- Louisiana is preparing to take a much closer look at the $4 billion it spends on special tax breaks each year, as the brand new Revenue Study Commission holds its first meeting this week. The chairman of the state’s House tax-writing committee admits that “we don’t know” whether Louisiana’s tax breaks are working, even though “some of these things have been on the books for more than 80 years.” Gov. Jindal may be the biggest obstacle to progress on this issue, as he’s said that eliminating an ineffective tax break is technically a “tax hike” that he would veto.
- An op-ed in the Orlando Sentinel highlights the problems with Florida’s tax system, and how to fix them: “Our tax structure is inadequate to our needs, poorly matched with today's economy and unfair to average Floridians and small business owners.” Writing for the Florida Center for Fiscal and Economic Policy, the author urges closing corporate tax loopholes and other special interest tax breaks to begin addressing these problems.
- As we’ve pointed out before, most of Indiana gubernatorial candidate John Gregg’s tax ideas so far have been short-sighted and unaffordable. But Gregg’s newest idea to create a child care tax credit is a good one, as has been recommended (PDF) by the Institute on Taxation and Economic Policy (ITEP).
- The Anniston Star Editorial Board has a numbers-heavy piece explaining the problems with the state’s tax system. In a nutshell: “Alabama may be a low-tax state for people and businesses at the upper end of the income scale, but at the lower end, Alabama’s tax system adds to people’s misery.” ITEP has found that Alabama has one of the ten most regressive state and local tax systems in the country.
Quick Hits in State News: Decades-Old Tax Breaks Getting a Closer Look, Getting Real about Regressivity, and More
A new report from the Political Economy Research Institute at UMass Amherst examines the research on potential responses to states raising taxes on wealthy households. They conclude that while it can lead to tax planning changes among the more affluent, a permanent reasonable tax increase will improve a state’s revenue picture and, contrary to conventional wisdom, will not cause wealthy residents to flee to lower tax states.
Legislation pending in Maryland would require the state to evaluate whether its tax credits are achieving the goals for which they were enacted. The vast majority of states still have no system in place for determining the costs and benefits of tax credits. As in Oregon, the legislation would use sunset provisions (or expiration dates) to force lawmakers to review the evaluations before allocating more funds. The Institute on Taxation and Economic Policy (ITEP) has a policy brief on accountability in tax credits and testified in support of a similar bill in Rhode Island last year.
The grassroots group Alabama Arise is getting positive news coverage for a rally they organized in Montgomery last week calling on lawmakers to exempt groceries from the sales tax and replace the revenue by eliminating a tax break that primarily benefits the wealthiest Alabamians.
In response to Ohio Governor John Kasich’s proposal to cut income taxes (paid for by increased taxes on gas mining) Policy Matters Ohio released a brief showing that Ohioans in the top one percent would get an annual tax cut of about $2,300 while middle income Ohioans ($32,000 to $49,000) would only get about $42. Meantime, the powerful House Finance Chairman, Rep. Ron Amstutz, is postponing action on the Governor’s proposal, saying, “the more the members of our caucus have learned about this particular proposal, the more concerned I’ve become that there are key questions that cannot be sufficiently answered and resolved within the available legislative time frame.”
There are few areas of policy where lawmakers’ shortsightedness is on display as fully as it is with the gasoline tax. Now, with a series of twenty six new charts from the Institute on Taxation and Economic Policy (ITEP), you can see the impact of that shortsightedness in most states as shareable graphs.
Overall, state gas taxes are at historic lows, adjusted for inflation, and most states can expect further declines in the years ahead if lawmakers do not act. Some states, including New Jersey, Iowa, Utah, Alabama, and Alaska, are levying their gas taxes at lower rates than at any time in their history. Other states like Maryland, Oklahoma, Massachusetts, Missouri, Tennessee, Arkansas, and Wyoming will approach or surpass historic lows in the near future if their gas tax rates remain unchanged and inflation continues as expected.
These findings build on a 50-state report from ITEP released last month, called Building a Better Gas Tax. ITEP found that 36 states levy a “fixed-rate” gas tax totally unprepared for the inevitable impact of inflation, and twenty two of those states have gone fifteen years or more without raising their gas taxes. All told, the states are losing over $10 billion in transportation revenue each year that would have been collected if lawmakers had simply planned for inflation the last time they raised their state gas tax rates.
Note for policy wonks: Charts were only made in twenty six states because the other twenty four do not publish sufficient historical data on their gas tax rates. It’s also worth noting that these charts aren’t perfectly apples-to-apples with the Building a Better Gas Tax report, because that report examined the effect of construction cost inflation, whereas these charts had to rely on the general inflation rate (CPI) because most construction cost data only goes back to the 1970’s. Even with that caveat in mind, these charts provide an important long-term look at state gas taxes, and yet another way of analyzing the same glaring problem.
Earlier this week, the Institute on Taxation and Economic Policy released a new report, Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head. The report highlights an unusual tax break that currently exists in only six states (Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon): a state income tax deduction for federal income tax payments. Collectively these states stand to lose over $2.5 billion in tax revenues in 2011 due to these tax breaks, with losses ranging from $45 million to $643 million per state.
Unfortunately, the high price tag of this tax giveaway yields remarkably little benefit to low-and middle-income families. In states where the deduction is uncapped, the best off 1 percent of taxpayers enjoy up to one-third of the benefits from this provision, while the top 20 percent enjoy up to 80 percent of the benefits. Wisely, several states have eliminated or scaled back this expensive and poorly targeted deduction in the last few years. North Dakota, Oklahoma, and Utah have all eliminated the deduction, and Oregon lawmakers voted recently to further limit their deduction.
Deductions for federal income taxes seriously undermine the adequacy and fairness of state income taxes. These deductions also leave state budgets vulnerable to changes in federal tax law. As the recession lingers and states look to enhance their long term fiscal solvency, elected officials in states with a deduction for federal income taxes paid have a real opportunity to close fiscal shortfalls in a way that has minimal impact on low-and middle-income families.
For a review of the most significant state tax actions across the country this year and a preview for what’s to come in 2011, check out ITEP’s new report, The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes.
"Good" actions include progressive or reform-minded changes taken to close large state budget gaps. Eliminating personal income tax giveaways, expanding low-income credits, reinstating the estate tax, broadening the sales tax base, and reforming tax credits are all discussed.
Among the “bad” actions state lawmakers took this year, which either worsened states’ already bleak fiscal outlook or increased taxes on middle-income households, are the repeal of needed tax increases, expanded capital gains tax breaks, and the suspension of property tax relief programs.
“Ugly” changes raised taxes on the low-income families most affected by the economic downturn, drastically reduced state revenues in a poorly targeted manner, or stifled the ability of states and localities to raise needed revenues in the future. Reductions to low-income credits, permanently narrowing the personal income tax base, and new restrictions on the property tax fall into this category.
The report also includes a look at the state tax policy changes — good, bad, and ugly — that did not happen in 2010. Some of the actions not taken would have significantly improved the fairness and adequacy of state tax systems, while others would have decimated state budgets and/or made state tax systems more regressive.
2011 promises to be as difficult a year as 2010 for state tax policy as lawmakers continue to grapple with historic budget shortfalls due to lagging revenues and a high demand for public services. The report ends with a highlight of the state tax policy debates that are likely to play out across the country in the coming year.
Good Jobs First (GJF) released three new resources this week explaining how your state is doing when it comes to letting taxpayers know about the plethora of subsidies being given to private companies. These resources couldn’t be more timely. As GJF’s Executive Director Greg LeRoy explained, “with states being forced to make painful budget decisions, taxpayers expect economic development spending to be fair and transparent.”
The first of these three resources, Show Us The Subsidies, grades each state based on its subsidy disclosure practices. GJF finds that while many states are making real improvements in subsidy disclosure, many others still lag far behind. Illinois, Wisconsin, North Carolina, and Ohio did the best in the country according to GJF, while thirteen states plus DC lack any disclosure at all and therefore earned an “F.” Eighteen additional states earned a “D” or “D-minus.”
While the study includes cash grants, worker training programs, and loan guarantees, much of its focus is on tax code spending, or “tax expenditures.” Interestingly, disclosure of company-specific information appears to be quite common for state-level tax breaks. Despite claims from business lobbyists that tax subsidies must be kept anonymous in order to protect trade secrets, GJF was able to find about 50 examples of tax credits, across about two dozen states, where company-specific information is released. In response to the business lobby, GJF notes that “the sky has not fallen” in these states.
The second tool released by GJF this week, called Subsidy Tracker, is the first national search engine for state economic development subsidies. By pulling together information from online sources, offline sources, and Freedom of Information Act requests, GJF has managed to create a searchable database covering more than 43,000 subsidy awards from 124 programs in 27 states. Subsidy Tracker puts information that used to be difficult to find, nearly impossible to search through, or even previously unavailable, on the Internet all in one convenient location. Tax credits, property tax abatements, cash grants, and numerous other types of subsidies are included in the Subsidy Tracker database.
Finally, GJF also released Accountable USA, a series of webpages for all 50 states, plus DC, that examines each state’s track record when it comes to subsidies. Major “scams,” transparency ratings for key economic development programs, and profiles of a few significant economic development deals are included for each state. Accountable USA also provides a detailed look at state-specific subsidies received by Wal-Mart.
These three resources from Good Jobs First will no doubt prove to be an invaluable resource for state lawmakers, advocates, media, and the general public as states continue their steady march toward improved subsidy disclosure.
ITEP’s new report, Credit Where Credit is (Over) Due, examines four proven state tax reforms that can assist families living in poverty. They include refundable state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits. The report also takes stock of current anti-poverty policies in each of the states and offers suggested policy reforms.
Earlier this month, the US Census Bureau released new data showing that the national poverty rate increased from 13.2 percent to 14.3 percent in 2009. Faced with a slow and unresponsive economy, low-income families are finding it increasingly difficult to find decent jobs that can adequately provide for their families.
Most states have regressive tax systems which exacerbate this situation by imposing higher effective tax rates on low-income families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve economic security. Although state tax policy has so far created an uneven playing field for low-income families, state governments can respond to rising poverty by alleviating some of the economic hardship on low-income families through targeted anti-poverty tax reforms.
One important policy available to lawmakers is the Earned Income Tax Credit (EITC). The credit is widely recognized as an effective anti-poverty strategy, lifting roughly five million people each year above the federal poverty line. Twenty-four states plus the District of Columbia provide state EITCs, modeled on the federal credit, which help to offset the impact of regressive state and local taxes. The report recommends that states with EITCs consider expanding the credit and that other states consider introducing a refundable EITC to help alleviate poverty.
The second policy ITEP describes is property tax "circuit breakers." These programs offer tax credits to homeowners and renters who pay more than a certain percentage of their income in property tax. But the credits are often only available to the elderly or disabled. The report suggests expanding the availability of the credit to include all low-income families.
Next ITEP describes refundable low-income credits, which are a good compliment to state EITCs in part because the EITC is not adequate for older adults and adults without children. Some states have structured their low-income credits to ensure income earners below a certain threshold do not owe income taxes. Other states have designed low-income tax credits to assist in offsetting the impact of general sales taxes or specifically the sales tax on food. The report recommends that lawmakers expand (or create if they don’t already exist) refundable low-income tax credits.
The final anti-poverty strategy that ITEP discusses are child-related tax credits. The new US Census numbers show that one in five children are currently living in poverty. The report recommends consideration of these tax credits, which can be used to offset child care and other expenses for parents.
The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax. But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years. Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford.
In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.
Thirty-one states and the District of Columbia currently allow itemized deductions. The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year. In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor). This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.
"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).
The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction. By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall. This option would raise substantial revenue with which to help states balance their budgets.
Another reform option examined by the report would place a cap on the total value of itemized deductions. Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto. This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).
Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report. This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers. Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.
Finally, two options for phasing-out deductions for high-income earners are examined. One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design. These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.
Read the full report.
And then there were seven. With the enactment of a tax expenditure reporting requirement in Georgia late last week, only seven states in the entire country continue to refuse to publish a tax expenditure report — i.e. a report identifying the plethora of special breaks buried within these states’ tax codes. For the record, the states that are continuing to drag their feet are: Alabama, Alaska, Indiana, Nevada, New Mexico, South Dakota, and Wyoming.
But while the passage of this common sense reform in Georgia is truly exciting news, the version of the legislation that Governor Perdue ultimately signed was watered down significantly from the more robust requirement that had passed the Senate. This chain of events mirrors recent developments in Virginia, where legislation that would have greatly enhanced that state’s existing tax expenditure report met a similar fate.
In more encouraging news, however, legislation related to the disclosure of additional tax expenditure information in Massachusetts and Oklahoma seems to have a real chance of passage this year.
In Georgia, the major news is the Governor’s signing of SB 206 last Thursday. While this would be great news in any state, it’s especially welcome in Georgia, where terrible tax policy has so far been the norm this year.
SB 206 requires that the Governor’s budget include a tax expenditure report covering all taxes collected by the state’s Department of Revenue. The report will include cost estimates for the previous, current, and future fiscal years, as well as information on where to find the tax expenditures in the state’s statutes, and the dates that each provision was enacted and implemented.
Needless to say, this addition to the state’s budget document will greatly enhance lawmakers’ ability to make informed decisions about Georgia’s tax code.
But as great as SB 206 is, the version that originally passed the Senate was even better. Under that legislation, analyses of the purpose, effectiveness, distribution, and administrative issues surrounding each tax expenditure would have been required as well. These requirements (which are, coincidentally, quite similar to those included in New Jersey’s recently enacted but poorly implemented legislation) would have bolstered the value of the report even further.
In Virginia, the story is fairly similar. While Virginia does technically have a tax expenditure report, it focuses on only a small number of sales tax expenditures and leaves the vast majority of the state’s tax code completely unexamined. Fortunately, the non-profit Commonwealth Institute has produced a report providing revenue estimates for many tax expenditures available in the state, but it’s long past time for the state to begin conducting such analyses itself. HB355 — as originally introduced by Delegate David Englin — would have created an outstanding tax expenditure report that revealed not only each tax expenditure’s size, but also its effectiveness and distributional consequences.
Unfortunately, the legislation was greatly watered down before arriving on the Governor’s desk. While the legislation, which the Governor signed last month, will provide some additional information on corporate tax expenditures in the state, it lacks any requirement to disclose the names of companies receiving tax benefits, the number of jobs created as a result of the benefits, and other relevant performance information. The details of HB355 can be found using the search bar on the Virginia General Assembly’s website.
The Massachusetts legislature, by contrast, recently passed legislation disclosing the names of corporate tax credit recipients. While these names are already disclosed for many tax credits offered in the state, the Department of Revenue has resisted making such information public for those credits under its jurisdiction.
While most business groups have predictably resisted the measure, the Medical Device Industry Council has basically shrugged its shoulders and admitted that it probably makes sense to disclose this information. Unfortunately, a Senate provision that would have required the reporting of information regarding the jobs created by these credits was dropped before the legislation passed.
Finally, in Oklahoma, the House recently passed a measure requiring the identities of tax credit recipients to be posted on an existing website designed to disclose state spending information. If ultimately enacted, the information will be made available in a useful, searchable format beginning in 2011.
Alabama's Tax System Redistributes Wealth from the Poor to the Rich -- and Alabama Lawmakers Apparently Like it that Way
Is progressive state tax reform "class warfare?" Alabama Representative Mac Gipson thinks so. House Bill 1 is a revenue-neutral "tax shift" that would eliminate the state grocery tax and fully pay for it by paring back an income tax giveaway for the best-off taxpayers. As House members prepared last week for a floor debate over HB 1, Gipson sputtered, "the whole bill is a redistribution of wealth."
In response to this claim, an ITEP report released earlier this week shows that in fact, the Alabama tax system does redistribute income -- but in exactly the opposite way from what Gipson appears to believe. A regressive tax system actually redistributes income from the poor to the rich -- and Alabama's tax system is one of the most egregious examples of this "Robin Hood in reverse" approach to taxation.
The ITEP report shows that the best-off Alabamians enjoy 19.6 percent of statewide income -- but only pay 11.5 percent of the Alabama taxes falling on Alabamians. Conversely, the poorest 80 percent of Alabamians earned 41 percent of statewide income -- but paid 54 percent of Alabama taxes.
The result? A tax system that actively shifts wealth away from low- and middle-income families to the best off. The top 1 percent of Alabamians enjoy 19.6 percent of income before taxes -- and 20.2 percent of the income after taxes. By contrast, the middle 20 percent of Alabamans have 11.4 percent of statewide income before tax, and 11.1 percent of the income after tax.
The tax shift proposed in HB 1 has been seen before in Alabama: Rep. John Knight has annually sponsored a similar bill for much of the past decade. And Alabama media outlets, laudably, are now familiar enough with the proposal to understand that it would be a major step forward for the state. The state's largest newspaper, the Birmingham News, editorialized strongly in favor of the bill on Thursday, and the second-largest state paper had a virtually identical view.
Unfortunately, editorial boards can't vote on the floor of the House: while more house members voted for it than against it, the 54-to-42 vote was not enough to achieve the three-fifths majority needed for passage, likely signaling the end of the road for progressive tax reform legislation in Alabama this year.
Pro-Tax Rally in Baldwin County, Alabama Provides Glimpse at Oft-Overlooked Side of American Public Opinion
The most dramatic example, of course, is the convincing victory of a variety of progressive tax proposals that were on the Oregon ballot this past January. Another example recently highlighted in the Digest is the support for higher taxes among Utahns demonstrated by recent polling. And of course, there’s the $32 billion in state tax increases that various states’ elected representatives have enacted to help balance state budgets during this current recession.
A recent blurb that ran in the Montgomery Advertiser regarding a pro-tax, pro-education rally in Baldwin County, Alabama (hardly a traditional bastion of “liberal,” “big government” sentiment) provides yet another gentle reminder of the continuing support for government services that persists in the hearts and minds of so many Americans. It may not be as eye-catching as the “tea party” shenanigans, but it represents an equally genuine expression of Americans’ feelings toward government.
Until this week, New Jersey was one of just nine states refusing to publish a tax expenditure report – i.e. a listing and measurement of the special tax breaks offered in the state. Such reports greatly enhance the transparency of state budgets by allowing policymakers and the public to see how the tax system is being used to accomplish various policy objectives.
Now, with Governor Jon Corzine’s signing of A. 2139 this past Tuesday, New Jersey will finally begin to make use of this extremely valuable tool. Beginning with Governor-elect Chris Christie’s FY2011 budget, to be released in March, the New Jersey Governor’s budget proposal now must include a tax expenditure report. The report must be updated each year, and is required to include quite a few very useful pieces of information.
The report must, among other things:
(1) List each state tax expenditure and its objective;
(2) Estimate the revenue lost as a result of the expenditure (for the previous, current, and upcoming fiscal years);
(3) Analyze the groups of persons, corporations, and other entities benefiting from the expenditure;
(4) Evaluate the effect of the expenditure on tax fairness;
(5) Discuss the associated administrative costs;
(6) Determine whether each tax expenditure has been effective in achieving its purpose.
The last criterion listed above is of particular importance. Evaluations of tax expenditure effectiveness are extremely valuable since these programs so often escape scrutiny in the ordinary budgeting and policy processes. Such evaluation can be quite daunting, however, and the Governor’s upcoming tax expenditure report should be carefully scrutinized in order to ensure that these evaluations are sufficiently rigorous. One example of the types of criteria that could be used in a rigorous tax expenditure evaluation can be found in the study mandated by the “tax extenders” package that recently passed the U.S. House of Representatives. For more on the importance of tax expenditure evaluations, and the components of a useful evaluation, see CTJ’s November 2009 report, Judging Tax Expenditures.
Ultimately, New Jersey’s addition to the list of states releasing tax expenditure reports means that only eight states now fail to produce such a report. Those states are: Alabama, Alaska, Georgia, Indiana, Nevada, New Mexico, South Dakota, and Wyoming. Each of these states should follow New Jersey’s lead.
This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.” The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy. The response has been overwhelming.
In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners. It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift. And it helps explain why the state is having trouble keeping up with funding needs for its most vital services. The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”
In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax. Currently, Michigan is among a minority of states levying a flat rate income tax.
Media in Virginia also explained the study’s importance. The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving. A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”
In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.” The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”
In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.” The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.” Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall. Can they also be considered low-tax states for poor families? Far from it.”
Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana. Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.
Alabama’s tax system has long been among the least fair in the nation. Indeed, the latest edition of ITEP’s flagship publication, Who Pays?, indicates that it is the tenth most regressive tax system among the fifty states, as it forces low- and middle-income residents to pay effective tax rates that are roughly twice that faced by the very wealthy.
The sources of such inequities are readily apparent. Alabama is one of just a handful of states that continue to tax groceries, an exceedingly regressive approach to generating revenue. It is also one of just a few states that offer an unlimited deduction, as part of its state income tax, for the federal income taxes that Alabamians pay. Since upper-income individuals and families tend to pay more in federal income taxes, they, by definition, reap the largest windfalls from this deduction, thus subverting the progressive intent of the federal income tax. Repealing both these policies would go a long way towards achieving greater tax fairness in Alabama.
For some time now, Representative John Knight has championed legislation that would do just that – and he appears ready to put forward such a measure in the fast-approaching 2010 legislative session as well. In addition to removing groceries from the sales tax base and eliminating the deduction for federal income taxes paid, the Knight proposal could also raise the level of income at which families begin to pay income taxes in the state, a change that would also help to make Alabama’s tax system more fair. To learn more about the proposal and about tax and budget matters in Alabama, visit Alabama Arise Citizens’ Policy Project.
Who Pays? New ITEP Study Finds State & Local Taxes Hit Poor & Middle Class Far Harder than the Wealthy
Read ITEP's New Report: Who Pays? A Distributional Analysis of Tax Systems in All 50 States
By an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy, according to a new study by the Institute on Taxation & Economic Policy (ITEP).
“In the coming months, lawmakers across the nation will be forced to make difficult decisions about budget-balancing tax changes—which makes it vital to understand who is hit hardest by state and local taxes right now,” said Matthew Gardner, lead author of the study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. “The harsh reality is that most states require their poor and middle-income taxpayers to pay the most taxes as a share of income.”
Nationwide, the study found that middle- and low-income non-elderly families pay much higher shares of their income in state and local taxes than do the very well-off:
-- The average state and local tax rate on the best-off one percent of families is 6.4 percent before accounting for the tax savings from federal itemized deductions. After the federal offset, the effective tax rate on the best off one percent is a mere 5.2 percent.
-- The average tax rate on families in the middle 20 percent of the income spectrum is 9.7 percent before the federal offset and 9.4 percent after—almost twice the effective rate that the richest people pay.
-- The average tax rate on the poorest 20 percent of families is the highest of all. At 10.9 percent, it is more than double the effective rate on the very wealthy.
“Fairness is in the eye of the beholder.” noted Gardner. “But virtually anyone would agree that this upside-down approach to state and local taxes is astonishingly inequitable.”
The “Terrible Ten” Most Regressive Tax Systems
Ten states—Washington, Florida, Tennessee, South Dakota, Texas, Illinois, Michigan, Pennsylvania, Nevada, and Alabama—are particularly regressive. These “Terrible Ten” states ask poor families—those in the bottom 20% of the income scale—to pay almost six times as much of their earnings in taxes as do the wealthy. Middle income families in these states pay up to three-and-a-half times as high a share of their income as the wealthiest families. “Virtually every state has a regressive tax system,” noted Gardner. “But these ten states stand out for the extraordinary degree to which they have shifted the cost of funding public investments to their very poorest residents.”
The report identifies several factors that make these states more regressive than others:
-- The most regressive states generally either do not levy an income tax, or levy the tax at a flat rate;
-- These states typically have an especially high reliance on regressive sales and excise taxes;
-- These states usually do not allow targeted low-income tax credits such as the Earned Income Tax Credit; these tax credits are especially effective in reducing state tax unfairness.
“For lawmakers seeking to make their tax systems less unfair, there is an obvious strategy available,” noted Gardner. “Shifting state and local revenues away from sales and excise taxes, and towards the progressive personal income tax, will make tax systems fairer for low- and middle income families. Conversely, states that choose to balance their budgets by further increasing the general sales tax or cigarette taxes will make their tax systems even more unbalanced and unfair.”
Implications for State Budget Battles in 2010
“In the coming months, many states’ lawmakers will convene to deal with fiscal shortfalls even worse than those they faced last year,” Gardner said. “Lawmakers may choose to close these budget gaps in the same way that they have done all too often in the past—through regressive tax hikes. Or they may decide instead to ask wealthier families to pay tax rates more commensurate with their incomes. In either case, the path that states choose in the upcoming year will have a major impact on the wellbeing of their citizens—and on the fairness of state and local taxes.”
So-called sales tax holidays, normally two- or three-day events that encourage shoppers to purchase back-to-school items tax-free, are bad policy for a variety of reasons. The holidays are poorly targeted, costly, and lull legislators into thinking that they've done something substantial to help reduce the regressivity of sales taxes.
The bottom line is that given the choice between targeted sales tax reform that takes into account one's ability to pay and a three-day sales tax holiday, lawmakers should always opt for targeted reform.
Last weekend a handful of states from Alabama to New Mexico held their sales tax holidays. (The Federation of Tax Administrators keeps a complete list of holidays here.) But because of the recent economic downturn, some legislators and economists are questioning the wisdom of not collecting sales taxes a few days a year.
Former chairman of South Carolina's Board of Economic Advisors Harry Miley certainly has his doubts about the effectiveness of sales tax holidays. He says that shoppers don't need incentives to go back-to-school shopping, and the cost to the state is quite high. He says, "The idea of a tax holiday for essential items doesn’t make any sense to me." For more on why sales tax holidays aren't all they are cracked up to be, see ITEP's Policy Brief.
As we've discussed in recent digest articles, this year saw a flurry of activity in the debate over state deductions for federal income taxes paid. Presently, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of income tax deduction for the federal income taxes they pay. This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they have the greater ability to pay. Proposals to reform the deduction for federal income taxes paid in Alabama and Iowa came up short this year, but state lawmakers are vowing to bring up the issue again next year.
Removing the sales tax on food and offsetting the revenue loss by phasing out the deduction for federal income taxes paid for wealthier Alabamians was the number one priority for Democratic lawmakers, but this week the House came up just one vote shy of the three-fifths needed to debate a bill before the state's budget passes. The bill's sponsor, Representative John Knight, has vowed to bring up the bill again next year and says, "I consider this an economic incentive package for working families of this state."
Lawmakers in Iowa proposed to completely eliminate the deduction and use the revenue generated to fund a reduction in state tax rates. The debate over the proposal was quite heated. According the Des Moines Register, "The debate included a rowdy public hearing where hundreds of Iowans -- most of whom opposed the plan -- were escorted from the House chambers by Iowa State Patrol troopers after they persisted in booing, hissing and applauding speakers." Despite support from the House Speaker Pat Murphy and Senate Majority Leader Michael Gronstal, the legislation didn't have enough support and ultimately wasn't debated in either the House or the Senate. Senator Gronstal is predicting that the legislation will be introduced again next year, saying, "There are times when issues are right but they're not ripe."
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.
At present, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of an income tax deduction for the federal income taxes they pay. This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they still have the greater ability to pay.
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 Iowa, momentum is building for a plan that would repeal the deduction outright while also lowering tax rates across the board and increasing a pair of tax credits. House Speaker Pat Murphy recently voiced his support for the changes and the Senate seems poised to act as well.
We've recently highlighted a variety of progressive revenue raising options gaining serious attention in New York and Wisconsin. This week we bring you yet another idea that's recently been the subject of debate, though this one applies to fewer states. Those seven states still offering income tax deductions for federal taxes paid (i.e. Alabama, Iowa, Missouri, Montana, North Dakota, Louisiana, and Oregon), should immediately repeal, or at the very least dramatically scale back, that deduction.
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 Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.
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. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.
Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.
Progressives have long contested the unfairness of depending on local property taxes for school funding. Property taxes are fundamentally regressive and many localities do not even have the tax base to adequately fund their local school district. But for some jurisdictions the only alternative funding mechanism is sales taxes, which are even more regressive. That means that localities' ability to raise property taxes to fund education is particularly important. Thus, a new court case is challenging Alabama's ultra-low property tax caps which are rooted in the state's archaic 1901 Constitution. Read much more about the case and Alabama's deeply disturbing history of racially motivated tax discrimination on our blog here.
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.
The Alabama House of Representatives this week passed a constitutional amendment that would improve the states 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.
Alabama Governor Bob Riley recently unveiled his legislative agenda which included targeted tax cuts for families with incomes less than $100,000. In his State of the State address delivered on Wednesday Riley said, "Our proposal builds on our earlier tax cut and will make the first $15,000 of income for a family of four tax-free. With this plan, 90 percent of Alabama's families will receive a tax cut."
But as the editorial board at the Tuscaloosa News points out, there are better strategies for making Alabama's tax system less unfair. A plan sponsored by state House member John Knight, and championed by Alabama Arise, would tie the state's low standard deduction to the (much higher) federal deduction amount. This approach is preferable to the Governor's plan not only because it would immediately increase the "no tax floor" for low-income families more than the Riley plan, but also because it would eliminate the state sales tax on groceries and pay for these tax cuts by repealing the state's unlimited deduction for federal income tax payments -- a high-end tax loophole that only two other states allow.
An extensive study of the Michigan Economic Growth Authority's (MEGA) business tax incentives that were distributed between 1996 and 2004 found that incentive programs frequently don't result in the job creation they promise. As the study explains, "since 1996, MEGA has put together 230 incentive agreements. Under these agreements, 127 projects should have produced 35,821 direct jobs by 2005. In fact, these deals have produced about 13,541 jobs, or 38 percent of original expectations. This represents roughly 0.3 percent of Michigan's total work force."
Perhaps Alabama lawmakers hadn't read the MEGA study because they are currently rejoicing in having won a new ThyssenKrup manufacturing facility. What will Alabama get in return? In the short-term, Alabama taxpayers have doled out $461 million in direct financial aid, including land acquisition, site preparation, worker training, and road improvements and an additional $350 million in "abatements of sales, property and utility taxes by state and local governments." But if results like those found in the MEGA study are replicated in Alabama, lawmakers and taxpayers may wish that they hadn't been so generous. For more on this topic, visit Good Jobs First.
Despite a growing consensus that imposing income taxes on families living in poverty is a terrible idea, many states continue to do so. According to a new Center on Budget and Policy Priorities report, " The Impact of State Income Taxes on Low-Income Families in 2006," 19 states collect income taxes on two-parent families of four who live below the federal poverty level. The report discusses some of the options available to states to prevent those in poverty from having to spend their limited resources on income taxes, including state Earned Income Tax Credits (EITCs), no-tax floors, and personal exemptions and standard deductions.
The good news is that states are increasingly seeking to avoid imposing their income tax on those who can least afford to pay it. A promising example of this is in Alabama, where the efforts of Alabama Arise have helped to spearhead state income tax changes that have decreased the income tax on those living in poverty by increasing the income filing threshold used to determine whether income taxes are owed (from an unbelievably low $4,600 to a still egregious $12,600). Although the state still ranks at or near the bottom in terms of the state income tax imposed on its poor, additional reform proposals have been made this year that would further increase the income threshold to $15,600 or $15,800.
Another positive development has occurred in Virginia, where lawmakers recently enacted a law that will raise the state income tax filing threshold from $7,000 to $11,950 for individuals and from $12,000 to $23,900 for couples.
Alabama and Virginia represent two examples of positive developments in decreasing the disproportionate tax imposed on the working poor by nearly every state. An even better solution to this problem would include refundable tax credits, like those found in the federal (and increasingly within state) EITC's.
Last week there were three states offering competing tax incentives for a new ThyssenKrupp steel mill. Now there are two; ThyssenKrupp has taken Arkansas out of the running, leaving Alabama and Louisiana as its final two candidates. In a press release announcing the move, the company explained its rationale for dumping Arkansas: "geological conditions, energy costs and logistical disadvantages." Notably absent from its explanation: tax breaks.
And elected officials in the two remaining states seem to agree that non-tax factors set one state apart. Louisiana Governor Kathleen Blanco boasts and, Alabama Governor Bob Riley openly admits, that Louisiana has geographic advantages that Alabama can't match.
But Riley and some state lawmakers are pushing for a special legislative session later this month that would be devoted entirely to creating a new fund for tax incentives for ThyssenKrupp and other companies the state is currently courting. If this sounds like a devious subversion of market forces, it is ... but Louisiana already did the same thing back in December, creating a $300 million fund to court the steelmaker.
How can states short-circuit this self-destructive competition of tax giveaways? Lessons might be learned from efforts by European Union members to prevent tax competition that distorts market forces, which culminated this week in an EU statement that Switzerland must curb its corporate tax giveaways.
Alabama Governor Bob Riley is once again talking about lowering taxes on working families. But his latest proposal isn't without controversy and comes with quite a price tag. The Governor's proposal includes lowering taxes on families making less than $100,000 annually and eliminating the state income tax on the first $10,000 of retirement income. His plans take five years to fully implement and would cost $205 million. Some in the education community are concerned that these tax cuts will be paid for by cuts to the State's education budget. Questions also remain about whether or not the proposal provides targeted tax relief for Alabama families in need. Let's hope Governor Riley actually does more than talk about tax fairness and finds a way to pay for cuts without harming Alabama's children.
Voters Reject TABOR, Estate Tax Repeal and Regressive Education Funding Proposals; Some Regressive Property Tax Caps and Cigarette Tax Hikes Approved
While the Democratic takeover of the House of Representatives (and apparently also the Senate) on Tuesday has has given new hope to advocates of progressive tax policies at the federal level, the results of ballot initiatives across the country indicate that state tax policy is also headed in a progressive direction.
In the three states where they were on the ballot, voters rejected TABOR proposals, which involve artificial tax and spending caps that would cut services drastically over several years. Washington State defeated repeal of its estate tax. Several states also rejected initiatives to increase school funding which, while based on the best intentions, were not responsible fiscal policy. Two of four ballot proposals to hike cigarette taxes were approved and the night also brought a mixed bag of results for property tax caps.
Taxpayer Bill of Rights (TABOR):
Maine - Question 1 - FAILED
Nebraska - Initiative 423 - FAILED
Oregon - Measure 48 - FAILED
Voters in three states soundly rejected tax- and spending-cap proposals modeled after Colorado's so-called "Taxpayers Bill of Rights" (TABOR). Apparently people in these three states had too many concerns over the damage caused by TABOR in Colorado. Property Tax
Arizona - Proposition 101 - PASSED - tightening existing caps on growth in local property tax levies.
Georgia - Referendum D - PASSED - exempting seniors at all income levels from the statewide property tax (a small part of overall Georgia property taxes. (The Georgia Budget and Policy Institute evaluates this idea here.)
South Carolina - Amendment Question 4 - PASSED - capping growth of properties' assessed value for tax purposes. The State newspaper explains why the cap would be counterproductive.
South Dakota - Amendment D - FAILED - capping the allowable growth in taxable value for homes, taking a page from California's Proposition 13 playbook. (The Aberdeen American News explains why this is bad policy here - and asks tough questions about whether lawmakers have shirked their duties by shunting this complicated decision off to voters.)
Tennessee - Amendment 2 - PASSED - allowing (but not requiring) local governments to enact senior-citizens property tax freezes.
Arizona's property tax limit will restrict property tax growth for all taxpayers in a given district. South Dakota's proposal was fortunately defeated. It would have offered help only to families whose property is rapidly becoming more valuable, and those families are rarely the neediest. Georgia's is not targeted at those who need help but would give tax cuts to seniors at all income levels. The Tennesse initiative, which passed, is a reasonable tool for localities to use, at their option, to target help towards those seniors who need it.
Cigarette Tax Increase:
Arizona - Proposition 203 - PASSED - increase in cigarette tax from $1.18 to $1.98 to fund early education and childrens' health screenings.
California - Proposition 86 - FAILED - increasing the cigarette tax by $2.60 a pack to pay for health care (from $.87 to $3.47)
Missouri - Amendment 3 - FAILED - increasing cigarette tax from 17 cents to 97 cents
South Dakota - Initiated Measure 2 - PASSED - increasing cigarette tax from 53 cents to $1.53. While many progressive activists and organizations support raising cigarette taxes to fund worthy services and projects, the cigarette tax is essentially regressive and is an unreliable revenue source since it is shrinking.
State Estate Tax Repeal:
Washington - Initiative 920 - FAILED
Complementing the heated debate over the federal estate tax has been this lesser noticed debate over Washington Stats's own estate tax which funds smaller classroom size, assistance for low-income students and other education purposes. Washingtonians decided it was a tax worth keeping.
Revenue for Education:
Alabama - Amendment 2 - PASSED - requiring that every school district in the state provide at least 10 mills of property tax for local schools.
California - Proposition 88 - FAILED - would impose a regressive "parcel tax" of $50 on each parcel of property in the state to help fund education
Idaho - Proposition 1 - FAILED - requiring the legislature to spend an additional $220 million a year on education - and requiring the legislature to come up with an (unidentified) revenue stream to pay for it.
Michigan - Proposal 5 - FAILED - mandating annual increases in state education spending, tied to inflation - but without specifying a funding source. The Michigan League for Human Services explains why this is a bad idea.
Voters made wise choices on education spending. The initiative in California would have raised revenue in a regressive way, while the initiatives in Idaho and Michigan sought to increase education spending without providing any revenue source. Alabama's Amendment 2 takes an approach that is both responsible and progressive.
Oregon - Measure 41 - FAILED - creating an alternative method of calculating state income taxes. Measure 41 was an ill-conceived proposal to allow wealthier Oregonians the option of claiming the same personal exemptions allowed under federal tax rules and would have bypassed a majority of Oregon seniors and would offer little to most low-income Oregonians of all ages.
Other Ballot Measures:
California - Proposition 87 - FAILED - would impose a tax on oil production and use all the revenue to reduce the state's reliance on fossil fuels and encourage the use of renewable energy
California - Proposition 89 - FAILED - using a corporate income tax hike to provide public funding for elections
South Dakota - Initiated Measure 7 - FAILED - repealing the state's video lottery - proceeds of which are used to cut local property taxes
South Dakota - Initiated Measure 8 - FAILED - repealing 4 percent tax on cell phone users.
The all-important first step towards an equitable property tax is figuring out how much each home and business is actually worth. To do this perfectly, a tax assessor would need to visually inspect the inside and outside of every home... which, of course, no one actually does. But as a recent New York Times article notes, governments from Philadelphia to Florida are now relying on computerized aerial images (taken from a small plane) to detect changes in the outside appearance of homes and businesses. A Philadelphia tax administrator notes that the computerized system, which costs the city about $100,000 a year, "probably paid for itself within about two weeks." Assessment by low-flying planes may seem intrusive, but at the end of the day this is how the property tax is supposed to work. This approach is in stark contrast to the head-in-the-sand approach to property tax administration proposed by Alabama Democratic gubernatorial candidate Lucy Baxley, who has proposed ending the annual reassessment of Alabama homes.
A New York Times article reports that for many homeowners, property taxes are growing much faster than income. New Jersey Governor Jon Corzine blames this trend on the property tax being "imposed without any regard to income or ability to pay." This isn't quite true, of course: a well-administered property tax will be based on a homeowner's actual home value, which is a decent, if imperfect, measure of ability to pay for most people. And for lower-income families, an income-sensitive circuit-breaker credit can make the property tax even more responsive to ability to pay considerations. Unfortunately, state lawmakers typically respond to rising property values by freezing or capping assessed values, which further warps the relationship between property taxes and ability to pay. A gubernatorial candidate in Alabama wants to put an end to a recently adopted reform requiring annual reassessment of properties, and at least one county in South Carolina has taken the step of throwing out the results of its most recent reassessment. The likely outcome of this misguided tax deform is a tax shift away from homes that are appreciating rapidly and toward homes whose values are stagnant or declining. Facing a localized home-value boom of its own, Mississippi policymakers are discussing imposing another, equally misguided approach: capping the allowable annual growth in homeowner property taxes. Find out more about why tax caps are counterproductive here.
Sales tax holidays are growing in popularity this year with four more states, Alabama, Maryland, Tennessee and Virginia, joining nine others and the District of Columbia in waiving sales and use taxes for a limited time during July and August. To see a list of participating states and tax holiday dates, click here.As ITEP staff told USA Today earlier this week, "This tax break makes sense for lawmakers because it's cheap and avoids real reform." State legislatures claim that tax holidays alleviate the tax burden on working families and jump-start local retail businesses. In reality, however, sales tax holidays are a political gimmick that probably helps consumers less than proponents claim.