Tax Breaks Don't Live Up to the Hype



| | Bookmark and Share

Some of the country’s most influential state tax-writers heard this week from our partner organization, the Institute on Taxation and Economic Policy (ITEP), about why they should reject the conventional wisdom about special business tax breaks being economy-boosters. Best known for its work promoting the collection of sales taxes on purchases made over the Internet, the NCSL Task Force on State and Local Taxation asked ITEP to speak at its meeting in Atlanta on the effectiveness of so-called “tax incentives.”

Among the reasons ITEP urged lawmakers to be skeptical of these special breaks:

  • Tax incentives often reward companies for hiring decisions or investments they would have made anyway. These “windfall” benefits significantly reduce the cost-effectiveness of every tax incentive.
  • State economies are closely interconnected, so the taxpayer dollars given to companies through incentive programs never remain in-state for very long.
  • Tax incentives require picking winners and losers. Incentive-fueled growth at one business usually comes at the expense of losses at other businesses – including businesses located in the same state.
  • Tax incentives must be paid for somehow, and state economies are likely to suffer if that means skimping on public services like education and infrastructure that are fundamental to a strong economy.

To address these problems, ITEP recommended a three-pronged approach to the Task Force: cut back on tax incentives (both unilaterally and through cooperation with other states); reform tax incentives to limit their most obvious flaws; and closely scrutinize incentives on an ongoing basis to weed out the least effective programs.

ITEP staff also participated in a follow-up panel on best practices for “tax expenditure reporting”—the main tool states use to keep tabs on the slew of special tax breaks they offer to businesses and individuals. For that panel, ITEP recommended expanding state tax expenditure reports to include more tax breaks, and to include more information, like the purpose of each tax break and a description of its beneficiaries.  ITEP also explained why lawmakers shouldn’t gut state tax expenditure reports by excluding large tax breaks from their scope; every tax break has supporters and a constituency who insist it’s justified, but every tax expenditure requires equal scrutiny.

Read ITEP’s written remarks on the folly of business tax incentives.

Read ITEP’s written remarks on best practices for tax expenditure reporting.



PBS Asks Some Hard Questions About Laffer and His Curve



| | Bookmark and Share

Supply-side economist Arthur Laffer has been very busy the last few years trying to convince state lawmakers that cutting taxes and making them more regressive will lead to an economic boom.  At the same time, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has done a lot of work pointing out the serious flaws in Laffer’s so-called research, and explaining why taxes and the public investments they pay for are key to healthy state economies.

Over at PBS, meantime, the fedora-donning business correspondent for the News Hour, Paul Solman, had gotten wind of ITEP’s critiques.  After reading ITEP’s “States with "High Rate" Income Taxes are Still Outperforming No-Tax States” and deeming it “a convincing piece of work,” Solman decided to sit down with Laffer and ask some questions.  Laffer’s response was predictable and anecdote-heavy.  Aside from recycling the same meaningless statistics ITEP has debunked before, he also included a data point that’s hard to rebut unless you live inside his brain, that he and his family moved to Tennessee “exclusively because of taxes.”  (Of course, a guy who’s made a living bashing taxes is not a particularly representative citizen.)

Happily, PBS’s Solman decided to do a little fact-checking and went looking for an expert, “impartial point of view” (his words, not ours) to help glean whether Laffer’s promise of sure-fire economic growth is all that – or all wet.  For his follow up piece, he turned to Joel Slemrod, noted public finance expert and chair of the Economics Department at the University of Michigan.

In one of many subtle but clear swipes at Laffer’s methods, Slemrod explained that while “economists have developed increasingly sophisticated statistical techniques to try to tease out the causal link between policies and performance … Laffer's analysis is not sophisticated.”

Slemrod’s criticisms of Laffer closely parallel those made by ITEP in 2012 and early 2013.  For one thing, Laffer fails to control for non-tax factors that impact growth. For another, the economic measures he chooses (cherry picks, really) don’t capture “what's happened to the … well-being of a typical resident.”  And, Laffer ignores how tax cuts require cuts in public investments that are hugely important to state economies.

On this last point, Slemrod notes that: “Laffer makes clear that … he believes more money does not provide better public services. This is a controversial statement that he backs with a few anecdotes, but it is not one that is widely held.”

In other words, Laffer and his supply-side compatriots have campaigned to frame most every government program as “wasteful” to make the idea (and their ideological obsession) of defunding government seem somehow justified.

Given all of this and his vast expertise, Slemrod concludes that ITEP’s study “make[s] arguably better methodological choices” than Laffer’s.  (We’ll take that as a compliment!) As Slemrod has pointed out in previous interviews, serious research has shown taxes to have little, if any, effect on economic growth; in fact, that “[r]aising taxes and using the money for education and certain infrastructure could certainly be beneficial to an economy.”  Laffer’s tax-phobic worldview notwithstanding, public services do matter to economic growth, and that means we will always need an adequate, fair, and sustainable tax system to pay for them.



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



| | Bookmark and Share

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



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



| | Bookmark and Share

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



Beware The Tax Swap



| | Bookmark and Share

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.”



Coming to a State Near You: Tax Reform That Might Get It Wrong



| | Bookmark and Share

Note to Readers: This is the first of a six part series on tax reform in the states.  Over the coming weeks, CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country.

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

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

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

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

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

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

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

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

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

3) Proposals to revamp gas taxes

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

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





Rush Limbaugh Pilfers Our Research, Deception Ensues



| | Bookmark and Share

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!



New Report: Arthur Laffer's Bad Data Misleads Lawmakers



| | Bookmark and Share

In an attempt to bolster income tax repeal efforts in states like Oklahoma, Kansas, and Missouri, supply-side economist Arthur Laffer recently teamed up with an Oklahoma-based group to perform an analysis that predicts huge economic gains as a result of cutting state personal income taxes.  A new report from the Institute on Taxation and Economic Policy (ITEP) shows, however, that the analysis is fundamentally flawed.

Bear with us as we guide you through a few methodological weeds.

At issue here is what’s called a regression analysis – a statistical tool used to explain the relationship between one set of variables and another.  In this case, Laffer has attempted to explain how state income tax rates affect economic growth, and, according to Laffer’s regression, the effect is enormous. He shows an inverse relationship between taxes and growth. That is, the lower the tax rates, the greater the economic growth.  Repealing Oklahoma’s income tax, he therefore predicts, will more than double the rate of personal income growth and state GDP growth, and create 312,000 jobs in the process.

If this sounds too good to be true, that’s because it is.

As ITEP’s new report explains, Laffer performs a data sleight of hand to produce his result.  He includes federal tax rates in an analysis supposedly aimed at explaining a state tax system. And as it turns out, this decision hugely distorts the results.  It allows him to include in his overall “tax rate” figures the Bush tax cuts – which caused a 4.1 percent drop in the top federal tax rate.  At the same time, his measure of economic growth just happens to be taken from the early 2000’s, when the country was climbing out of the post 9/11 recession. That is, the economic growth indicators were improving just as the Bush tax cuts were going into effect.

Laffer essentially creates a bogus measure (federal and state tax rates combined) and maps it onto an exceptional moment in economic history.  This allows him to create the illusion that cuts in state tax rates between 2001 and 2003 fueled economic growth later in the decade.  If the analysis is refocused on just state tax rates, the findings fall apart entirely, as the regression no longer shows any relationship between state tax rates and economic growth.

But Laffer’s analysis is plagued by more problems than these.  Also notable, as covered in an earlier report from ITEP, is its complete failure to measure the impact of other factors, from sunshine to oil production, that contribute to state economic growth.  The flaws in Laffer’s analysis are so fundamental that its findings cannot be taken seriously. 

ITEP’s two companion critiques of why Arthur Laffer’s analysis should not be trusted can be found here.

Photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0

Archives

Categories