Tax Justice Digest stories about Alabama
The Center on Budget and Policy Priorities recently released a very useful report
summarizing tax expenditure reporting practices in the states, as well
as methods for improving a typical state's tax expenditure report. For
those unfamiliar with the term, a "tax expenditure" is essentially a
special tax break designed to encourage a particular activity or reward
a particular group of taxpayers. Although tax expenditures can in some
cases be an effective means of accomplishing worthwhile goals, they are
also frequently enacted only to satisfy a particular political
constituency, or to allow policymakers to "take action" on an issue
while simultaneously being able to reap the political benefits
associated with cutting taxes.
Tax
expenditure reports are the primary means by which states (and the
federal government) keep track of these provisions. Unfortunately,
most if not all of these reports are plagued by a variety of
inadequacies, such as failing to consider entire groups of tax
expenditures, or not providing frequent and accurate revenue estimates
for these often costly provisions. Shockingly, the CBPP found that
nine states publish no tax expenditure report at all. Those nine
states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming,
undoubtedly have the most work to do on this issue. All states,
however, have substantial room for improvement in their tax expenditure
reporting practices.
For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.
Efforts
to limit or to repeal these deductions -- and to use the additional
revenue to provide tax reductions for low- and moderate-income
taxpayers -- have been underway in two such states. In Alabama, Representative John Knight
has proposed legislation to pare back his state's federal income tax
deduction in order to finance a sales tax exemption for groceries.
Unfortunately, House Republicans may have successfully prevented further consideration of the bill this session, voting en bloc to keep it from coming before the House for debate.
Meanwhile, in
For more on efforts in
The federal income tax deduction takes what is perhaps the best attribute of the federal income tax -- its progressivity -- and uses it to stifle that very attribute at the state level. Since wealthy taxpayers generally pay more in federal taxes than their less well-off counterparts, allowing taxpayers to deduct those taxes from their income for state income tax purposes is a gift to precisely those folks who need it least. And since most state income tax systems possess a degree of progressivity, those better-off taxpayers who face higher marginal tax rates are benefited even more by being able to shield their income from tax via this deduction.
Iowa Governor Chet Culver most recently drew attention to this problem while urging lawmakers this week to end the deduction. The idea has also recently garnered attention in Missouri, where ITEP recently testified on a bill that would, among other changes, eliminate the deduction. Finally, another bill making its way through the Alabama legislature seeks to end the deduction for upper-income Alabamians.
With three of the seven states that still offer this deduction considering its elimination, this is definitely one progressive policy change to keep an eye on.
Despite
their obvious unfairness, tax amnesties are a tool frequently used by
states during tough budgetary times. By waiving late fees and
sometimes reducing the interest rate charged on overdue taxes, state
policymakers can provide their state with a quick band-aid fix without
having to make the much harder choice of raising taxes or cutting
valued services. But penalizing similar taxpayers at different rates
dependent only upon whether they decide to pay up during an amnesty
period is plainly unfair. The problems associated with amnesties
become even worse, however, as soon as a state establishes a habit of
repeatedly offering amnesties during tough economic times.
With
the possibility of another amnesty always on the horizon, delinquent
taxpayers will think twice before settling their debts with the state
during normal times, and at normal penalty rates. Creating multiple
sets of penalties (one for normal times, and one, lower penalty when
budgets shortfalls are projected) therefore reduces fairness by
penalizing similar taxpayers differently based only on the timing of
their payment, and can also reduce the effectiveness of enforcement
efforts and the tax system broadly. These effects can continue long
after the most recent amnesty period ends. (Note that this is very
similar to the argument against
allowing corporations to "repatriate" their profits to the U.S. at a
lower rate, a proposal which was recently rejected at the federal
level).
Despite the obvious problems, Maryland and New Mexico
are both considering legislation to once again provide temporary tax
amnesty programs some time in the coming months. New Mexico last
provided an amnesty less than a decade ago, while Maryland's last
amnesty came in 2001. After that 2001 amnesty, the Maryland
comptroller's office noted that "repeated use of amnesties is likely to
create cynicism among law-abiding taxpayers, and lessen the need for
voluntary compliance with state tax laws, which is vital for our system
of taxation". Should another amnesty be offered less than a decade
after the 2001 amnesty, growth in taxpayer cynicism seems unavoidable,
especially in light of the fact that a similar program offered in 1987
in the state was billed as a "once-in-a-lifetime" opportunity for delinquent payers.
Without a doubt, the momentum in favor of such programs is strong. Alabama is already in the mist of an amnesty period (the state last offered an amnesty in 1984). Massachusetts is currently in the process
of deciding upon a date for its amnesty program (Massachusetts last
provided amnesty in 2003). Connecticut's program is already slated to take effect on May 1st (Connecticut's last amnesty took place in 2002). And Oklahoma just recently closed its most recent amnesty period, just seven years after its 2002 amnesty.
In this environment, it is extremely important for state policymakers
to not only oppose more amnesties, but also to convincingly state that
another amnesty will not be offered any time in the near future. For
states looking to responsibly close their tax gaps, stepping-up
enforcement spending is often a route that can produce sizeable
returns, and is undoubtedly much more fair than trying to get something
for nothing by arbitrarily waiving penalties in an effort to boost
voluntary "compliance". For more specific alternatives to the tax
amnesty approach, take a look at these recent enforcement recommendations from Oregon's Department of Revenue.
As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.
Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include
Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code.
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.
The Alabama House of Representatives this week passed a constitutional amendment that would improve the state’s tax system in three very important ways. Though the vote was contentious, with the amendment gaining only the bare number of votes needed to pass, each of the changes would result in a tax cut for the vast majority of Alabama families and would bring the state tax system closer in line with what most other states have been doing for years.
The centerpiece of the proposal is an elimination of the state’s regressive sales tax on groceries. Alabama is currently one of only two states that provides no tax relief whatsoever for groceries, and a majority of states already exempt groceries completely from the sales tax.
Additional tax cuts would be given to almost all Alabama families by tying the state standard deduction to the larger, federal standard deduction. The personal and dependent exemptions would also be increased, though they would not increase with inflation. The most important impact of these changes would be a reduction or elimination of state income taxes for low-income families, but all Alabama families paying the income tax would see a benefit.
Revenue loss associated with these progressive cuts would be offset by ending the state’s rare and regressive state income tax deduction of federal income taxes paid. The beneficiaries of the existing deduction are primarily those wealthier taxpayers who have the largest federal income tax liabilities. Unfortunately, there are already rumblings that this change may have to be scaled back in order to get the amendment through the full legislature. Instead of entirely repealing the deduction, it may be the case that the deduction is capped at some amount. Though this would preserve the benefits of this proposal for middle-income taxpayers while eliminating huge tax cuts currently being handed to the rich, it would would produce only a fraction of the revenue generated by a full repeal. Without the revenue created by a full repeal, ending the grocery tax and increasing the standard deduction and exemptions would be much more difficult. Additionally, scaling back the deduction for federal income taxes paid may be seen by some as “enough,” and could serve to stall a needed repeal of the entire deduction in the future.
An additional problem for the amendment may be a dispute over whether it was fairly passed. The Alabama legislature has a history of allowing other people to cast legislators’ votes for them when they cannot be in attendance. In this instance, however, there was some question about whether legislators’ votes were cast in the opposite direction from what they intended. One Democratic legislator admitted to voting in favor of the amendment on other legislators’ machines, though after this was discovered a motion to reconsider the bill failed and the passage of the amendment was not reversed.
Ideas are being floated in Alabama and Illinois to address the regressive nature or their tax structures. Proponents of a revenue-neutral plan that has gained some attention in Alabama claim that it would cut taxes or keep them at their current level for 80% of taxpayers, while increasing taxes on only the wealthiest 20% of payers. Since the Alabama tax system is incredibly regressive, this would be a very welcome change.
Under the proposed plan, the income tax would be made more progressive by increasing personal exemptions and standard deductions, at a cost of about $250 million per year. Additionally, the regressivity of the Alabama sales tax would be reduced by exempting groceries. The grocery exemption would bring Alabama closer in line with the overwhelming majority of states, as Alabama is one of only two states that makes no effort to mitigate the regressive effects of the grocery tax. The $550 million price tag attached to these tax cuts would be paid for by eliminating Alabama's regressive tax deduction for federal income taxes paid. Only two other states allow for a full deduction of federal income taxes paid. Eliminating this deduction would increase taxes the most for those wealthiest Alabamians who have the highest federal income tax liabilities.
The reforms proposed in Illinois, and just recently approved by a Senate committee, would result in a net tax increase of about $3.8 billion to be used to fund education, early childhood programs, pensions, health care, and construction projects. Given that Illinois is projected to have budget deficits this year and for years to come, progressive tax increases seem like a very good idea. To ensure tax fairness, revenues would be raised by the most progressive tax available – the income tax. The personal income tax rate would increase from 3% to 5%, and the corporate income tax rate would rise from 4.8% to 8%. Offsetting much of this tax increase would be property tax cuts (a minimum of 20% of the school portion of property tax bills) and income tax credits for low-income families.
Unfortunately, the governors in each of these states are opposed to the plans (primarily to the tax increases for wealthier taxpayers). This means that if tax reform is to occur in 2008, it could be much less progressive than what has been proposed thus far. It's certainly refreshing, however, to see state lawmakers discussing these kinds of relatively major tax overhauls with fairness considerations obviously on the top of their agendas.
