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Estate Tax Proposal Would Partially Extend One of Bush's Tax Cuts for the Wealthy

January 16, 2009 4:26 PM |
On January 9th, Congressman Earl Pomeroy (D-ND) introduced a bill (H.R. 436) to retain the estate tax with a per-spouse exemption of $3.5 million, essentially freezing in place the estate tax rules in effect this year. The Obama campaign has favored a similar approach to dealing with the estate tax.

Under the first tax cut enacted by President Bush in 2001, the estate tax is being phased out gradually. Under current law, if a wealthy person dies in 2009, the first $3.5 million of their estate is not subject to the tax. That exemption was scheduled to increase gradually under the 2001 law, until 2010 when the estate tax is scheduled to disappear completely. Like almost all of the Bush tax cuts, these rules expire at the end of 2010, meaning that the estate tax will return in 2011 and the pre-Bush rules will apply (including a $1 million per-spouse exemption). Congressman Pomeroy's bill would therefore prevent the estate tax from disappearing in 2010, but would constitute a significant tax cut for millionaires in years after that.

In December, Citizens for Tax Justice issued a report using the latest estate tax data from the IRS showing why the Obama/Pomeroy approach would be a huge and unnecessary tax cut for extremely wealthy families. The report found that only 0.7 percent of deaths that occurred in the United States in 2006 resulted in estate tax liability. The per-spouse exemption that year was only $2 million, which means that the estate tax will affect even fewer families with the $3.5 million per-spouse exemption in place.

Rep. Pomeroy's bill would also repeal new "carryover basis" rules scheduled to be effective next year.  Under current law, when you inherit property from an estate, the "basis" of that asset for income tax purposes is stepped up to its fair market value (FMV) on the date of death.  When the estate tax is fully repealed in 2010, the stepped-up basis rules are also scheduled to be repealed.  The new general rule will be that the basis of the property will carry over from the decedent.  (An exception to this rule allows $1.3 million of property to be stepped up to FMV, and an additional $3 million is stepped up if the property is left to a surviving spouse.)  H.R. 436 would repeal the new rules prior to their effective date.

It's true that the new carryover basis rules scheduled to come into effect in 2010 under current law are difficult for taxpayers and administrators.  How can we figure out what Aunt Sarah paid for her G.E. stock that she's had for at least 30 years when we don't even know when she bought it (or if she received it as a gift or inheritance)?  And what if she's been reinvesting dividends all these years (which increase the basis)?  A similar rule was enacted by the Tax Reform Act of 1976, but was repealed before its effective date in 1980 because of the outcry from taxpayers and practitioners about the impossibility of complying with the statute.

The phase-out of the federal estate tax also continues to hurt state treasuries.  Most states base their state inheritance tax on the federal system and many have lost significant revenues because of the federal changes, including the loss of the credit for state estate taxes.  In his budget proposal last week, Gov. Baldacci of Maine included changes to Maine law that would impose a Maine estate tax computed under the pre-2001 federal and state rules.  Gov. Sibelius of Kansas has proposed delaying the state's scheduled elimination of estate taxes.

The State Budget Crisis: Some (Very) Modest Revenue Raising Ideas from Kansas, Oregon, and Massachusetts

January 9, 2009 3:58 PM |

Repeating the familiar mantra that “now is not the time for tax increases”, far too many state policymakers have completely dismissed the idea of raising additional revenue to fill their looming budget shortfalls.  Other lawmakers, however, have at least left some modest revenue raising ideas on the table.  In this piece, we highlight just a few of the ways to boost revenues that have sprung up in states such as Kansas, Oregon, and Massachusetts.

Kansas should be in a somewhat better position than many states, at least politically, when it comes to raising additional revenue.  Before Kansas’ budget fell into such disarray, legislators passed a variety of unwise business tax cuts that have yet to be completely phased in.  Now, with the economy having made a turn for the worst, vulnerable Kansas families are in need of state assistance to weather the storm.  At least one Kansas lawmaker has pointed to freezing the phase-in of these business tax cuts as one possibility for protecting state revenues and the families that rely on them.  Other states in the process of phasing-in tax breaks may want to re-think their priorities before allowing the phase-in to occur.

Oregon's governor has taken things a step further by proposing three concrete, though not terribly progressive or innovative, ways to boost revenue during these desperate times.  First, the Governor would like to raise the state's cigarette tax, a move that many other states have also identified as one of the most politically palatable options available (e.g. Arkansas, Florida, Georgia, Kentucky, Mississippi, South Carolina, Utah, and Virginia).  We've written about the connection between the cigarette tax and budget shortfalls before here.

Second, the Governor is seeking some very minor increases in the gas tax, vehicle registration fees, and title fees in order to pay for transportation.  Though the two cent gas tax increase he's pondering (and some hikes in various vehicle fees) won't fix Oregon's transportation woes, such a move is certainly preferable to pretending there isn't a need for additional revenue.

Finally, the Governor recommends increasing the state's corporate minimum tax.  As was pointed out in the Governor's release, Oregon's corporate minimum tax has not been raised since 1929.  As a result, the minimum tax has ceased to be an effective protection against companies who seek to manipulate the tax code to escape taxation.  But while the Governor's increase in the minimum tax would generate approximately $40 million per year, this would ultimately be only a very minor step toward a better system of corporate taxation.  Fortunately, the Oregon Center for Public Policy has played a leading role in advocating much more meaningful tax solutions in the state, especially in their recent report titled, "Rolling Up Our Sleeves: Building an Oregon that Works for Working Families".

And lastly, a valuable reminder regarding the potential revenue to be had from taxing internet sales surfaced in Massachusetts this week, where the Governor proposed (and significant legislative support has formed around) an idea to tax companies that have agreed to participate in the streamlined sales tax initiative.  Since participation is currently voluntary, such a move is estimated to produce only $15 million per year for the state -- not a huge sum, but it certainly doesn't hurt.  Should a comprehensive internet sales tax plan be passed by the federal government, however, the state could enjoy as much as $545 million in additional annual revenue.  Continuing the forward momentum of the streamlined sales tax initiative could ultimately prove quite valuable in enhancing the sustainability of state revenue systems.

Cigarette Taxes: Another State Seeking the Path of Least Resistance

September 15, 2008 1:24 PM |

Kansas Governor Kathleen Sebelius this week again voiced support for a 50 cent cigarette tax hike, proposing that the revenue be dedicated to expanding health care coverage to more low-income Kansans.  This story should sound familiar, as numerous tax-phobic states in search of ways to pay for popular government services have recently turned to the cigarette tax.

The benefits that a higher cigarette tax would produce in terms of reduced smoking deaths and improved public health are well-documented in the recommendations included in a recent report from the Kansas Health Policy Authority.  But it’s the tension such an arrangement would create between efforts to reduce smoking, and efforts to fund health care, that is controversial.

Arkansas this year attempted to pass a similar cigarette tax hike dedicated to funding a new health trauma system.  South Carolina pursued similar legislation (eventually vetoed by the Governor) that was designed to direct new cigarette tax hike revenues into a popular health-care expansion.

In each of these cases, legislators were seeking to fund vital programs (each of which naturally increases in cost over time) with a revenue source that is sure to decline with time.  South Carolina briefly considered one interesting approach to this problem (indexing the amount of its tax to a measure of medical cost inflation) but that proposal was ultimately dropped from the final bill.

Sustainability issues arise not only from inflation, however, but also from decreases in the popularity of smoking, and increases in the incentives to purchase cigarettes in low-tax areas.  This latter component of the sustainability problem, in particular, has received a good bit of attention as of late.

With cigarette tax rates having increased substantially in many parts of the country, the rewards to smokers associated with shopping in low-tax areas have grown.  A recent study by Howard Chernick entitled “Cigarette Tax Rates and Revenue” found that a 10% increase in the cigarette tax rate of one state can boost the revenue collections of a neighboring state by about 1%.  Maryland provides one stark example of this phenomenon, where a recent tax hike has yielded significantly less than expected as a result of cross-border cigarette purchases and smuggling.  The experience of New Hampshire, however, may suggest that this point has only limited applicability (see next story).

Transportation Funding Ideas Abound, But What Role Should the Gas Tax Play?

June 27, 2008 11:49 AM |
As was discussed in last week’s Digest, adequate transportation funding has been hard to come by for many states as a result of stagnant gas tax revenues and rising transportation infrastructure costs.  This past week, a couple of interesting developments in the transportation finance debate arose out of this nationwide problem.

The first of those developments was a summit held with the cooperation of the National Governor’s Association and the U.S. Department of Transportation.  Though no formal recommendations were made, among the more intriguing revenue-raising ideas to come out of that meeting were an expansion of tolling on new and existing roads, implementing congestion pricing during high-traffic times, and creating a tax on the number of “vehicle miles” one travels.  Each of these provisions would be regressive, requiring low- and middle-income people to pay more of their incomes than their wealthier counterparts, but this could be offset with increases in the overall progressivity of state and federal tax systems.  What makes each of these options most appealing is that they can serve two purposes simultaneously -- providing needed funding for roads while at the same time reducing traffic congestion by placing a “price” on driving.

Slightly less encouraging was the insistence by U.S. Transportation Secretary Mary Peters that the gas tax is essentially outdated and broken and should not be increased to keep up with inflation-driven increases in transportation costs.  Peters’ criticism was that as people consume less fuel by either driving less, switching to mass transit, or purchasing more fuel-efficient vehicles, the gas tax will become increasingly unsustainable.  But with states facing immediate transportation shortfalls that need to be addressed in a matter of weeks and months, not years, such a firm opposition to a gas tax increase seems unwarranted.

The transportation funding debate in many states has recently turned to a competition between increasing the gas tax and increasing the sales tax.  The gas tax, like Peters’ other ideas, asks the most of those people who drive the most, and potentially has some effect on decreasing traffic congestion by adding to the price of driving.  If the gas tax is indexed to inflation, as it is to some extent in Florida and Maine, it can also be a sustainable funding source.  The sales tax, on the other hand, is just as regressive as the gas tax but isn’t at all based on one’s driving habits -- it therefore also has no role in reducing congestion.  It would seem that until her more long-term goals could be enacted, Peters’ should be a staunch supporter of the gas tax as the next best solution.

By contrast, the other big transportation development of the week was a report released by the Kansas Department of Transportation that recommended “protecting [gas tax] revenues from inflation” by continuously adjusting the tax rate.  That report also recommended adding additional tolling as a method for addressing the state’s transportation woes.  But with Kansas facing an immediate transportation funding shortfall estimated at $30 billion over the next 2 decades, an easily implemented solution like a gas tax hike seems like an absolute necessity to any transportation funding package.  Other states that lack the luxury of time would do well to listen to the recommendations out of Kansas and consider adjusting their gas tax rates so that the widening gap between revenues and costs may begin to be bridged.

Unfortunate Sweepstakes

December 14, 2007 1:48 AM |

In Kansas, several school districts are fighting to lure casinos into their boundaries. As the Kansas City Kansan notes, "Each of the five casino proposals on the table would bring different levels of funding to each of the local school districts." These local school districts are lobbying hard for casinos that would add to their their district's property tax base. Millions of dollars in new tax revenue -- as well as millions of dollars in social costs -- could result for the school district "lucky" enough to be the recipient of a new casino. 

Meanwhile, Illinois lawmakers continue to grapple with funding education, construction, and Chicago area public transportation. Some are predicting a financial "doomsday" next year for the state if new revenues aren't created in a hurry. House Speaker Michael Madigan has come out in favor of a plan to increase state gambling to forestall the doomsday. His plan "would put a casino in Chicago, auction off two other licenses, expand existing riverboats and put thousands of slot machines and video poker at horse tracks." Illinois House members are expected back in Springfield on Monday to consider increased gambling. 

Policymakers in both Kansas and Illinois have the opportunity to meet the needs of their residents through progressive and stable means, like income tax reforms. Unfortunately, gambling revenue is not stable over the long term and is certainly a regressive revenue source. Residents in both states lose when gambling proposals like these are on the table.

Border Conflict

August 24, 2007 3:07 PM |
The Monty Python character expressed something that all politicians aspire to when he said, "To boost the British economy I'd tax all foreigners living abroad." Every elected official would prefer that any taxes be paid by someone who can't vote them out of office. It's not any different in Missouri, which recently triggered a war of words with its neighbor, Kansas. 
 
Kansas Governor Kathleen Sebelius is becoming irritated about a seemingly arcane provision in a recent tax bill signed by Missouri Governor Matt Blunt. The provision does what all states would love to do: It raises taxes on people who work in the state but live and vote somewhere else. And for the Kansas residents who work in Kansas City, Missouri, that means their taxes have been raised by people unaccountable to them. 
 
Earlier this year, Governor Blunt signed into law H.B. 444, an ill-advised bill that created a tax break for better off seniors who receive Social Security benefits. Included in this legislation is a provision ensuring that anyone who works in Missouri, but lives out of state will no longer be allowed to write off their out-of-state property taxes if they itemize on their Missouri income tax forms. This means that many workers who live outside of Missouri will pay higher Missouri income taxes. This is a good thing for Missouri, which is struggling to provide adequate health care and education.
 
But if you're a policymaker in neighboring Kansas you'd quickly understand that workers who live in Kansas will actually pay less Kansas income tax because they can claim credits for taxes paid to other states. Governor Sebelius asked Governor Blunt to repeal this provision, which she says amounts to a tax increase on nonresidents.
 

Seeing that shots were being fired at him from the other side of the border, Governor Blunt relented partially and said that he'll support the provision's repeal in the 2008 legislative session. But it's really not clear that the Missouri legislature would relent at all. "What obligation do we have to Kansas people? Why would we want to give them a break on Missouri taxes?" one Missouri legislator said publicly. Kansas Rep. Kenny Wilk, chairman of the House Taxation Committee, is vowing to retaliate unless Missouri acts soon. He said, "Missouri just needs to decide whether they want to do this the hard way or the easy way. We will respond to make sure we recoup all — and plus a bit more — of what we're losing."

How Not to Deal with the Property Tax Issue

August 24, 2007 11:48 AM |

Property tax reform continues to make headlines in several states. Some Indiana property taxpayers are revolting against what they perceive to be an unfair system. Recently more than 3,000 Hoosiers signed post cards addressed to their state policymakers urging them to fix the state's property tax mess permanently. In fact, a legislative commission began hearings last month and Governor Mitch Daniels' appointed blue ribbon commission started work this week. The problems are that taxes are not based on a homeowner's ability to pay and that assessments are executed poorly.

One thought-provoking solution described in the Indianapolis Star is to closely study the property in the state that is not being taxed. Indiana, like most states, exempts nonprofit organizations and religious institutions from paying the property tax. In Marion County alone millions of property tax dollars could be collected if religious institutions paid property taxes. Estimates show there is $2.7 billion in property that goes untaxed in Marion County. Should churches and nonprofit organizations pay property taxes? It's probably the case that no politician in Indiana would seriously propose to tax churches, but the fact that some are contemplating such a move could startle legislators enough to enact real reform.
 
Are Rebates the Answer?
 
Indianans will receive locally-funded property tax rebates this winter, but those rebates aren't being greeted with much enthusiasm. Many question the motives of the legislators who approved these rebates. The Post-Tribune writes that instead of offering credits that would be applied to a homeowner's property tax bill directly, "The General Assembly instead decided property owners should receive checks in the mail, so they can see what their elected officials did for them this year."
 
This week Montana homeowners can begin to apply for a $400 state-funded property tax rebate. The rebates were a highly contested issue in the legislative session as Republicans pushed for permanent property tax cuts instead of the one-time rebates supported by Governor Brian Schweitzer. The Montana rebates shed light on a problematic aspect of property tax rebates and circuit breakers. Because states don't often know how much property tax a homeowner paid, it becomes the homeowner's responsibility to know about and apply for the credit.
 
Itemized Deductions on State Tax Are No Better
 
Another misconceived approach to property tax reform is the itemized exemption for property taxes, which is allowed for most states' income taxes. One problem with this is that in the low- and middle-income families hit hardest by property taxes typically don't itemize. Also, income tax deductions are an "upside-down" tax break, since deductions are worth more to the wealthy taxpayers who typically pay higher income tax rates. If property taxes are problematic for some families, offering a deduction that is largest for the wealthiest and not available at all to many middle-income families is certainly not the solution.
 
In the current skirmish between Missouri and Kansas discussed above, some Missouri legislators have asked why people should be granted such an itemized deduction for property taxes paid in another state (which certainly angers those who pay Missouri income taxes because they work in Missouri, even though they live in and pay property taxes in Kansas). But the better question is why should Missouri allow an itemized deduction for property even if its located in Missouri. The deduction probably does little to help those who could actually use some help. 

Do Retirees Living in Mansions Need Tax Breaks?

March 23, 2007 12:26 PM |

In Kansas two state senators are championing a new amendment to the state constitution that would freeze the assessed value of a home upon the homeowner's sixty-fifth birthday. The intent behind the proposal is a popular one: to help fixed-income seniors struggling with their property tax payments. However, the bill is poorly-targeted. It would help all seniors, including the wealthiest, and not just those struggling to pay their bills. Critics of the measure are starting to line up. Notably, AARP came out against the bill, saying, "It's not that we aren't concerned about older Kansans and their ability to pay property taxes, we just believe property tax relief should be more targeted". Some have suggested that the measure should be tied to the value of the home, so that, for example, only houses valued at less than $200,000 would have their assessed value frozen. Such a move would make the amendment much less expensive to the state, while still helping elderly homeowners.

However, an even better solution would be to expand the current Kansas property tax "circuit breaker" to include people of all ages. A circuit breaker kicks in when property taxes exceed a given percentage of the taxpayer's income, providing targeted relief only to those who need it. Circuit breakers are a cost-efficient way to provide targeted relief to those who need it most. For more information check out the latest report from the Center on Budget and Policies which takes a hard look at circuit breaker programs across the country.

Multi-State Focus: Senior Tax Cuts

February 2, 2007 12:30 PM |
Legislators in Missouri, Kansas, and Georgia are debating reducing taxes on seniors in their state. Lawmakers in Missouri and Kansas introduced legislation that would eliminate income taxes on Social Security benefits. On the surface, eliminating taxes on Social Security sounds like a wonderful idea. However, only a handful of states levy a tax on Social Security benefits and the Social Security Administration estimates that nationally about a third of current beneficiaries pay federal taxes on their benefits. Those who stand to gain the most from these proposals are better off seniors.
 
An ITEP analysis of the Missouri bill found that 72 percent of Missourians would receive no benefit from the proposal. Also, the bill carries a price tag of $100 million and the cost is likely to increase as Missourians age. For more on the Missouri proposal read the testimony presented by ITEP staff to the Missouri House of Representatives' Tax Reform Committee.

The Peach State already exempts Social Security benefits from their income tax and offers generous retirement income exclusions (totaling $35,000 of retirement income in 2009). But recently Governor Purdue introduced legislation that would completely eliminate tax on retirement income for Georgians 65 and over. Instead of turning to these poorly targeted tax cuts, legislators would do better to provide tax relief to those state residents with the least ability to pay - regardless of age considerations.

Who Benefits from Tax Breaks for Business?

January 26, 2007 12:36 PM |

Advocates of tax breaks for business typically argue that such tax breaks will benefit workers as companies are more able to expand and invest. The latest study to call this into question comes from the University of Kentucky, which finds that tax breaks don't create as many jobs as previously hoped. The report concludes, "Based on our evidence showing that training incentives are positively related to economic activity in an area, and given that relatively little is spent on this program, the Legislature may want to consider increasing the amount spent on training incentives" rather than more tax breaks.

 
It's also doubtful that tax breaks are very important to the success of businesses themselves. Despite the fact that Kansas business owners named excessive taxation as their biggest concern for the fourth year in a row, nearly half of the businesses surveyed by the Kansas Chamber of Commerce weren't even aware that the Legislature had enacted a six-year, $632 million business tax cut last year. The bill eliminated the state's property tax on new capital investment in business equipment and machinery and went into effect last July. It's difficult to believe that tax breaks could be vital to economic expansion if they're not even noticed by the corporations that benefit most from them.

Gas Tax "Buffer Zone" in Kansas?

September 21, 2006 12:38 PM |

The Kansas legislature's Joint Tax Committee is considering a proposal to create a series of gas tax "buffer zones" around the state's perimeter. Of the four states that share a border with Kansas, only Nebraska currently has a lower gas tax, allegedly prompting some motorists to cross state lines to fill up. The proposed buffer zones would allow any gas station in a "border town" to lower their gas tax to within one cent of that of the neighboring state. These areas are being promoted as a way to capture gas tax revenue that is currently lost to cross-border trade. However, it is likely that these zones will not eliminate the border problem, but instead simply move the lower gas border further inside Kansas.  If these buffer zones become reality, instead of crossing the border to get cheaper gas, Kansans will be able to simply drive into a border town.  

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