Tax Justice Digest stories about North Dakota
In each case, the break would not be available for purchasers of older residences, suggesting that these breaks are more of a bailout for developers than they are aid for those in the market to buy a home. And in either case, the proposals still suffer from many of the flaws with the federal break -- such as their potential to re-inflate home prices, and the fact that these breaks won't provide homebuyers with any cash at the time of purchase.
For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.
This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)
Read the report.
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.
Of course, not every idea floated during these tough fiscal times is worth adoption or even consideration. Some are just downright bad. Take
Similarly, North Dakota Governor John Hoeven, as part of his budget plan for the 2009-2011 biennium, has proposed cutting property taxes by $300 million and income taxes by $100 million. Fiscal circumstances in North Dakota are, to be sure, markedly different than those in New York; after all, the Peace Garden State is one of the few expected to experience a budget surplus by the end of the current fiscal year. Yet, as the Grand Forks Herald recently warned, “oil prices already have plunged, threatening the energy boom that has dramatically boosted the state’s surplus,” suggesting that state legislators should proceed slowly and carefully. Caution certainly seems to be what the voters of
Legislators in
The votes in these three states are especially important given the economic slowdown that is laying waste to state budgets across the country. Massachusetts is already projecting a mid-year budget deficit, while Oregon is projecting a deficit in the next fiscal year. North Dakota, though doing well relative to other states, is unlikely to escape the slowdown without similar budgetary wounds. Given such a difficult environment for state budget-makers, it’s not at all hard to see that tax cuts are the exact opposite of what is needed -- especially if those cuts are targeted overwhelmingly to the rich.
Multiple stories and descriptions of each of these failed measures can be found in the Tax Justice Digest’s Massachusetts, Oregon, and North Dakota archives.
A proposal to be voted on in Oregon seeks to allow taxpayers to deduct (in full) their income tax payments to the federal government for state income tax purposes. Currently, only the first $5,600 one pays to the federal government is allowed to be deducted on Oregon state income tax forms. This arrangement already has regressive results, and by uncapping the deduction limit completely, those wealthy individuals who owe the most in federal income taxes will be allowed to slash their Oregon tax payments substantially.
Though the workings of the Oregon proposal may seem a bit confusing, its results most certainly are not. The vast majority (78 percent) of Oregonian families will get nothing, the wealthiest 1 percent will enjoy a nearly $16,000 annual tax cut, and the government of Oregon will have to make due with between $500 million and $1 billion less in revenues each year. (Six other states, Alabama, Iowa, Louisiana, Missouri, Montana, and North Dakota, currently allow for some deduction of federal income taxes, and they should all end this regressive practice.)
So how are backers of the Oregon proposal justifying this giveaway to the rich? You guessed it. One news account informs us that "[Russ] Walker, Oregon director of the national fiscal conservative group FreedomWorks [and co-sponsor of Measure 59], says the tax reduction would produce a supply-side result of economic expansion with more income and more tax revenue to offset the cut." The argument is that the tax cut will at least increase revenue enough to pay for itself -- the most extreme form of supply-side thinking.
North Dakota voters will also be taking a look at their income tax this fall. Backers of an income tax rate cut are enthusiastically pushing a plan that offers an average tax cut of just $83 to the bottom 60 percent of taxpayers statewide. What's the big deal? The wealthiest 1 percent of North Dakotans would save an average of over $11,000 per year. And those numbers don't even include the corporate income tax cuts, which are sure to also disproportionately benefit the wealthy. And to make matters worse, the proposal would cost the state over $200 million annually.
And how do backers of this measure justify giving away revenue to the rich? Well, if a tax cut simply pays for itself through supply-side magic, backers hope that the practical, common sense folk of North Dakota won't ask such uncomfortable questions. As one news account explains, "Measure 2 proposes to cut income taxes 50 percent and corporate taxes 15 percent, said Duane Sand of the group Americans for Prosperity [the measure's principal backer]. Sand said the state's tax policies have forced young and old to leave the state. The OMB estimates Measure 2 would cut state revenue about $415 million for the next biennium. That money would be replaced by higher tax collections from increased economic activity, Sand said."
A proposal on the ballot in Massachusetts provides perhaps the most obvious example of the recklessness so often involved in anti-tax ballot initiatives. Massachusetts voters will once again have to decide this November on a proposal to constitutionally end the income tax -- a move that would reduce government revenues by a whopping 40 percent, and would undoubtedly have dire consequences in the form of reduced government services. But while all Massachusetts residents would have to share in the pain of a 40 percent reduction in their government's budget, the wealthy would be the primary beneficiaries of the tax cut, since the income tax is the only major progressive tax levied by the state. Even more alarming is the fact that over 45 percent of Massachusetts voters supported a similar measure in 2002.
Now, even supply-siders would have trouble arguing that reducing a tax to zero can result in increased revenues. (Except that apparently the Republicans in the U.S. House of Representative do believe that about the capital gains tax, as we said in a previous article in this Digest).
But backers of the Massachusetts measure do argue, using supply-side logic, that less taxes will result in so much economic growth that no one will feel the loss of public services that would inevitably result.
Carla Howell, chairperson of the group backing the measure (and Libertarian candidate for governor in 2002) says that "In addition to giving each worker an annual average of $3,700, it will take $12.5 billion out of the hands of Beacon Hill politicians -- and put it back into the hands of the men and women who earned it. Every year. In productive, private hands this $12.5 billion a year will create hundreds of thousands of jobs in Massachusetts."
Actually, this proposal to slash state government revenue by 40 percent is so extreme that even business groups cite a report showing just how devastated infrastructure, education and other services would be if this proposal is approved.
So it seems that many states are on the verge of ruining themselves with the narcotic of supply-side tax economics. If these states fail to resist, then what? Rehabilitation is possible, but it's a long and hard road. Colorado is trying to break free of the mess it created a decade ago when taxes and revenues were strictly suppressed by the so-called "Taxpayer Bill of Rights" (TABOR) that was approved by voters. TABOR poses a serious problem given that the cost of government services sometimes increases at a rate greater than general inflation. Also, another amendment to the state's constitution requires regular increases in education spending. Reconciling these two competing demands proved impossible, and in 2005 Colorado voters temporarily suspended a significant portion of the TABOR requirement.
This year, it appears many Coloradans have finally had enough with having to deal with inadequate government services under the unrealistic TABOR requirements. Voters will have the opportunity to decide on Amendment 59, which would end the automatic refunds to taxpayers used to suppress state revenues, in favor of diverting that money toward education. This effort gives hope to those who realize that public services like schools and roads are the building blocks of a state economy, and that to have these services we have to pay for them. It also should serve as a warning to people in other states where supply-siders are promising voters that they can have their cake and eat it too.
The runup to the 2008 elections has given us plenty of reminders of why direct democracy is generally not the best approach to tax reform. In North Dakota, a typo in the language of a proposed tax cut may actually result in a tax increase for some families. In Nevada, the failure of supporters to properly file thousands of signatures in favor of an (ill-conceived) property tax cap resulted in that measure being thrown off the ballot.
But while both of these rather innocent mistakes are undoubtedly serious, neither is as serious as the rampant dishonesty often involved in the signature collection process. In Arizona, for example, a staggering 42% of signatures for a transportation ballot proposal this year were found to be invalid. In North Dakota, though problem wasn't quite as rampant, one signature collector this week was found guilty of faking potentially hundreds of signatures for their regressive income tax cut.
While there may be compelling reasons rooted in democratic theory for allowing citizens to take matters directly into their own hands, it is also important to remember the benefits of representative democracy. A badly written ballot proposal backed by thousands of fraudulent signatures is hardly an improvement over whatever flaws the legislative process may have. The problems with the initiative process illustrate that there are good reasons for having those who we have elected (and whose salaries we pay) writing our laws.
While the process by which the initiative made its way onto the ballot may be troubling, its likely impact, should it make it into law, is even more worrisome. North Dakota voters and policymakers alike may be feeling flush due to an oil-boom-fueled budget surplus, but that surplus won’t be around forever. The enormous tax cut that Measure 2 would engender, well in excess of $100 million per year, would be forever. Moreover, the vast majority of the tax reductions that Measure 2 would spawn would be realized by the very wealthiest North Dakotans -- at a time when the latest data from the Census Bureau show no improvement in income for the typical
States' collective fiscal outlook appears to be quite dim and could get even darker in the months ahead according to a report released this week by the National Conference of State Legislators (NCSL). The report notes that, in the aggregate, states experienced a $40 billion budget gap for fiscal year 2009, a chasm that has been bridged largely through reductions in spending.
Not every state's budget is shrouded in gloom, however. Some states derive significant revenue from severance taxes (taxes imposed on the extraction of natural resources like oil and natural gas) and have economies closely tied to these industries. These states, Louisiana, North Dakota, and Wyoming for example, are enjoying substantial budget surpluses.
Given the volatility of energy markets, these surpluses are likely a temporary phenomenon, but that hasn't stopped states from considering and enacting tax cuts that would permanently reduce revenue. Earlier this year, Louisiana briefly weighed the idea of repealing its income tax altogether, only to settle on an oh-so-modest annual cut of $300 million. North Dakota has not only revived its property tax debate from a few years ago, but may also place on this November's ballot a measure that would slash the personal income tax by 50 percent and the corporate income tax by 15 percent. In this context, a plan backed by West Virginia Republicans to completely exempt groceries from the state sales tax appears far more reasonable in scope - and would certainly help to improve the progressivity of the state's tax system. However, it would still likely leave the
Perhaps the most responsible - and fair - approach to surpluses generated by skyrocketing severance tax revenue comes from New Mexico, where Governor Bill Richardson this past week put forward a proposal to dedicate the majority of the state's projected $400 million surplus to one-time tax rebates and to highway construction.
