The Tax Justice Digest

House of Representatives Approves Housing Bills, Bush Threatens Veto

Fri, 09 May 2008 15:59:37 -0500

On Thursday, the House of Representatives passed two bills that are part of a housing stimulus package promoted by House Democratic leaders. The first is the Neighborhood Stabilization Act (H.R. 5818), which would make available $15 billion in grants for state and local governments and non-profits to buy up and rehabilitate foreclosed homes, in order to prevent neighborhoods from being adversely affected by vacancies. The second, larger bill is the American Housing Rescue and Foreclosure Prevention Act. This consists of several separate pieces of legislation offered as amendments to replace the language in the housing bill passed in the Senate, H.R. 3221. It includes language that reforms the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac, modernizes the Federal Housing Authority (FHA) and allows the FHA to guarantee refinanced mortgages for homeowners in danger of foreclosure.

Housing Tax Provisions in the House Package

Another piece of legislation included in the larger bill is the $11 billion tax bill approved by the House Ways and Means Committee a month ago. It includes a refundable $7,500 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years, which is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $70,000 (or married couples with incomes of $140,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a downpayment is made but would be claimed afterwards.

The House bill also has a deduction for property taxes for non-itemizers, which is capped at $350 per spouse. Because of the home mortgage interest deduction that is currently available for itemizers, most people with a mortgage currently do itemize their deductions. That means that the main beneficiaries of this provision will likely be homeowners who don't have mortgages -- even though this is a bill that is supposed to address a mortgage foreclosure crisis.

The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.

Senate Bill Widely Panned

A month ago, the Senate passed a housing bill that was widely panned by housing advocates, policy experts, and labor, partly because of its inclusion of a "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed). This would basically amount to a tax break with no strings attached for any company (not just home builders).

It's highly unlikely that this will prevent layoffs of employees as its proponents claim. Companies will always have an incentive to lay off workers if no one is seeking to buy whatever the company produces. Handing the companies a tax break with no strings attached does nothing to change that. Contrary to the claims of backers of the tax break, labor groups have argued that this provision could actually encourage construction companies to dump their excess housing inventory on the market more quickly since the tax break would cushion the losses that result from selling at lower prices.

The Senate bill also includes a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which is larger than the similar deduction in the house legislation but will still save most families only $150 at the most. This deduction will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing fiscal problems.

Also included in the Senate bill is a $7,000 non-refundable credit for the purchase of a foreclosed home, which will do little to make housing more affordable and might actually encourage foreclosure. Unlike the credit in the House version, the Senate bill would not require the credit to be paid back over time, but it would be non-refundable, meaning fewer families could benefit from it. The Senate bill also includes provisions expanding the use of bonds by state and local government, like the House bill.

Unlike the tax provisions approved by the House, the Senate's tax cuts would not be paid for.

Veto Threats from the White House

President Bush opposes all of these bills, arguing that in many cases they reward lenders or homebuyers who acted irresponsibly. The President has threatened to veto the two House bills. White House Press Secretary Dana Perino even attacked the Senate bill, saying it "will likely do more harm than good by bailing out lenders and speculators and passing on costs to other Americans who play by the rules and honor their mortgage debt obligations.” The differing provisions of the House and Senate bills and the opposition from the President make it very unclear what legislation -- if any -- will be enacted to address the housing situation.

Online Video Explains Why We Must Eliminate the Tax Loopholes Used by Private Equity

Fri, 09 May 2008 15:58:13 -0500

An online video linked with a petition to the presidential candidates has generated nearly 30,000 signatures in support of closing the loopholes used by the buyout fund managers ("private equity" fund managers) to generate billions without paying their fair share of taxes. The video is part of the "War on Greed" film series that Robert Greenwald has created and which takes a comical yet serious look at the greed of private equity titans like Henry Kravis of Kohlberg Kravis Roberts (KKR). The most recent video explains the tax loopholes used by the industry, including the loophole for "carried interest," which is basically compensation paid to fund managers for managing other people's money. Although the video does not use the term "carried interest," it does explain that these super-wealthy fund managers are allowed to pay taxes on their compensation at the special low 15 percent rate reserved for capital gains.

Many were disappointed last year when the Senate failed to approve a House-passed bill that would have closed the carried interest loophole and clamp down on the fund managers' use of offshore tax avoidance schemes. Hundreds of organizations had publicly endorsed the effort to close the carried interest loophole.

For its part, the private equity industry/buyout industry seems to know that the loopholes it enjoys still infuriate some members of Congress and the public. KKR just hired Ken Mehlman, the former chairman of the Republican National Committee, to run its public affairs department, demonstrating real concern that Congress may move to check the unfair advantages the industry enjoys.

Big Deficit Cries Out for Big Thinking in California

Fri, 09 May 2008 15:56:48 -0500

With a projected budget deficit that some believe may reach $20 billion, policymakers in California can avoid the harsh reality no longer. They must either address some of the fundamental problems that plague their tax system or impose draconian cuts in vital public services.

One of the shortcomings with California’s tax system that has received a great deal of attention in recent weeks is the state’s sales tax and its relatively narrow base. Like many states, California taxes only a handful of services, despite the prominence of that form of consumption in today’s economy. The Chair of the State Board of Equalization, Judy Chu, released an analysis late last month demonstrating that California could generate as much as $10 billion in additional revenue by expanding its sales tax base. Senate President Don Perata has previously expressed support for such a change and new Assembly Speaker Karen Bass may also be open to the idea -- as well to other reforms. Now it seems that Governor Schwarzenegger may have taken the report’s ideas to heart too, as the Los Angeles Times reports he has been meeting with business leaders in recent weeks to build support for changes in tax policy.

Unfortunately, California’s budget woes haven’t just highlighted problems with state tax policy. They have once again shed light on a legislative process that makes constructive responses to fiscal crises incredibly difficult. In particular, tax increases require a two-thirds supermajority vote to pass the legislature, a rule that gives disproportionate power to the legislative minority and that fosters intransigence among those opposed to tax increases no matter how dire the state’s fiscal situation.

How States Can Avoid Losing Revenue as a Result of the Corporate Tax Cuts in the Stimulus Law

Fri, 09 May 2008 15:54:43 -0500

Alabama's House of Representatives passed a bill on Tuesday that would decouple the state tax rules regarding depreciation from the depreciation rules in the federal tax code. If enacted, this will prevent a revenue loss that will otherise occur because of the federal stimulus law enacted in February.

That stimulus bill included Congress's latest round of "accelerated depreciation" corporate tax cuts passed under the guise of helping the economy rebound. It allows companies to claim a "bonus" depreciation tax break that lets them deduct the cost of their investments much faster than would otherwise be allowed.

Since virtually every state's corporate tax laws are based on federal rules, this tax break will create an automatic tax loss for states unless (as Alabama is in the process of doing) they take steps to "decouple" from the federal tax break. The Alabama bill, HB 455, is estimated to save the state over $50 million in the current fiscal year. The Center on Budget and Policy Priorities reports that as many as 22 other states could take the same loophole-closing step to help shore up their corporate income tax base -- and their budgets.

Report: Virginia Needs More Money for Transportation, but also Needs to Protect Low-Income Families

Fri, 09 May 2008 15:53:19 -0500

At the request of Governor Tim Kaine, the Virginia legislature will be convening in a special session next month to figure out how to pay for much-needed transportation maintenance. The solution most observers expect to come out of that session will involve some combination of increases in the gas tax, in the sales tax, and/or in vehicle-related fees. Unfortunately, each of these options is regressive, taking a larger share of the income of lower- and middle-income taxpayers than from their wealthier neighbors. A recent report from the Virginia-based Commonwealth Institute offers a couple of inexpensive options for policymakers to offset the disproportionate impact these tax increases will have on more vulnerable low-income families.

Along the same lines as a program recently enacted in Minnesota, the report recommends coupling any gas or sales tax hike with a $30 credit per family member for families earning less than $20,000 per year ($40,000 for married families). By limiting the credit to only low-income families, this option would be a very inexpensive way of protecting families in need from further strain upon their already tightening budgets. The credit would cost only $80 million per year, while a one cent sales tax increase would raise $940 million and a ten cent gas tax hike would raise about $500 million. Even states not contemplating a gas tax hike should give consideration to the idea of new or expanded low-income credits. A refundable credit of this sort is much preferable to the gas tax holiday shenanigans being floated at both the federal and state levels as a solution to the squeeze many families are feeling.

In addition, the report suggests making the state’s Earned Income Tax Credit (EITC) refundable. Of the over twenty states that currently offer an EITC, Virginia is one of only three that fails to refund amounts of the credit beyond one’s income tax liability. The result of this is that for those low-income families who owe little or no income tax, the EITC is of very little use in offsetting the impact of regressive sales and property taxes. Failing to make the EITC refundable denies assistance precisely to those families who need it the most.

Minnesota Is Miles Ahead of Most States When It Comes to Property Tax Reform

Fri, 09 May 2008 15:51:05 -0500

At a time when it seems like only the worst kinds of property tax reform have any chance of gaining steam, the Minnesota House recently came through with a reform bill that completely bucks the trend.

Expecting that property tax bills in Minnesota may soon grow a bit too high for comfort for some families, legislators avoided the temptation that we’ve seen take hold elsewhere to carelessly slash property taxes without regard for how those cuts will affect families of varying income levels. Instead, the House has proposed expanding the state’s “circuit-breaker” credit to include many more families than are currently eligible, and to provide many families already benefiting from the credit with even more relief.

Just as appealing as the expansion of the state “circuit-breaker”, however, is the means by which Minnesota plans to pay for that expansion. The House has proposed ending the state income tax deduction for property taxes paid. This deduction overwhelmingly benefits better off taxpayers who are more likely to itemize, and for whom deductions are more valuable since they pay income taxes at a higher rate.

The combination of these changes is a significant step toward making less unfair a starkly regressive property tax in Minnesota. Scaling back the state’s existing homestead credit will also provide funds with which to pay for this better-targeted relief. Finally, the bill would also eliminate what is estimated to be a $186 million loophole for foreign operating corporations.

Unfortunately, there are serious obstacles to the bill’s passage. First, the Senate has been contemplating a different approach in which state money would simply be given to local governments, in the hope that an influx of funds would encourage localities to cut taxes. Fortunately, Governor Pawlenty is not on board with this plan, preferring relief be given directly to taxpayers. But the Governor is also not yet on board with the House’s plan. Pawlenty continues to insist that a firm cap on increases in local property tax collections must be the “linchpin” of any reform. The House added a levy limit on local governments to its bill in an attempt to accommodate the Governor, though that limit is not as strict as he has requested. Hopefully the Minnesota legislature will be able to push this bill through without too strict a limit on local government revenues. Such limits generally tend to leave local governments hurting for funds as the rising cost of providing government services outpaces the allowed limits.

The Clinton-McCain Gas Tax Proposal: Get Half a Tank Free This Summer

Fri, 02 May 2008 14:40:12 -0500

This week, Senator Hillary Clinton came out in support of lifting the federal tax on gasoline during the summer months, an idea originally proposed by Senator John McCain. Senator Barack Obama publicly scoffed at the idea, saying "this isn’t an idea designed to get you through the summer, it’s designed to get them through an election." Obama explained that the overall savings for a family over the summer would probably average about "$25 to $30. Half a tank of gas."

The federal gas tax is currently 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. With the average gasoline price $3.60 per gallon this week, the federal gas tax is only around 5 percent of the total cost of gasoline.

While the benefit to the consumer may be too small to even notice, this proposal could have a very real and very negative effect on the Highway Trust Fund which is supported by the gas tax and which we depend on to fix and improve congested highways and roads in need or repair. The American Society of Civil Engineers points out that every dollar spent on highway construction is estimated to bring $5.40 in benefits and every billion dollars spent on highway construction generates about 30,000 jobs each year, according to the Department of Transportation. Repealing the gas tax for a summer would cost the Highway Trust Fund about $8.5 billion.

It's true that the gas tax is a regressive tax, requiring low-income drivers to pay more of their income in tax than wealthier drivers. But the gas tax is different from most other taxes in ways that minimize the importance of tax fairness. Most notably, the gas tax can serve to help reduce demand in a market where many would agree demand is far too high. With gasoline in limited supply (Paul Krugman explains that the supply is actually fixed for the next few months), environmental concerns continuing to mount, and traffic congestion remaining a problem, any effect the gas tax has on reducing demand should be a welcome one.

Senator Clinton would replace the money in the Highway Trust Fund by enacting a new windfall profits tax for oil companies. With a White House opposed to anything that can conceivably be called a tax increase and a Senate that has trouble paying its bills, it's hard to imagine this part of the proposal being enacted during this Congress. President Bush said he was open to considering the idea of a gas tax holiday, but there appears to be no chance he would ever support a windfall tax on oil companies to pay for it.

John McCain: If the Issue Is Health Care, the Answer Is... Tax Cuts!

Fri, 02 May 2008 14:38:09 -0500

On Tuesday, Senator John McCain refined his health care proposal a little bit in a speech in Florida. The main thrust of his plan is still to allow a tax credit for the purchase of health insurance, including non-group insurance (insurance purchased on the individual market rather than through an employer). The credit amount would be $2,500 for individuals and $5,000 for families.

To pay for this, McCain would eliminate the exemption for employer-provided health insurance. This would basically make the tax code tilted towards individually purchased health care and perhaps even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance.

The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.

Responding to criticisms that people with preexisting health conditions would never be offered adequate health insurance, McCain on Tuesday added a detail that he calls a "Guaranteed Access Plan" which would "reflect the best experience of the states to ensure these patients have access to health coverage." Jonathan Cohn at The New Republic explains why the programs set up by the states to do this so far utterly fail to provide affordable care to the people who have a preexisting condition. In these state plans the premiums can run in the neighborhood of $600-$850 per month, cost-sharing runs in the thousands and the preexisting condition won't even be covered for at least several months.

McCain also wants to pass legislation that would make it easier for health insurance companies to sell policies across state lines, but health care advocates have opposed similar legislation because it would make null and void the differing regulations and standards that states have enacted for health insurance companies operating within their borders. McCain also said he would expand Health Savings Accounts (HSAs). Introduced as part of the Medicare prescription drug law in 2003, HSAs are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan. They offer the most benefit to those who are in the highest tax bracket and need no or little medical care, and can therefore serve as tax shelters. The Government Accountability Office just found that HSAs are typically used by people with incomes far higher than average.

State Budget Math: Economic Downturns + Enormous Tax Cuts = Painful Spending Cuts

Fri, 02 May 2008 14:35:58 -0500

Like many states, Ohio currently faces a serious budget deficit, one that has prompted the administration of Governor Ted Strickland to announce plans to cut agency budgets by more than $400 million for the FY08-09 biennium. The consequences of those cuts are already being felt around the state, but, as a recent column from Joe Hallett of the Columbus Dispatch implies, they shouldn’t be entirely unexpected. The combination of recent income and property tax cuts and the only-partial replacement of Ohio’s corporate income tax with a new commercial activities tax (CAT) will mean that the state will lose in excess of $10 billion in tax revenue between 2006 and 2010, making spending cuts all but inevitable.

As Hallett notes, “Tax cuts are easy to love. But the reality is that taxes pay for services citizens want and need.” This latest report from Policy Matters Ohio details the substantial revenue losses Ohio will experience as a result of reductions in personal income tax rates and explains how heavily those reductions are tilted in favor of the rich.

Lawmaker Says His Deciding Vote to Abolish Income Tax Was Just Being “Cutesy”

Fri, 02 May 2008 14:30:19 -0500

In the eyes of most fiscal policy experts, there are a few commonly accepted principles for judging tax policy – neutrality, horizontal and vertical equity, and enforceability, to name a few. Apparently, in the eyes of one Louisiana legislator, “cutesy” now ought to be added to the list.

As the New Orleans Times-Picayune reported earlier this week, Sen. Joe McPherson apologized to his colleagues for casting the deciding vote in favor of an amendment to repeal the state’s income tax, which currently yields nearly $3 billion per year. It seems that the Senator expected the amendment to lose, but “wanted to be on the record as doing away with income taxes.” He later owned up to being “cutesy” with his vote.

The bill that Senator McPherson and his colleagues voted to amend would have repealed yet another element of the 2002 Stelly plan, which substantially improved the fairness of Louisiana’s tax system. Just last year, Pelican State lawmakers voted to reinstate the “excess” itemized deductions that had been eliminated as part of the Stelly plan, a move that cost the state more than $150 million in tax revenue annually and that benefits only the wealthiest 20 percent of taxpayers.

The bill being debated now was intended to raise the income tax brackets that had been lowered under the Stelly plan. It would have (before being amended) reduced state revenue by roughly a quarter of a billion dollars per annum and, despite the claims of proponents, yet again help the most affluent. As the Times-Picayune notes, the bill’s proponents portray it as a prototypical “middle-class tax cut”, but preliminary estimates from the Institute on Taxation and Economic Policy indicate that more than 70% of the benefits from changing Louisiana’s income tax brackets would accrue to the wealthiest fifth of taxpayers.

Florida: Good Thing We Don’t Have to Do This Again for Twenty Years

Fri, 02 May 2008 14:27:11 -0500

Seven tax-related ballot proposals ranging in quality from "highly regressive and irresponsible" to "completely inconsequential" are now set to be on the November ballot in Florida. Proposed by a “reform” commission that meets only once every two decades, the small scale of most of the proposals is surprising. Preferential property tax treatment for marinas, farm land and housing livestock, as well as for owners who improve their property with windstorm protection or renewable energy products, are among the proposals for which Florida voters have apparently had to wait twenty years.

But there is one very serious change to the state tax structure that has left progressives wishing the Commission would have stuck to making only minor changes. Well aware of the existing $3.4 billion budget shortfall facing Florida, the Commission has nonetheless proposed that school property taxes be abolished at an annual cost of $9 billion. In order to meet the requirement established by the Commission that school funding not decline as a result of this change, it was recommended that the legislature raise the sales tax rate by one percent, eliminate numerous sales tax exemptions (on both goods and services), and cut spending. In addition to these ideas, the Commission helpfully suggested that the legislature might try to find “other revenues”.

A 1% sales tax hike is expected to raise less than half of the revenue needed to replace school property taxes, so expansions of the sales tax base appear imminent if the proposal gains approval in November. Expanding the sales tax base is good policy, assuming that it is done carefully, but doing so would ideally be coupled with much better targeted tax cuts. An across-the-board property tax reduction of the kind proposed here will provide huge benefits to those wealthier individuals with the most valuable homes.

And as if all of this wasn’t bad enough, the Commission has also proposed tightening the caps on increases in a home’s assessed value (criticized in the Digest just a few weeks ago) for homes not occupied by the owner.

McCain's Transformation Complete: Tax Cuts for the Rich, Even if We Cannot Pay for Them

Fri, 25 Apr 2008 15:00:01 -0500

Last week Senator John McCain finally completed a process that has been underway for some time now. McCain has worked his way back into his party's good graces by coming out in support of running massive budget deficits to extend the Bush tax breaks and give new tax breaks to business.

It's difficult to remember now, but Senator McCain had said back in 2000, "There’s one big difference between me and the others -- I won’t take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy." He also said of the tax plan George W. Bush proposed while running for president in 2000, "Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans -- and that’s not the kind of tax relief that Americans need."

The New John McCain

Let's compare this to the new John McCain, who fleshed out his latest ideas a bit more during a tax day speech in Pittsburgh.

McCain said he would extend the Bush tax cuts, even though over half of the benefits would go to the richest one percent and the cost would be $5 trillion over a decade. He would cut the corporate tax rate down from 35 percent to 25 percent, even though measured as a percentage of GDP, U.S. corporate taxes are among the lowest of any developed country. He would double the personal income tax exemption for dependents to $7,000, which would do the most for those families in higher income tax rates and nothing for low-income people who pay payroll taxes but who do not have taxable income (meaning a family of four with income of less than $25,000). He would abolish the Alternative Minimum Tax, even though about 9 tenths of it is paid by people with incomes over $100,000.

He would enact first-year deduction or "expensing" of "equipment and technology investments, which, along with a lower corporate tax rate, will create new opportunities for tax sheltering by the wealthy. He would ban internet and cell phone taxes permanently because he seems to believe that new technologies need to be granted a waiver from taxes that lasts forever. (If only Thomas Edison had thought to lobby for laws shielding his inventions from taxes.) He would make permanent the research and development credit because he believes innovation comes from the private sector, except not really, because apparently he also believes that no one will invent anything unless we give them a subsidy through the tax code.

And, most tantalizingly, he would offer a simplified alternative income tax that people can choose, at their option, to file. It's optional, presumably because everyone claims they want a simpler tax form but no one can agree on actually giving up the various deductions and credits that make filing ones' taxes complicated. Rather than simplifying tax filing, this will probably lead some people to calculate their tax liability under two different systems to determine which will result in lower taxes.

Massive Cuts in Public Services Would Be Necessary to Pay for McCain's Tax Plan

The Tax Policy Center has calculated that McCain's plans would cost $553 billion in 2012 alone. That's not even including the interest payments on the additional debt that will result, but let's put that aside for a second. McCain claims he can avoid increasing the national debt, at least to a degree, by cutting spending. But the cost of his plan in 2012 is about 17 percent of all projected federal spending that year according to estimates from the OMB (on page 134 for anyone interested). That's a whole lot of spending to cut. Looked at another way, it's more than all the non-defense discretionary spending that year and about equal to discretionary spending on defense.

During his Pittsburgh speech, McCain said he could get $100 billion in "savings from earmark, program review, and other budget reforms" but was not any more specific. The Senator's oft-mentioned earmarks are said to account for only around $18 billion at the most.

McCain has also said that he will obtain $30 billion in revenue by closing corporate tax loopholes. But his corporate tax cut alone is estimated to cost $143 in 2012.

Actually, You Should Just Bill My Grandkids

Then finally, on Sunday, McCain said on ABC's "This Week" that his tax cuts would take priority over balancing the budget.

To get a sense of what a huge shift this is for McCain, remember that during presidential debates he tried to explain away his opposition to President Bush's tax cuts in 2001 and 2003 by claiming that he thought cuts in federal spending should have accompanied those tax cuts to ensure that the nation's fiscal health would not deteriorate.

Of course, what he said back in 2000 also touched on the fact that the benefits of the Bush tax cuts would go mostly to the rich, but the new McCain is apparently unwilling to remind anyone about this.

On "This Week," George Stephanopoulos asked McCain, "If Congress does not give you the spending cuts you say you can get, will you hold off on signing the tax cuts?"

McCain replied, "Uh, no, of course not, because we don't want to increase people's taxes during a recession..."

It's worth pointing out that none of the candidates are actually talking about raising taxes (with the possible exception of the capital gains tax). Allowing parts of the tax cuts to expire exactly as the Republican House, Republican Senate and Republican White House wrote them to expire can hardly be called a tax increase. Further, it would be interesting to know how McCain might explain the prosperity that followed Clinton's tax increase or the economic doldrums that have followed George W. Bush's tax cuts.

Massachusetts’ Long and Winding Road to Tax Reform

Fri, 25 Apr 2008 14:57:48 -0500

The road to progress rarely travels in a straight line. Nowhere has that been more evident than in Massachusetts this month, as a major effort to combat corporate tax avoidance could end up being undermined by an eleventh-hour maneuver to permit businesses to continue to exploit weaknesses in the tax code.

About two weeks ago, the Massachusetts House of Representatives approved a bill that, among other things, would institute combined reporting of corporate income for tax purposes in the Commonwealth. Combined reporting is the single most important reform states can adopt to prevent corporations from using legal and accounting techniques to shift income from one state to another in order to avoid taxation. It is now used in 20 states. Should the House bill be made law, Massachusetts would become the third Northeastern state in as many years to embrace the change.

Yet, during its consideration of the measure, the House approved, with little open debate, a last-minute amendment that would seriously weaken the reform, to the likely benefit of such behemoths as Wal-Mart and McDonald’s. The amendment would constrain the Commonwealth’s ability to enforce combined reporting, would create new tax planning opportunities for companies with operations both in Massachusetts and overseas, and would compensate companies for accounting losses they might incur due to statutory changes intended to curb tax avoidance. Ultimately, the Massachusetts Department of Revenue indicates that the amendment could lead to annual revenue losses of “at least $100 million to $200 million” -- or about half of the corporate tax revenue the bill might otherwise be expected to generate! Importantly, that expected revenue yield is already diminished by the fact that the bill also would, over time, reduce the tax rate paid by corporations from 9.5 to 7.5 percent and by financial institutions from 10.5 to 9 percent.

Fortunately, as the Boston Globe reports, the Massachusetts Senate may reconsider this particular amendment when it takes up the larger reform bill sometime next month. To learn more about the House bill and the impact that it would have, see this latest report from the Massachusetts Budget and Policy Center.

Colorado Lawmakers Propose to Loosen the So-Called "Taxpayer Bill of Rights"

Fri, 25 Apr 2008 14:55:12 -0500

Colorado might permanently loosen a constitutional constraint that has caused the state on-going fiscal damage, the so-called Taxpayer Bill of Rights (TABOR).

Voters approved an amendment to their constitution enacting TABOR in 1992. TABOR limits the growth of state revenues to a combination of inflation and population growth by requiring that any revenue in excess of this limit be refunded to taxpayers. TABOR also requires that any tax increase be approved by voters. The main problem is that inflation is only a very crude measure of changes in the costs faced by state and local governments, which for the most part have outpaced inflation in the rest of the economy.

In 2000, Colorado voters complicated matters further by approving a very different measure, Amendment 23, which mandates an increase in funding for K-12 education by at least 1% plus inflation every year. This amendment was a response to the dismal state of Colorado public schools in the wake of unrealistic revenue restrictions enacted in TABOR.

Enacting both of these provisions made sense to many voters who would like to see both lower taxes and more spending on education. The problem is that the combination of TABOR and Amendment 23 serve to starve transportation, higher education and just about anything that is not K-12 education.

Now, Colorado House Speaker Andrew Romanoff, with the backing of Governor Bill Ritter, plans to unshackle the legislature from these impossible demands. His proposal, if approved by two thirds of both chambers and by the voters, would repeal Amendment 23 and the part of TABOR that requires the state to refund taxes when the revenue limit is exceeded. Fortunately, the citizens of Colorado are likely to look favorably on this proposal, given that they voted in 2005 to suspend TABOR’s revenue-refund provision for 5 years. This suspension would essentially become permanent under this proposal.

But one problem associated with TABOR would not be fixed under this plan: tax increases would still require voter approval. Of course, it would be better if the Colorado legislature were allowed to write tax policy themselves. That is, after all, what lawmakers are elected to do. But a related improvement to the policymaking process appears to be on its way. Local legislators will likely soon be given the authority (by a bill expected to be signed by the governor) to propose sales tax increases to their voters without having to first seek the approval of the state legislature.

Maine Seeks to Help Residents Lacking Health Insurance… Kind of

Fri, 25 Apr 2008 14:53:04 -0500

State legislators in Maine last week missed a great opportunity to expand health care coverage to a significant number of residents. The state’s health insurance program was originally created in 2003 with the mission of providing insurance to 135,000 uninsured persons by 2009. Currently, just 15,000 people are covered by the program. The reason for this huge disparity is primarily an unwillingness on the part of legislators to raise taxes to pay for it. In describing this year’s legislative session, one representative stated that avoiding tax increases was one of the “overarching goals that we began the budget deliberations under”.

Rather than seizing upon the fast-approaching 2009 target they set for themselves, legislators working under the “overarching goal” chose to expand coverage to only 4,000 of the additional 120,000 people they had originally planned to cover by next year. Instead of addressing the problem head-on with needed tax increases, Maine legislators sidestepped the issue by only enacting relatively minor excise tax increases on alcohol and soda.

This proposal is totally inadequate and will disproportionately affect those lower-income Mainers who are most likely to have trouble affording health care coverage in the first place. In addition to having all the regressive traits of the sales tax, excise taxes possess an additional degree of regressivity in their per-unit rather than percentage basis. That is, rather than being levied at a fixed percentage of a product’s price (5-7% for general sales taxes in most states), excise taxes are levied at a fixed amount on a specific type of good, regardless of that good’s price. The Maine excise tax collected per gallon of wine, for example, is the same 65 cents whether that wine costs $6 or $600 per bottle. The obvious result is that low-income people who purchase less expensive brands will usually face a higher effective tax rate than their wealthier neighbors.

Admittedly, Maine has taken more initiative to provide health care than most states. This does not change the fact, however, that thousands remain uninsured and many would quickly enroll in the state-subsidized program if funding was to be provided in amounts sufficient to meaningfully raise existing enrollment caps. Next time health care is debated in the Maine legislature, policymakers would do well to make assisting the uninsured, rather than steadfastly avoiding tax increases, the “overarching goal” of their work.