Tax Justice Digest stories about Connecticut
Critics of progressive income tax increases like to suggest that such changes will only spur the wealthy to pack up and head to more tax-friendly climes like, say, Wyoming or South Dakota. Yet, as ITEP observed earlier this week, at least three of the states that turned to income tax increases during the last fiscal crisis (
Under
these circumstances, the best way to eliminate state budget deficits is
through tax increases on upper-income individuals and families, as such
changes would reduce consumer demand the least. Three states in the
northeast --
In the Nutmeg State, budget deficits are projected to total $8.7 billion over the next two years. In response, the Assembly's Finance Committee approved legislation that, among other changes, would add four new income tax brackets, with rates ranging from 6 percent to 7.95 percent, all affecting married Connecticuters with incomes over $250,000 annually (and single taxpayers with incomes above $132,500).
Finally, in the
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.
The Center on Budget and Policy Priorities has put out a critical appraisal of the Tax Foundation’s latest rankings of states by their relative state and local tax levels. Due to some methodological changes and recently revised data, some states underwent huge shifts in their ranking (changes of 10 to 15 places were not uncommon) which are not explained by the minor shifts in tax policy that may have taken place within the states. They’ve revised downward their estimates of the overall state and local tax burden by a full percentage point since 2007. They also no longer call 2007 a “25-year high” in state and local tax burdens, now considering the year lower tax than the mid-90s.
If history is any indication, the Tax Foundation’s inconsistent methodology and reliance on early projections without hard data will lead to further rankings revisions in the future. The problem is that when state and national media pick up a juicy story along the lines of, "Your taxes are too high," they don’t report the numbers as estimates or tentative. They report them as fact and don’t report it when figures for previous years are revised. This is problematic because if politicians take the numbers at face-value, they may overreact to the almost certainly flawed numbers that indicate an enormous shift like, “New Jersey edged out New York to become the highest taxed state in 2008” after being ranked 10th for two previous years.
But because the numbers used to derive this conclusion are so preliminary and based on a shifting methodology, no responsible policy analyst would confidently claim that
There are also several more fundamental problems with the Tax Foundation’s ranking scheme. The Tax Foundation attempts to determine the combined tax impact from all states on a given state’s residents. This is different from how most organizations would identify an average tax load, by simply dividing total state and local tax receipts by total income within a state. This is an important distinction because states generally cannot influence tax policy in other states. Also, while the Census Bureau takes two years or more to compile the official data for a given fiscal year, Tax Foundation relies on proxies (such as dividend income to estimate capital gains) to obtain data for a fiscal year that has barely ended. Using such fly-by-night estimates as a basis for ranking states against one another is so unreliable as to provide almost meaningless numbers.
Of course, the most fundamental criticism of the Tax Foundation report is that it lumps all of a state's residents, from the very poorest to the wealthiest, together in one group for purposes of measuring tax levels. As an excellent Birmingham News editorial reminds us, calling Alabama a "low tax" state conceals the harsh reality that it is among the highest-tax states in the nation in its effect on low-income families. As the editorial points out, "[Our tax fairness ranking] is the ranking that most needs to change. "
Earlier this week, the Institute on Taxation and Economic Policy (ITEP) released a brief report using IRS data and revealing that the most unequal states in the country also happen to be states that lack the type of progressive tax provisions that could reduce this inequality and raise badly needed revenue. The most unequal states either don’t have a personal income tax or have one in need of improvement. Consequently, these states are left with tax systems that, on the whole, are unsustainable, inadequate, and unfair over the long-run.
The IRS data show that, in 2006, ten states -- Wyoming, New York, Nevada, Connecticut, Florida, the District of Columbia, California, Massachusetts, Texas, and Illinois -- have greater concentrations of reported income among their very wealthiest residents than the country as a whole. Yet, the tax systems in these states generally ignore that very important reality. Of those ten states, four lack a broad-based personal income tax and three either impose a single, flat rate personal income tax or have a rate structure that all but functions in that manner. Three do use a graduated rate structure, but of these, two have cut income taxes for their most affluent residents substantially over the past two decades.
Given this mismatch, it should not be too surprising that over half of these states face severe or chronic budget shortfalls. After all, the lack of an income tax, the lack of a graduated rate structure, or moves to make the income tax less progressive all mean that a state’s revenue system will not completely reflect the concentration of income among the very wealthy and therefore will not yield as much revenue.
Case in point:
The Connecticut House and Senate each approved a bill early Thursday morning that adds to the state's existing $150 million deficit by cancelling a scheduled increase in the state's tax on wholesale earnings from gasoline sales. Governor Rell is expected to sign the measure. The bill prevents what would have been a 0.5% increase in the petroleum wholesale earnings tax, which industry lobbyists are claiming would have increased prices at the pump by about 5 cents.
Even if the industry's 5 cent figure is taken at face value, few observers are seriously suggesting that this bill will do anything to improve the financial situation of Connecticut families. During the brief debate that occurred earlier this year over a proposed suspension of the 18.4 cent federal gas tax, that plan was heavily criticized for only providing the average driver with a $30 tax cut. The Connecticut bill would save drivers less than a third of that amount, though it would drive state government millions deeper into debt. Despite the fact that this would only provide a negligible tax cut for the average family, one legislator insisted that it is important to "let our citizens know that we are very concerned about what they're up against" - an unsurprising sentiment given that this is an election year. Pure political motives are the only explanation for why a token gas tax cut is so high on lawmakers' agendas despite the existence of a state government deficit and numerous fiscal problems in many Connecticut counties.
But perhaps even more worrisome than cutting taxes in the face of a deficit is that Connecticut lawmakers have decided to play politics with a very serious issue affecting low-income families. Even if Connecticut legislators don't want to fix their state's regressive tax system, there are still much better options for assisting families hurt by high fuel costs. Instead of providing an across-the-board tax cut that benefits both Connecticut's wealthiest, as well as its poorest families, a targeted low-income gas tax credit of the type enacted in Minnesota could have distributed more gas tax relief to lower-income families at a similar cost. Lawmakers need to admit that the most dramatic impact of the recent economic slowdown has been on lower-income families struggling to make ends meet. Until then, more poorly targeted and gimmicky tax cuts of the kind passed in Connecticut can be expected.
Indeed, Meg Gray Wiehe of the North Carolina Budget and
Advocates in Kentucky have long been pushing for the implementation of a state Earned Income Tax Credit (EITC). The EITC is a popular, targeted tax credit that offers assistance to working families. Similar credits have been enacted in 22 states and the District of Columbia. The House Budget Committee passed a bill that would introduce a credit equal to 7.5 percent of the federal EITC, coupled with a broader state estate tax. The bill will now go before the full House.
Policymakers in
The state of
In more low income tax relief news, the Idaho House Revenue and Taxation Committee voted this week to increase the state rebates offered to offset the state's sales tax on groceries. Currently Idaho residents receive a $20 credit as an offset to the sales tax on groceries (more for seniors). The proposal being debated in the House would provide increased and targeted tax relief. For example, the new expanded credit would offer $50 per family member if the family's income is less than $25,000. The value of the rebates would increase each year until the maximum credit of $100 is reached. By 2015 the proposal is expected to cost about $122 million. Read more about options states have to provide targeted tax relief in ITEP's policy brief.
