Thirty-five years ago today, California voters passed an initiative that would change the fiscal trajectory of their great state for decades: Proposition 13.

Championed by two citizen-activists with a politically popular message, but ill-conceived vision for California’s fiscal future, Proposition 13 cut and capped the state’s property tax at one percent and allowed for assessed property values to rise by no more than 2 percent per year. Stripping localities of their primary ability to raise revenues, the initiative changed how public services like K-12 education, police and fire protection, road and bridge upkeep, and water and sewers would be paid for.

Many proponents of Proposition 13 were individual homeowners who saw housing prices grow rapidly throughout the 1970s. Because California property taxes were assessed at market value, rapidly growing housing prices were causing property tax liabilities to grow in matching fashion. As Bruce Bartlett recently wrote in the New York Times, “Many Californians were literally being taxed out of their homes.” (Proposition 13 was a poorly targeted response to this problem because research has shown time and again that sensible options exist that wouldn’t involve capping property taxes). Additional supporters included those who believed the initiative would shrink the size of government - a mentality that went on to cause what commonly referred to as the “national tax revolt.”

Thirty-five years later, Proposition 13 is still in full effect. How has the 1978 ballot initiative fared? Well, after years of fiscal crises, several of the country’s largest municipal bankruptcies, deteriorated spending on public education (PDF) at both the state and local level, and increased reliance on the very regressive sales tax, Proposition 13 didn’t have exactly the impact its advocates had hoped for.

Proposition 13’s shortfalls are becoming increasingly clear, particularly in how it has shifted revenue collection (and spending power) from local governments to the state. Take K-12 education, for example. According to the California Budget Project (CBP)  (PDF), “Passage of Proposition 13 in 1978 fundamentally changed how schools receive their dollars,” by significantly shifting their revenue source from the local level to the state level. Alone, this shift shouldn’t have affected schools negatively, but state lawmakers engaged in poor fiscal stewardship throughout the 1990s and 2000s (primarily in the form of tax cuts, spending cuts, and a weak rainy day fund) and generally failed to fund schools as well as local governments previously did. CBP writes, “State cuts to education combined with California schools’ substantial reliance on state dollars explains the widening gap between the resources available to California schools and those of the rest of the US.”

William Fulton and Paul Shigley, experts on Proposition 13 and editors of the California Planning & Development Report, who summarize this dilemma by saying:

“In the old days, property taxes were high, but at least you could have a debate at your local city hall about how much they would be increased and what the money would be used for. No more.”

In addition to this shift in responsibility, Proposition 13 has shifted the property tax burden away from commercial property owners and onto residential homeowners. This shift has taken place due to a loophole which allows companies to avoid reassessments when properties change hands, allowing them to pay taxes on assessed land values from years (and in some cases decades) ago. This practice is termed the “Dell Tax Maneuver,” after Michael Dell, who has avoided paying more than one million dollars a year in property taxes on a piece of commercial property he bought in 2006, but which is still taxed at its 1999 assessed value.

In May, Assemblyman Tom Ammiano (D-San Francisco) introduced AB 188, a bill that would keep residential homeowners under Proposition 13’s umbrella, but would force business owners to pay property tax based on a more realistic assessment of their property’s value. While the bill stalled in committee and most likely won’t be heard again until next year, it is a step in the right direction – and the public seems to agree.

According to a new survey (PDF) conducted by the non-partisan Public Policy Institute of California, a majority of voters – regardless of political affiliation – support splitting the property tax roll.

This movement is significant. It signals that after thirty-five years of wreaking fiscal havoc on the state, both the political climate and public opinion are such that change to Proposition 13 is possible.

Colorado lawmakers recently decided to enact a pair of poverty-fighting tax policies: an Earned Income Tax Credit (EITC) and a Child Tax Credit (CTC). Both had been on the state’s books at some point but had either been eliminated or were often unavailable. The EITC, equal to 10 percent of the federal credit, will become a permanent feature of Colorado’s tax code once state revenue growth improves – likely not until 2016. Similarly, the CTC will not take effect until the federal government enacts legislation empowering Colorado to collect the sales taxes due on online shopping.

Kansas legislative leadership and Governor Brownback are in the midst of secret meetings to discuss how the House and Senate will reconcile their varying tax plans. The largest sticking point is whether or not to allow a temporary increase in the state’s sales tax rate to expire. But the larger issue, that is getting less attention, is that (as ITEP’s recent analysis points out) both the House and Senate plans could eventually phase out the state’s income tax altogether.

The Rockefeller Institute is warning (PDF) states and the federal government not to get too excited about the recent “surge” in income tax revenues. Rather than indicating an economic recovery, the surge is likely a result of investors realizing their capital gains a few months earlier than usual in order to avoid the higher federal tax rates that went into effect on January 1st. As the Institute points out: “over the longer term, this could be bad news — it could mean that accelerated money received now, used to pay current bills, will not be there to pay for services in the future.”

California is one state enjoying a sizeable revenue surplus this year. The state’s Legislative Analyst’s Office understands that a good portion of the bump is thanks to rich Californians cashing in on capital gains in 2012 to avoid higher federal tax rates in 2013. Yet as budget season kicks off, lawmakers are sure to be at odds over exactly what to do with the more than $4 billion in unanticipated revenues they will have to either spend or save.  

Here’s an excellent editorial from the Wisconsin State Journal urging Governor Scott Walker and the legislature to be wise about a projected uptick in revenues and invest any “surplus” in public schools, which have endured cuts in recent years. “Our editorial board is less convinced a showy income tax cut makes sense. Up is certainly better than down when it comes to revenue predictions. But some caution is required.” It seems that the Governor may not heed this caution, however, as he appears poised to propose an expansion of his current income tax cut proposal.

Here’s some happy news: a recent poll finds that just 27 percent of Louisianans support Governor Bobby Jindal’s tax swap, and that’s before the Institute on Taxation and Economic Policy (ITEP) released its latest analysis showing that the poorest 60 percent of taxpayers in Louisiana would see a tax hike as a result of the Governor’s plan.

A robotics company based in Nevada recently decided to abandon the state’s allegedly “business friendly” environment in favor of Silicon Valley in California, where there are better trained employees and plenty of deep pocketed investors. Nevada does not levy a personal or corporate income tax, but as Romotive founder Keller Rinaudo explains: "It was not a short-term economic decision ... We have to find experienced roboticists, and that really only exists in a few places in the world, and California is one of them."

Maryland’s gas tax will be increased and reformed starting July 1 under a bill just sent to Governor Martin O’Malley by the state’s legislature.  This year’s increase will be something less than 4 cents per gallon, but the tax will now rise each year alongside inflation and gas prices, as recommended by ITEP. ITEP showed that even with the increase, Maryland’s gas tax rate will still remain below its historical average and be less than the state probably needs.

Here’s an interesting story in the Minnesota Star Tribune about how Governor Dayton’s tax plan would impact the wealthiest Minnesotans. While opponents resort to the usual tax-hikes-kill-jobs refrain, Wayne Cox of Minnesotans for Tax Justice notes, “Economists believe keeping teachers and firefighters on the payroll is at least three times more helpful to the economy than keeping income tax rates at the top the same.”

Tax cuts for opposite ends of the income spectrum are getting opposite treatment in Maine and Arkansas. This week, Maine lawmakers rejected a bill that would cut taxes on capital gains (which heavily benefits wealthy taxpayers) and approved an increase in the state’s Earned Income Tax Credit (EITC) (PDF), which amounts to a tax cut to low- and moderate-income families. But last week in Arkansas, a House panel approved a cut in taxes on capital gains while passing up an opportunity to enact a state EITC.

This week the Supreme Court heard arguments on two cases looking at the constitutionality of same-sex marriage. Specifically, the cases were about measures that ban recognition of gay marriage by the federal government and the state of California. At the federal level, the Court heard about the Defense of Marriage Act (DOMA), which bans the recognition of a same-sex marriage and entails over 1,100 different laws that consider marriage status when determining an individual’s rights and responsibilities.  And some of those laws determine how much that individual owes in taxes.

The discriminatory effect of the DOMA, which was signed into law in 1996, in tax law is at the center of United States v. Windsor. The original petitioner in the case, Edith Windsor, was forced to pay $363,000 more in federal estate taxes because under DOMA, her same-sex marriage is not recognized for tax purposes and thus is not eligible for the “surviving spouse” estate tax exemption available to heterosexual spouses. If the Supreme Court rules in favor of Windsor and declares DOMA unconstitutional, it would mean that same-sex marriages will be recognized by the federal government for all purposes, including taxes.

While such a ruling would have a relatively small impact in terms of the estate tax since almost no one pays it, there are many other federal tax provisions that do affect most married couples. The New York Times, for example, points to the fact that DOMA prevents same-sex spousal health benefits from being treated as a tax-exempt benefit, therefore increasing the tax bill of individual same-sex couples by a few thousand dollars each year. 

Perhaps the most widespread tax impact would be on same-sex spouses who are not currently allowed to file their federal tax returns jointly. According to an analysis by CNN and tax experts, some same-sex spouses may currently be paying as much as $6,000 in extra taxes each year because of DOMA. While many same-sex spouses could receive a substantial tax benefit from filing jointly, they could also end up paying more in taxes due to the infamous marriage penalty, depending on each spouse’s level of income.

There is also a larger fiscal effect to consider. A 2004 Congressional Budget Office (CBO) report (PDF) estimated that federal recognition of same-sex marriage would actually reduce the deficit by roughly $450 million each year, through a combination of higher revenues and lower outlays. In other words, ruling DOMA unconstitutional would not only end same-sex marriage discrimination in the tax code and other parts of federal law, but would also have the bonus effect of slightly reducing the deficit.

Actor John Cleese, most famous for his central role in the British comedy group Monty Python, has decided to move back to Great Britain from Monaco, after concluding that the tax benefits of moving to the tax haven last year were not worth it after all. The actor’s return to Great Britain provides a high profile counterpoint to the false narrative that “high” taxes are driving wealthy people to migrate to low-tax jurisdictions, like Florida in the United States, or like Monaco, Russia or Bermuda for the globe trotting set.

The quest for a lower tax rate has not proven to be as much of a factor for wealthy individuals as anti-tax advocates would have you believe. Several studies confirm this, including a recent academic analysis based on actual tax returns that concludes the effect of tax rates on migration is “negligible” between the different tax jurisdictions in the United States.

What anti-tax advocates ignore is the fact that taxes actually play a very small role in an individual’s decision where to live, especially compared to factors like employment opportunities, family and friends, housing and even weather. In addition, lower taxes may actually discourage migration if they result in lower quality government services (a well-funded Ministry of Silly Walks  maybe especially close to John Cleese’s heart for example). What wealthy person wants to move to a jurisdiction with poor public schools, dirty streets and parks, and inadequate law enforcement?

The real lesson is that non-tax benefits of living in a location usually outweigh higher taxes, even in cases where the individual could save substantial sums of money by moving elsewhere. A recent case in point? The billionaire hedge-fund manager John Paulson’s decision not to move to Puerto Rico, despite the fact that doing so would have allowed him to avoid billions of dollars in capital gains taxes. In other words, Paulson has indicated that he’d just as soon keep paying billions more in taxes for the advantages of living in New York City. Colorful anecdotes and threats aside, the holy grail of tax codes ends up being the one that allows for a quality of life worthy of millionaires – and everybody else.

This weekend, Professional Golf Hall of Fame member Phil Mickelson hinted that he might move from California, and even expatriate to Canada, because of recent tax increases on the wealthy in his home state.  Aside from the fact that he would face higher taxes in Canada, if his tax rate is such a concern, Mickelson might consider Myanmar or Chad whose citizens enjoy some of the lowest tax rates in the world.

Many have been critical of Mr. Mickelson’s comments, since he is the 7^th wealthiest athlete in the world, and yesterday he walked them back. “Finances & taxes are a personal matter and I should not have made my opinions on them public. I apologize to those I have upset.” 

We tried to guess which of his corporate sponsors was most upset by the remarks and persuaded their 50-million dollar man to quit talking about taxes and issue the apology.  The pharmaceutical giant, Amgen, perhaps, which is uniquely skilled at dodging taxes by parking its profits in tax havens?  Or maybe it was Exxon Mobil, which has found ways to pay less than half the U.S. corporate tax rate in recent years.  Most ironic would be accounting behemoth KPMG, whose job is to help multinationals and high wealth individuals reduce their tax bills year after year.  Mickelson’s message that there are some tax increases you just can’t avoid can’t be good for business.

During his walk-back, Mickelson also said he was still learning about the new tax laws.  He might also want to brush up on his math, too, because he said his combined state and federal tax rate is 62 or 63 percent.  But with the highest average combined tax rate on the very wealthiest Americans hovering around 30 percent, that’s not likely.  Maybe that’s why it’s so very rare that Americans move to lower to their tax rates, once they understand how they work.

Local governments in Ohio have taken tremendous fiscal hits in recent years and now many are resorting to the ballot box to close their budget gaps. Next week Ohio voters will be voting on 194 school levies, including 123 for additional funding. According to the Columbus Dispatch this is “the highest percentage of new tax issues in a general election in at least the past decade.” Recently, the state cut aid to local governments from by more than a billion dollars and then eliminated the state’s estate tax, a key revenue source for cities and towns which brought in $230 million to local government coffers in 2010, for example.  Wendy Patton with Policy Matters Ohio wrote earlier this summer, “Gov. John Kasich and the General Assembly pushed the fiscal crisis down to local schools and communities.”  

Ohio is not the only state where local governments are turning to voters this year to approve new revenue in the wake of state aid reductions.  More than 1000  local governments across the country in more than a dozen states have tax or fee related questions on their November 6 ballots.

California voters will not only have to decide on two competing statewide tax increase measures, but will also likely face similar decisions at the local level.  Hundreds of measures will appear on local ballots including sales tax increases, school parcel taxes, and hotel tax hikes.  The revenue raised from these initiatives will be used for everything from schools to police and fire services to the upkeep of parks.

There’s been a lot of good research these past few years debunking claims that state taxes – particularly income taxes on the rich – send wealthy taxpayers fleeing from “unfriendly” states.  CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP), took a lead role in disproving those claims in Maryland (PDF), New York, and Oregon (PDF), for example. CTJ has also been covering the controversy in several states and in the media.

Some particularly thorough research on this topic has come out of New Jersey, where researchers at Princeton and Stanford Universities were granted access to actual tax return data, which is not available to the public, in order to investigate the issue in more detail. The resulting paper (PDF) found a “negligible” impact of higher taxes on the migration patterns of the wealthy.

And now, for the further benefit of lawmakers seeking to become better informed about tax policy, those same Princeton and Stanford researchers were recently granted access to similar confidential taxpayer data in California. Unsurprisingly, the findings of their newest paper (PDF) were similar to those out of New Jersey: “the highest-income Californians were less likely to leave the state after the [2005] millionaire tax was passed… [and] the 1996 tax cuts on high incomes … had no consistent effect on migration.”

That’s right.  California millionaires actually became less interested in leaving the state after the tax rate on incomes over $1 million rose by one percentage point starting in 2005.

Another important finding: migration is only a very small piece of what determines the size of a state’s millionaire population.  “At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population,” they explain.  The other 98.8 percent is due to yearly fluctuations in rich taxpayers’ income that moves them above or below the $1 million mark.  

This finding (which is not entirely new) defeats the very logic that anti-tax activists use to argue their “millionaire migration” case. Here’s more from the researchers:

“Most people who earn $1 million or more are having an unusually good year. Income for these individuals was notably lower in years past, and will decline in future years as well. A representative “millionaire” will only have a handful of years in the $1 million + tax bracket. The somewhat temporary nature of very-high earnings is one reason why the tax changes examined here generate no observable tax flight. It is difficult to migrate away from an unusually good year of income.”

But for every new piece of serious research on this issue, there are just as many bogus studies purporting to show the opposite.  Of particular note is a September “study” from the Manhattan Institute, recently torn apart by Sacramento Bee columnist Dan Walters.

Somewhat surprisingly for a right-wing organization’s study of this topic, the Manhattan Institute report actually concedes that other variables, things like population density, economic cycles, housing prices and even inadequate government spending on transportation, can motivate people to leave one state for another.  But while the Institute doesn’t claim that every ex-Californian left because of taxes, regulations, and unions, it does, predictably, assign these factors an outsized role. But their “analysis” of the impact of taxes spans just six paragraphs and is, in essence, nothing more than an evidence-free assertion that low taxes are the reason some former Californians favor states like Texas, Nevada, Arizona – even, oddly, Oregon, where income tax rates are similar to California’s.

Obviously, the guys looking at the actual tax returns have a better idea of what’s actually going on, and state lawmakers need to listen.

California is not the only state this election season taking taxing decisions directly to the people on November 6.  The stakes will be high for state tax policy on Election Day in nine other states with tax-related issues on the ballot. With a couple of exceptions, these ballot measures would make state taxes less fair or less adequate (or both).

Arizona

• Proposition 204 would make permanent the one percentage point sales tax increase originally approved by voters in 2010.  The increase would provide much-needed revenue for education, particularly in light of the worsened budget outlook created by a flurry of recent tax cuts.  But it’s hard not to be disappointed that the only revenue-raising option on the table is the regressive sales tax (PDF), at a time when the state’s wealthiest investors and businesses are being showered with tax cuts.

• Proposition 117 would stop a home’s taxable assessed value from rising by more than five percent in any given year.  As our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains (PDF), “Assessed value caps are most valuable for taxpayers whose homes are appreciating most rapidly, but will provide no tax relief at all for homeowners whose home values are stagnant or declining. As a result, assessed value caps can shift the distribution of property taxes away from rapidly appreciating properties and towards properties experiencing slow or negative growth in value - many of which are likely owned by low-income families.”

Arkansas

• Issue #1 is a constitutional amendment that would allow for a temporary increase in the state’s sales tax to pay for large-scale transportation needs like highways, bridges, and county roads. If approved, the state’s sales tax rate would increase from 6 to 6.5 percent for approximately ten years, or as long as it takes to repay the $1.3 billion in bonds issued for the relevant transportation projects. Issue #1 would also permanently dedicate one cent of the state’s 21.5 percent gas tax (or about $20 million annually) to the State Aid Street Fund for city street construction and improvements. It’s no wonder the state is looking to increase funding for transportation projects. ITEP reports that Arkansas hasn’t increased its gas tax is ten years, and that the tax has lost 24 percent of its value during that time due to normal increases in construction costs. Governor Beebe is supporting the proposal, and his Lieutenant Governor Mark Darr recently said, “No one hates taxes more than me; however, one of the primary functions of government is to build roads and infrastructure and this act does just that. My two primary reasons for supporting Ballot Issue #1 are the 40,000 non-government jobs that will be created and/or protected and the relief of heavy traffic congestion.”

California

• For a detailed description of two competing revenue raising ballot measures in California, read California Voters to Choose Which Tax Proposals Will Pay for Schools on November 6

• Thus far overshadowed by the competing Prop 30 and 38 revenue raising proposals, Proposition 39 would close a $1 billion corporate tax loophole that Governor Brown and other lawmakers have tried, but failed to end via the legislative process.  Currently, multi-national corporations doing business in California are allowed to choose the method for apportioning their profits to the state that results in the lowest tax bill.  If Prop 39 passes, all corporations would have to follow the single-sales factor apportionment (PDF) method.  Half of the revenue raised from the change would go towards clean energy efforts while the other half would go into the general fund.

Florida

• Amendment 3 would create a Colorado-style TABOR (or “Taxpayer Bill of Rights”) limit on revenue growth, based on an arbitrary formula that does not accurately reflect the growing cost of public services over time.  As the Center on Budget and Policy Priorities (CBPP) explains, Amendment 3 is ““wolf in sheep’s clothing” because it would phase in over several years, which obscures the severe long-term damage it would cause.  Once its revenue losses started, however, they would grow quickly. To illustrate its potential harm, we calculate that if the measure took full effect today rather than several years from now, it would cost the state more than $11 billion in just ten years.” The Orlando Sentinel's editorial board urged a No vote this week writing that voters “shouldn't risk starving schools and other core government responsibilities that are essential to competing for jobs and building a better future in Florida.”

• Amendment 4 would put a variety of costly property tax changes into Florida’s constitution, including most notably an assessment cap (PDF) for businesses and non-residents that would give both groups large tax cuts whenever their properties increase rapidly in value.  Moreover, as the Center on Budget and Policy Priorities (CBPP) explains, “Amendment 4’s biggest likely beneficiaries would be large corporations headquartered in other states, with out-of-state owners and shareholders,” including companies like Disney and Hilton hotels.

Michigan

• Proposal 5 would enshrine a “supermajority rule” in Michigan’s constitution, requiring two-thirds approval of each legislative chamber before any tax break or giveaway could be eliminated, or before any tax rate could be raised.  As we explained recently, the many flaws associated with handcuffing Michigan’s elected representatives in this way have led to a large amount of opposition from some surprising corners, including the state’s largest business groups and its anti-tax governor. Republican Governor Rick Snyder wrote an op-ed in the Lansing State Journal opposing the measure saying it was a recipe for gridlock and the triumph of special interests. Proposal 5 is also bankrolled by one man to protect his own business interests.

Missouri

• Proposition B would increase the state’s cigarette tax by 73 cents to 90 cents a pack. The state’s current 17 cent tax is the lowest in the country.  Increasing the state’s tobacco taxes would generate between $283 million to $423 million annually. The Kansas City Star has come out in favor of Proposition B saying, “It’s not often a single vote can make a state smarter, healthier and more prosperous. But Missourians have the chance to achieve all of those things on Nov. 6 by voting yes on Proposition B.”

New Hampshire

• Question 1 would amend New Hampshire’s constitution to permanently ban a personal income tax.  The Granite State is already among the nine states without a broad based personal income tax and proponents want to ensure that will remain the case forever. As Jeff McLynch with the New Hampshire Fiscal Policy Institute explains, a Yes vote would mean that “you’d limit the choices available to future policymakers for dealing with any circumstances, and by extension, you’re limiting choices for future voters.”

Oklahoma

• State Question 758 would tighten an ill-advised property tax cap (PDF) even further, preventing taxable home values from rising more than three percent per year regardless of what’s happening in the housing market.  As the Oklahoma Policy Institute explains, “Oklahomans living in poor communities, rural areas, and small towns would get little to no benefit, since their home values will not increase nearly as much as homes in wealthy, suburban communities.”  And since many localities are likely to turn to property tax rate hikes to pick up the slack caused by this erosion of their tax base, those Oklahomans in poorer areas could actually end up paying more.  

• State Question 766 would provide a costly exemption for certain corporations’ intangible property, like mineral interests, trademarks, and software.  If enacted, the biggest beneficiaries would include utility companies like AT&T, as well as a handful of airlines and railroads.  The Oklahoma Policy Institute explains that the exemption, which would mostly impact local governments, would have to be paid for with some combinations of cuts to school spending and property tax hikes on homeowners and small businesses.  And the impact could be big.  As one OK Policy guest blogger explains: “In 1975, intangible assets comprised around 2 percent of the net asset book value of S&P 500 companies; by 2005, it was over 40 percent, and the trend is likely to continue. If SQ 766 passes, Oklahoma will find itself increasingly limited in its ability to tax properties.”

Oregon

• Measure 84 would gradually repeal Oregon’s estate and inheritance tax (PDF) and allow tax-free property transfers between family members.  If the measure passes, Oregon would lose $120 million from the estate tax, its most progressive source of revenue.   According to many legal interpretations of the measure, the second component - referring to inter-family transfers of property - would likely open a new egregious loophole allowing individuals to avoid capital gains taxes (PDF) on the sale of land and stock by simply selling property to family members.  Oregon’s Legislative Revenue Office released a report last week that showed 5 to 25 percent of capital gains revenue could be lost as a result of the measuring passing. The same report also found no evidence for the claim that estate tax repeal is some kind of millionaire magnet that increases the number of wealthy taxpayers in a state.

• Measure 79, backed by the real estate industry, constitutionally bans real estate transfer taxes and fees.  However, taxes and fees on the transfer of real estate in Oregon are essentially nonexistent, prompting opponents to refer to the measure as a “solution in search of a problem.”

• Measure 85 would eliminate Oregon’s “corporate kicker” refund program which provides a rebate to corporate income taxpayers when total state corporate income tax revenue collections exceed the forecast by two or more percent. Instead of kicking back that revenue to corporations, the excess above collections would go to the state’s General Fund to support K-12 education. Supporters of this measure acknowledge that a Yes vote will not send buckets of money to schools right away since the kicker has rarely been activated.  But, it is a much needed tax reform that will help stabilize education funding and peak interest in getting rid of the Beaver State’s more problematic personal income tax kicker.

South Dakota

• Initiative Measure #15 would raise the state’s sales tax by one cent, from 4 to 5 percent. The additional revenue raised would be split between two funding priorities: Medicaid and K-12 public schools. As a former South Dakota teacher writes, “[w]hile education and Medicaid are important, higher sales tax would raise the cost of living permanently for everyone, hitting struggling households the hardest, to the detriment of both education and health.”  This tax increase is the only revenue-raising measure on the horizon right now; South Dakotans deserve better choices.

Washington

• Initiative 1185 would require a supermajority of the legislature or a vote of the people to raise revenue. A similar ballot initiative, I-1053, was already determined to be unconstitutional. As the Washington Budget and Policy Center notes about this so called “son of 1053” initiative:  “Limiting our state lawmakers with the supermajority requirement is irresponsible, and serves only  to limit future opportunity for all Washington residents.”

In November, California voters will decide on two not-so-different revenue raising ballot measures.  Proposition 30, backed by Governor Jerry Brown, temporarily raises income taxes on the state’s wealthiest taxpayers and increases the sales tax by a quarter cent.  The rival measure, Proposition 38, temporarily raises personal income tax rates on all taxable income upwards of about $50,000.  Californians can technically vote for both measures on the ballot, but even if both “win” only the one with the most votes will become law, so voters must choose carefully.

Both measures would raise billions of dollars in much needed revenue for education spending, primarily from the wealthiest Californians. An Institute on Taxation and Economic Policy (ITEP) analysis published by the California Budget Project found that the wealthiest one percent of Californians, with incomes averaging $532,000, would pay for close to 80 percent of the tax increase under Proposition 30 and around 45 percent under Proposition 38.  

As ITEP’s Meg Wiehe explained it to the San Francisco Chronicle recently, the big question for voters is not so much a tax fairness one but more about “'where do I want the money to go?  They both have very different end goals with the amount of money raised.”

California is one of a dozen or so states handicapped by a law that says a supermajority of lawmakers must approve of any tax changes. (Just as invoking the filibuster rule requires 60 votes to get anything done in the U.S. Senate, and we’ve all seen how well that works!) Facing a multi-billion dollar budget gap, Governor Jerry Brown first tried to raise revenues via the normal legislative process, but was stopped short of the two-thirds support needed. So he turned to the ballot process – and the people – to get the revenue increase the state needed.  The revenue from Proposition 30 would go into a new Education Protection Account in the state’s General Fund, increasing funding for K-12 and community colleges and freeing up other general fund dollars to address other spending priorities.  Importantly, Brown also built $6 billion of trigger cuts into his FY12-13 budget if Proposition 30 does not pass in November.  In other words, the governor’s budget was built on the premise that the revenue from his measure would be available and if it loses, naturally spending would have to be reduced by that amount mid-year.

All revenues from Proposition 38 would go directly to K-12 schools and only K-12 schools. None of the revenue could be spent on any other budget priorities since it can only supplement rather than supplant current spending on K-12 education; however, about a third of the funds can be used to reduce state debt. Even with the billions of dollars in new revenue Proposition 38 would bring to the Golden State, if it gets more votes than Proposition 30, $6 billion in spending cuts would automatically go into effect as per the Governor’s budget, forcing reductions in vital programs such as community colleges, universities, corrections and others. 

In large part due to this one striking difference between the two measures – that Proposition 30 would prevent devastating spending cuts and Proposition 38 would not – both the LA Times and the San Francisco Chronicle have endorsed Proposition 30.

It’s worth mentioning that some opponents of both measures have hauled out the millionaire migration canard, suggesting California’s wealthiest residents will flee if asked to pay higher taxes. But as ITEP’s Carl Davis explained to the Silicon Valley Mercury News, "There just isn't any persuasive evidence out there to make you think that there would be a significant number of Californians moving because of this tax change.” In fact, the newspaper’s own analysis found that over the past 15 years, the share of the country’s ultra rich living in California has gone unchanged, even with a series of temporary tax increases and a new millionaire’s tax in 2004.

For more detail on who would pay for each of the ballot initiatives, ITEP’s analysis can be found in three California Budget Project reports: What Would Proposition 30 Mean for California?, What Would Proposition 38 Mean for California?, and How do Propositions 30 and 38 Compare?

The Olympics may be over, but some US lawmakers are still competing for the lousy tax policy medal. Weeks after Florida Senator Marco Rubio proposed—and President Barack Obama endorsed—a bill to exempt US Olympians’ gold-medal bonuses from federal income tax, a California Senate Committee approved a plan last week to exempt these bonuses from the state’s income tax.  

An unusually pointed Senate Governance and Finance Committee staff analysis of the bill, however, noted that “the measure is the exact opposite of sound tax policy” and tartly suggested that “[t]he Committee may wish to consider whether running afoul of good tax policy is worth the bill's kind gesture.”

The staff analysis also pointed out that, like the federal legislation that inspired it, the California bill could inadvertently exempt from tax not just the $25,000 bonus Kobe Bryant will receive from his basketball gold medal, but also Olympics-related compensation he might receive from advertisers and sponsors.

Seemingly undeterred by this analysis, the Senate Committee initially approved the bill by a 5 to 1 vote last week, but its sponsor couldn’t get it past the Appropriations Committee for a full vote. He has said he will add amendments and try again.

As we’ve noted previously, the trivial cost of this measure does not change the fact that it would add one more brick to the wall of tax complexity. Meaningful tax reform requires weeding out special tax breaks for privileged groups rather than adding them; any politician who knows this and endorses an Olympic winnings tax exemption is engaging in political opportunism of hypocritical proportions.

Months after cutting the state income tax for wealthy taxpayers, Idaho’s budget situation isn’t looking good.  The Associated Press reports that “earlier this year it looked like the state had sufficient revenue to provide a $36 million tax cut, as well as give state employees a 2 percent raise” but that surplus has already evaporated. In fact, there was never real consensus about the state’s revenue projections in the first place.

Kansas Governor Sam Brownback admits his radical tax cut package is a “real live experiment.”

The South Carolina House approved a measure to keep the state running if it doesn’t have a budget by July 1 when the new fiscal year begins.  The Senate and House are currently bickering over how to implement a (regressive) tax cut for so-called "small" business owners.

It’s back! New Jersey Assembly Democrats are once again planning to introduce a millionaire’s tax into the budget debate.  Proponents of the tax on the wealthiest New Jerseyans want to use the $800 million in revenue it would raise to boost funding to the state’s current property tax credit program for low and middle-income homeowners and renters.  Governor Chris Christie has already vetoed a millionaire’s tax twice. 

The clever folks at Together NC, a coalition of more than 120 organizations in North Carolina, held a Backwards Budget 5K race this week to “to shine a spotlight on the legislature’s backwards approach to the state budget.” 

California Governor Jerry Brown’s revenue raising initiative (which temporarily raises income taxes on the state’s wealthiest residents and increases the sales tax ¼ cent) has officially qualified for the state’s November ballot. Two additional tax measures will join Brown’s plan on the ballot: a rival income tax measure pushed by a billionaire lawyer to fund education and early childhood programs; and an initiative to increase business income tax revenues by implementing a mandatory single-sales factor (PDF backgrounder) formula.

The Pittsburgh Post-Gazette editorializes in favor of capping Pennsylvania’s “vendor discount,” a program (PDF) that allows retailers to legally pocket a portion of the sales taxes they collect in order to offset the costs associated with collecting the tax.  The Gazette explains that a handful of big companies are taking in over $1 million per year thanks to this “antiquated” giveaway.  Computerized bookkeeping takes the effort out of tax collecting and a cap would only impact the national chain stores who disproportionately benefit from the program.

Facebook® co-founder Eduardo Saverin is facing mounting public scorn for renouncing his US citizenship, presumably to save some tax money (which he says is not the case). There are even two US Senators after him! He left in September but the pile-on is happening this week because of Facebook’s Initial Public Offering (IPO) of its stock: Saverin’s share will be worth somewhere in the neighborhood of $4 billion.

Saving Capital Gains Taxes
If Eduardo Saverin were a US citizen and sold his stock, most of that income would be subject to special low rate capital gains taxes of 15 percent (or 20 percent in future years if the new rate goes into effect January 1 as scheduled). By renouncing his citizenship, Saverin avoids paying those current and future capital gains taxes (and he would never have to pay the full income tax rate that Facebook employees exercising their stock options will be paying), but he does have to pay an "exit tax" (see below). Saverin now lives in Singapore, which doesn’t have a capital gains tax. 

Lowering the “Exit Tax”
When wealthy Americans give up their citizenship, they must pay an “exit tax” which treats all of their assets as if they’d been sold for fair market value (the actual tax payment can be deferred until the assets are sold). The fair market value of publicly-traded stock is what it traded for that day; privately-held stock must be appraised.

A spokesman for Saverin said that he renounced his citizenship last September, well ahead of this week’s Facebook IPO. Therefore, the stock’s valuation for “exit tax” purposes was likely substantially below its expected $38 IPO value, allowing Saverin to reduce his exit tax cost.

Not Tax, But Financial Decision
According to a spokesman, Saverin is expatriating for financial, not tax reasons. He doesn’t mind paying tax, he says, he just dislikes the complicated rules. He claims that the US rules, like the recently enacted Foreign Account Tax Compliance Act (FATCA), are preventing him from making some foreign investments he’d like to make.

Why It Feels Like Treason
Saverin emigrated to the US with his family at age 13 when his name turned up on a list of potential kidnap victims in his native Brazil where criminal gangs target the children of wealthy citizens and hold them for ransom. In the US, not only was Saverin safe from such violence, but he benefited enormously from government investment in education, the court system, and the Internet. Would he be a billionaire today if his family had relocated somewhere else?

Farhad Manjoo, a fellow immigrant, wrote a brilliant post (one of many, including this one) on the IT blog PandoDaily about what Eduardo Saverin owes America (nearly everything) including, quite possibly, his life. Taxes are the least of it.

In February, we noted that Facebook® will get huge federal and state income tax refunds and pay no tax for years to come because of an absurd tax break related to the stock options it granted to employees.

When employees exercise their stock options, they pay income tax on the difference between what they paid for the stock (its exercise price) and its fair market value (what it’s trading for). The employer, meanwhile, gets a tax deduction equal to the amount of that difference their employees report – even though the employer isn’t actually out any cash.

This week we have a vivid example of why this deduction makes no sense, and why Senator Carl Levin wants to see this loophole closed, too.

In February, Facebook estimated its tax deduction for the stock options it gave its employees to be $7.5 billion, based on the price of its soon-to-be publicly offered shares. But with its IPO price going up and up, the company has revised its estimated tax deduction. In documents filed with the SEC on May 15, Facebook now estimates the employee stock options that will be exercised in connection with the IPO will result in tax deductions for the company of $16 billion – more than twice their initial estimate!  This massive deduction will cost the federal and state governments about $6.4 billion in lost tax revenue.

The stock option loophole overall will cost the US treasury and taxpayers $25 billion over the next ten years. Surely there’s a better use of that money than making Mark Zuckerberg richer.

Photo of Facebook Logo via Dull Hunk Creative Commons Attribution License 2.0

The history of states subsidizing professional sports stadiums with taxpayer dollars is long and, increasingly, controversial. Maryland provided nearly one hundred percent of the financing for the Orioles’ and Ravens’ shiny new facilities in the 1990s. In 2006, the District of Columbia subsidized the Washington Nationals’ new stadium at a cost to taxpayers of about $700 million.  And even though most stadiums are, in the long run, economic washes at best, losers at worst, there are still politicians willing to throw money at them.

Minnesota legislators, for example, are currently grappling with how to fund a new stadium for the Vikings in response to threats that the franchise may leave the state.  But before the legislature gives away nearly a billion dollars, State Senator John Marty raises some excellent points about the math, and morals, behind the proposed taxpayer subsidies for the stadium:

“The legislation would provide public money in an amount equivalent to a $77.30 per ticket subsidy for each of the 65,000 seats at every Vikings home game. That's $77 in taxpayer funds for each ticket, at every game, including preseason ones, for the next 30 years.… Public funds can create construction jobs, but those projects should serve a public purpose, constructing public facilities, not subsidizing private business investors. The need to employ construction workers is not an excuse to subsidize wealthy business owners, especially when there is such great need for public infrastructure work.” 

In  Louisiana, the House of Representatives has gone ahead and approved a ten-year, $36 million tax subsidy  to keep the state’s NBA team, the Hornets, in New Orleans until 2024. Some are asking if the state can really afford it given a $211 million budget gap.  Representative Sam Jones noted that while the state has cut health and education spending, it still found a way to come up with millions of dollars to help out the ”wealthiest man in the state.” That would be Tom Benson, owner of not only the Hornets but the legendary New Orleans Saints football team, whose net worth is $1.1 billion dollars.

In California, however, a different scenario is unfolding. Sacramento Mayor Kevin Johnson just abandoned negotiations with owners of the city’s NBA team, the Kings.  The Kings organization was unwilling to put up any collateral, share any pre-development costs, or commit to a more than a 15 year contract; this would have left the city shouldering all the costs – and all the risks – for developing the $391 million downtown facility.  Mayor Johnson said he’d offered everything he could to the team and it still wasn’t enough, so he pulled the plug. 

Given the high cost and low return (including in terms of jobs) that sports facilities generate, more leaders should follow Minnesota’s Marty and Sacramento’s Johnson and stand up for the taxpayers who pay their salaries.

(Thanks to Field of Schemes and Good Jobs First for keeping tabs on these subsidies!)

While the sale of online coupons for local merchants boomed in 2011 – Living Social sold $750 million and Groupon sold an astounding $1.62 billion in online coupons last year – state governments are still trying to play catch up and figure out how to ensure these sales are taxed fairly.

The central question facing the states is whether a state or local sales tax should be applied on the cost of the online coupon, or on the face value of the coupon, meaning the list price of the product for which the coupon is being redeemed. For example, if you were to buy a Groupon for $25 that allows you to purchase $50 worth of books at a local bookstore, the question is whether sales tax should be assessed on $25 (the cost of the coupon) or $50 (the face value of the coupon). Whatever the amount, the tax could be collected either at the time of coupon purchase or product purchase.

As Forbes’ Janet Novack reports, right now states are treating online coupons for sales tax purposes differently, or in many cases don’t even have a definitive answer to this question. For example, New York requires that sales tax be collected by retailers on the full face value of the items purchased with coupons, but only in the case where the coupons are for a specific dollar amount of spending. California, by contrast, only applies the sales tax to the price paid for the coupon itself in any case.

So why isn’t Groupon itself collecting sales tax on the original coupon purchase, rather than having the tax collected by the merchant?  After all, it’s reasonable to compare their service to the one provided by  Expedia, Orbitz, Priceline and other travel sites who sell discount hotel rooms, as should be done in our view. The difference is that online coupon sites consider what they do to be advertising and, in fact, it’s part of Groupon’s contract with merchants that merchants handle all the taxes. Discount travel sites are more properly reselling those hotel rooms.

A promising development is that 24 states who collaborate in the Streamlined Sales and Use Tax Agreement, which grapples with state sales tax issues, are moving to tackle the coupon question head on by surveying member states and putting out model policy for all states, possibly as soon as May. The Streamlined Sales Tax Governing Board, of course, faces a difficult task because it’s a brave new world of e-commerce.  While there is more than one good way to solve the problem – as states like New York and California have shown – states need to act sooner rather than later.

Photo of Movie Ticket Groupon via Groupon Creative Commons Attribution License 2.0

Published in the Sacramento Bee, February 17, 2012

With jobs front and center in most voters' minds, politicians seeking to cut or repeal personal income taxes are marketing their proposals as tools for boosting the economy. Recently, some have sought to bolster this claim by asserting that states without income taxes are experiencing a real economic boom, and by promising that the boom can be recreated in any state smart enough to join the no-tax club.

My organization was skeptical of these claims, so we decided to take a closer look at one of the most prominent studies, cited by the governors of Kansas and Oklahoma, among others. It turns out that the study was done by a consulting firm headed by economist Arthur Laffer, perhaps best known as a longtime spokesman of a supply-side economic theory that George H.W. Bush once called "voodoo economics" because of its bizarre insistence that tax cuts often lead to higher revenues.

In kicking the tires on the study's findings, we paid particular attention to the same 18 states it includes: the nine without income taxes, and the nine with the highest top income tax rates.laf But while Laffer chose to focus on clumsy aggregate data (more on that later), we took a look at three of the most important and widely recognized measures of economic success: growth in economic output per person, growth in median income levels, and the unemployment rate. The results we found were very different than Laffer's.

In terms of the first two measures - economic output per person and median income levels - the nine states without income taxes are actually lagging behind the nine states with the highest top income tax rates, and most no-tax states are actually doing worse than the national average. On the third measure, the unemployment rate, it turns out that no-tax states and "high tax rate" states are essentially neck and neck, which will no doubt shock lawmakers promising that an improved job climate will come hot on the heels of income tax repeal.

We also found that on all three measures, some of the states most frequently disparaged by the tax cut true believers - including Maryland, Hawaii and Vermont - managed to best not only no-tax idol Texas but also most of the other eight states "unburdened" by a personal income tax.

So how was Laffer able to reach the opposite conclusion, and in the process generate a wave of assertions that states without income taxes are booming? It turns out that the aggregate numbers he picked - designed to measure the total size of an economy and its workforce - are heavily influenced by shifts in population. These shifts, in turn, are driven by a slew of factors Laffer fails to control for, like the housing market, population density, birth rates, immigration and even climate. And since most no-tax states happen to be located in the growing south and western regions of the country, they tend to have a lot of these factors working in their favor.

Laffer also makes no effort to account for the tremendous natural resource advantages enjoyed by many no-tax states. The two best performing states, according to Laffer, also happen to be the two states most dependent on mining: Alaska and Wyoming. But one would be hard pressed to find a serious analyst in either state willing to attribute their recent growth to the lack of an income tax.

The bottom line is this: no-tax states aren't booming, and lawmakers should not expect their states' economies to improve if they join the no-tax or low-tax club. In fact, in terms of the economic factors that matter most to families - income levels, and whether or not they can find a job - the states with the highest top income tax rates are, in most cases, doing better than the no-tax states. If the economy is really the concern of lawmakers railing against the income tax, it's time for them to put away Arthur Laffer's tax cut snake oil.

ABOUT THE WRITER

Carl Davis is a senior analyst at the Institute on Taxation and Economic Policy, 1616 P Street NW, Suite 200, Washington, D.C. 20036; website: www.itepnet.org.

This essay is available to McClatchy-Tribune News Service subscribers. McClatchy-Tribune did not subsidize the writing of this column; the opinions are those of the writer and do not necessarily represent the views of McClatchy-Tribune or its editors.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

Oklahoma’s Governor Mary Fallin finally unveiled her plan for eliminating the state income tax.  Full elimination would take a number of years, but low-income families are likely to be hit hard right away when various refundable credits are repealed.  The Institute on Taxation and Economic Policy (ITEP) plans to conduct a full analysis as soon as sufficient details are made available.

One Michigan lawmaker wants to take money away from Medicaid, education, and other programs to cover the cost of maintaining the state’s roads – costs that the state’s long stagnant gas tax can’t keep up with.  This is not the only such proposal to redirect money to cover up for lawmakers who lack the political courage to raise their state’s gas tax. Nebraska, Utah, Wisconsin, Virginia, and Oklahoma have proposed or enacted similar raids that ITEP warned of in its recent report, Building a Better Gas Tax.

The Colorado legislature is debating a boondoggle of a bill which would create a sales tax holiday the first weekend in August.  The facts are getting out that these events are expensive and don’t benefit the people who need them most.

The Virginia-Pilot has an excellent editorial on the efforts of some lawmakers to ramp up the level of scrutiny applied to billions of dollars in special interest tax breaks.  As the Pilot points out, Richmond is increasingly forcing cities and counties to pick up costs the state can’t cover, yet lawmakers threw away $12.5 billion in corporate tax breaks without any evidence they are helping Virginians.

Two tax increase initiatives appear headed for California’s November ballot that Governor Jerry Brown fears will undermine support for his own initiative to temporarily raise the sales tax and income taxes on wealthier Californians.  The competing measures are both permanent and superior in terms of fairness: a “millionaire’s tax” backed by labor groups who say it will raise $6 to $10 billion for education; and a $10 billion personal income tax hike on all Californians except for low-income families, backed by a wealthy civil rights attorney. But with three tax increasing options on the ballot, there’s a good chance the measures will cancel each other out, leaving California still in a fiscal wreck.

Photo of Jerry Brown via Randy Bayne  and Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, the Institute on Taxation and Economic Policy will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would increase state revenues to pay for important public investments. 

Given the number of Governors calling for major tax cuts in their states, you’d think that states are suddenly awash in cash and well on the road to economic recovery.  But the reality is that very few states are back to where they were before the recession hit in terms of tax collections and public spending.  Many were limping along with federal stimulus funds, but now that’s dried up, too. Recognizing the need to begin restoring investments in education, transportation, and health care or prevent even more devastating cuts to these services, a handful of Governors have put tax increases on the table.  The proposals range from across-the-board rate increases to tax hikes only on the wealthiest, permanent to temporary changes, and plans that require only legislative approval to ballot initiatives for the public to decide.

California Governor Jerry Brown is taking his proposed tax increase to the voters in November.  In an effort to prevent damaging cuts to public education, Brown is asking wealthy Californians to pay more income taxes and everyone to chip in with a higher sales tax for the next five years.  A recent poll shows Californians are overwhelmingly on his side- more than 2/3rds of those surveyed support the Governor especially when the tax increases are linked to investments in education.

Maryland Governor Martin O’Malley included several revenue raising measures in his recent budget proposal to help close a $940 million gap.  Most notable is a plan to raise taxes on upper-income Marylanders through limiting the amount of itemized deductions and personal exemptions they are able to claim - a recommendation ITEP made last year.

O’Malley also proposed taxing internet transactions, digital downloads and increasing taxes on tobacco products and the state’s “flush tax.”  He recently announced a plan to apply the sales tax to gasoline rather than an increase in the designated gas tax to address transportation needs in the state.

Washington lawmakers are facing off on how best to address a $1 billion budget gap this year.  Governor Christine Gregoire is pushing for a temporary half-cent sales tax increase that would raise roughly $500 million, and to close the remaining gap with spending cuts.  At least two competing proposals, however, have emerged that would raise needed revenue and improve the fairness of the state’s tax structure.  The first is a one percent tax on corporate and personal income that would raise $500 million and allow for a reduction in the state’s sales and business-occupations taxes. Another plan would tax realized capital gains at five percent, raising between $215 million and $650 million a year. 

Given Washington’s restrictive rules on revenue-raising (a two thirds legislative supermajority is required to enact increases), any proposed tax increase will likely end up on a ballot (which a legislative simple majority can implement) for the voters to decide this Spring or Fall.

North Carolina Governor Beverly Perdue recently proposed reinstating most of a temporary sales tax increase that expired last year.  She wants to invest the $800 million the tax would raise in the state’s public schools, community colleges and universities, all of which suffered massive cuts over the past four years.

Massachusetts Governor Deval Patrick is promoting some revenue raising ideas he says are supported by the public.  His $230 million revenue package includes a 50 cent per pack increase in the cigarette tax (bringing the total to $3.01), increases on other tobacco products, expanding the bottle bill so that a wider range of beverages require a redeemable nickel deposit, and taxing candy and soda at the state’s 6.25 percent rate (both are currently exempt from taxation).

Rhode Island After failing to gain legislative support last year for his reform-minded and sensible tax plan, Governor Lincoln Chafee has offered up a hodgepodge of tax changes this year he thinks lawmakers can stomach.  Chafee’s$88 million tax package includes some modest expansion of the sales tax to items such as taxi and limousine rides and pet services.

Photo of Christine Gregoire via Studio 8, photo of Deval Patrick via Green Massachusetts, and photo Jerry Brown via Steve Rhodes Creative Commons Attribution License 2.0

Amazon.com announced this week that it plans to bankroll a California ballot initiative that would make it easier for online shoppers to commit sales tax evasion.

At issue is a new California law expanding the group of retailers required to collect and remit sales taxes.  Virtually every traditional “brick and mortar” retailer, as well as a number of online retailers, is already required to collect sales taxes on every sale they make.  Absent this requirement, California’s sales tax law would be basically unenforceable.

But many online retailers are able to skirt this collection requirement because they lack a so-called “physical presence” in the state, like a warehouse or a store. (By contrast, Amazon.com does have a physical presence in the state even though they claim otherwise.)  This unfortunate reality came about because of a misguided US Supreme Court ruling from nearly two decades ago, and the result of this arrangement has been completely predictable.

While Californians who shop at Amazon.com are required to pay sales taxes directly to the state, only a small number actually do so.  But rather than attempt to track down these tax scofflaws one by one, California recently enacted a law that increases the number of retailers required to help the state enforce its existing sales tax laws.  Specifically, online retailers that partner with California businesses to generate sales are now required to help collect sales taxes, just like most other retailers operating in the state.

Evidently, Amazon views its ability to offer an open highway for sales tax evasion as a huge advantage over its competitors.  To protect that advantage, the company plans to spearhead an effort to collect half a million signatures in order to get a measure repealing the new law onto the ballot in either February or June of 2012.  Presumably, the company is also planning to spend the big money needed to combat what the California Retailers Association has already promised will be a major opposition campaign.  The fact that Amazon views sales tax evasion as so central to its business strategy that it’s willing to take these radical (and costly) steps is an enormous revelation.

Of course, as we’ve pointed out before, this is hardly the first time that Amazon has resorted to aggressive tactics to combat tax policy it dislikes.  And California is learning the online giant will go to great lengths to avoid doing what most every retailer has to do every day – collect sales taxes.

Photo via Markuz Creative Commons Attribution License 2.0

After months of negotiations, California Governor Jerry Brown was ultimately unsuccessful in his attempt to balance the state’s massive budget using new tax dollars, specifically, $11 billion in revenues from an extension of temporary increased personal income and sales taxes and vehicle fees.  Rather than including the revenue in his own budget proposal, Brown stuck to a campaign promise to take all tax increases to the voters (this was also necessary because it takes a supermajority to pass tax increases in the legislature).  He was unable to garner the support of enough GOP legislators to put the extension on the ballot this summer or fall, so he gave up to allow the state’s budget to be completed in time for the new fiscal year.

On the eve of the new fiscal year, Governor Brown signed a plan that relies primarily on deep spending cuts and higher than previously forecast revenues to close the state’s budget gap.  Still, deeper cuts in spending will need to be made if revenues do not hit the $4 billion above target projection lawmakers counted on when balancing the budget.

In response to the enacted spending plan, the California Budget Project wrote: “This is a very tough budget for families and communities across California… it is deeply disappointing that the approved budget does not reflect a balanced approach that combines additional revenues with spending reductions to move the budget toward balance.”

One significant tax change did make it into the final budget.  California became the 7^th state to adopt an “Amazon law” which will make it more difficult for state residents to evade sales taxes when shopping online.  Under California’s new law (which went into effect July 1), a larger set of online and catalogue retailers (specifically, those partnering with in-state businesses in order to generate sales) are required to collect and remit sales taxes.  Traditional brick and mortar retailers have dutifully fulfilled this responsibility for decades – and indeed, having the retailer collect sales taxes is the only effective method for enforcing existing sales tax laws.

In response to the enactment of this new law in California, Amazon.com and Overstock.com ended their relationships with their California affiliates (a move the retailers also made in North Carolina, Rhode Island and Connecticut).  These large online retailers’ tactics are doing very little to slow the spread of this sensible method for reducing sales tax evasion.  Illinois, Connecticut and Arkansas enacted Amazon laws this year and nearly a dozen more states seriously considered them.  The seven states with Amazon laws include nearly 30 percent of the country’s population.

Photo via Neon Tommy Creative Commons Attribution License 2.0

Sales tax laws would be essentially meaningless if retailers were not required to collect the tax every time a purchase is made.  The opportunities for customers to evade the sales tax (either on accident, or on purpose) would be overwhelming.  Every state with a sales tax knows this — and as a result, the vast majority of retailers are legally required to collect and remit sales taxes.

Amazon.com and many other online retailers, however, are the major exception to this broad rule.  A 1992 Supreme Court case carved out a special exemption for any “remote sellers” that don’t have a “physical presence” in a state — like a store or warehouse.  The ruling has allowed the Internet to become an open highway for tax evasion. While customers shopping online owe the same sales tax they would if they shopped in a store, very few actually take the time and effort necessary to pay that tax.

This week, four states (California, Louisiana, Texas, and Vermont) made headlines for their attempts to limit the amount of sales tax evasion occurring through “remote sellers,” while a fifth state (Illinois) will soon have to defend its efforts to do the same in court.  By contrast, South Carolina lawmakers were recently bullied into granting Amazon an exemption from having to collect sales taxes for five years, despite the fact that it will soon have a “physical presence” in the state.

In Vermont, Governor Shumlin recently signed a so-called “Amazon law” that will eventually require all remote sellers partnered with affiliate companies physically based in the state to collect and remit sales taxes (see this ITEP report for more on “Amazon laws”).  Unfortunately, the bill was written so that it won’t take effect until 15 other states have enacted similar laws. 

Six states — Arkansas, Connecticut, Illinois, New York, North Carolina, and Rhode Island — have enacted such laws so far, and many more have given the issue serious consideration.  In the meantime, remote sellers like Amazon will be required to notify Vermont residents of the taxes they owe when making a purchase.

The California Assembly easily passed an Amazon law last week.  That legislation now goes back to the Senate, where a similar bill gained narrow passage last month.  Even if the Senate approves the Assembly’s version of the bill, however, it’s unclear whether Governor Brown will sign the measure.

Louisiana can now be added to the long list of states giving serious consideration to enacting an Amazon law.  The House Ways and Means Committee unanimously passed such a law in late-May, though opposition by Gov. Jindal makes it unlikely that it will be enacted any time soon.

In Texas, Gov. Perry recently vetoed a measure that would have required Amazon.com to collect sales taxes in the state, though the legislature may still try to enact the measure by inserting it into a larger bill that Perry is unlikely to veto. 

Unlike the true “Amazon laws” discussed above, the measure in Texas was designed to prevent Amazon from continuing to skirt its sales tax responsibilities by claiming that its Texas distribution center is actually owned by a subsidiary, and therefore does not amount to a “physical presence.”  The nearby photo is the actual sign in front of the Texas-based distribution center that Amazon claims it does not own.  

In Illinois, the Performance Marketing Association (PMA) has filed a lawsuit challenging the constitutionality of the state’s Amazon law.  The lawsuit is similar to one being pursued by Amazon against New York State.

And in South Carolina, Amazon.com has demanded, and received, a five year exemption from having to collect sales taxes on purchases made by South Carolinians, despite the fact that it plans to open a distribution center in the state (and will therefore meet the Supreme Court’s definition of having a “physical presence”). 

The granting of this exemption represents a stark reversal from just one month ago, when it was soundly defeated 71-47 in the House. 

Brian Flynn of the South Carolina Alliance for Main Street Fairness accurately summed up the unfortunate reality of this situation when he said that “with this economy, [Amazon was] in a good position to strong-arm legislators.”  Fortunately, the exemption is only supposed to last five years — though judging from Amazon’s past behavior, it’s reasonable to expect that the company will undertake an aggressive campaign to extend that five-year window.

California, Delaware, Michigan, New Jersey, Oregon, and Wisconsin have all experienced better than expected revenue growth over the past few months.  This is unambiguously good news, but for many lawmakers it’s unfortunately an excuse to ditch any restraint on tax-cutting.

California

In California, stronger-than-expected revenue growth has made the GOP even more vocal in opposing efforts to extend a variety of temporary income, sales, and vehicle tax increases.  Governor Jerry Brown’s continued push to extend these tax hikes is very sensible given that the unanticipated revenue boost was still quite small compared to the state’s total budget.  

Brown has behaved much less sensibly, however, in deciding to abandon efforts to end a variety of business tax credits.  As Jean Ross of the California Budget Project points out, “One of the virtues of the original budget was that there was some level of shared sacrifice.  But now, some businesses are going to come out ahead of where they were last year.”

Delaware

In Delaware, a surprise bump in revenue collections has inspired the state’s Democratic Governor, and a number of Republican legislators, to begin pushing for tax cuts.  

Specifically, the Governor has proposed cutting taxes for banks, businesses, and individuals with taxable incomes of over $60,000.  

In reference to the windfall that banks would receive under the Governor’s plan, Rep. John Kowalko argues that "They do pretty damn well with the federal handouts … I want to see a return on the investment before I will blindly vote on that."

Michigan

In Michigan, better-than-expected revenue growth in the current fiscal year may be used to reduce cuts in school spending that are currently under consideration.  

Any unexpected revenue growth in subsequent fiscal years, however, will be swallowed up by the massive business tax cuts that Michigan’s legislature passed last week.

New Jersey

In New Jersey, unanticipated revenue growth is expected to be used by Governor Chris Christie as yet another excuse for doling out billions in corporate tax breaks.
 
As New Jersey Policy Perspective points out, however, “the state remains stuck in a very deep hole … even with that growth, the state’s revenue collections would still be $3.4 billion less than was collected in FY2008, the year prior to the recession … the state must choose to invest these revenues wisely, using the money to restore the devastating cuts made to services and to pay into the state pension system.”

Oregon

In Oregon, unexpected revenue growth will likely be used to restore cuts to human services and public safety, at least in the short term.  By 2013, however, the state’s “kicker” law will probably require that some amount of revenue growth be dedicated to tax cuts.  

As Rep. Phil Barnhart points out, "Because this budget is so bad, we don't take care of schoolchildren, basic health issues and maintaining prisons — and we have a kicker at the end … We are stuck with this kicker law when we really need to spend some of this money on the budget."

Wisconsin

Finally, in Wisconsin, Governor Scott Walker has stubbornly refused to adapt to changing conditions on the ground.   If Walker gets his way, $1 billion will still be slashed from public schools, despite the state’s recently improved revenue picture.

Elected officials in California and Florida face unprecedented fiscal challenges at both the state and local levels. Yet rather than working to reduce their budget shortfalls, policymakers in each state are doing their best to dig their budget holes deeper by offering new company-specific tax breaks to keep footloose corporations from moving their operations elsewhere.

A front-page article in today's New York Times offers some insights into this seemingly irrational behavior. Focusing on the battle between Kansas and Missouri lawmakers over the future headquarters of movie-theater chain AMC Entertainment, the article describes a system of extorting tax breaks that is viewed by everyone involved — from lawmakers to the beneficiaries of the tax breaks — as a pointless zero-sum game.

AMC's chief executive officer, poised to receive lavish tax handouts from the two states, wonders aloud "whether this is an appropriate role for government to be playing," and a lawyer whose job involves seeking out tax breaks for corporate clients describes it as "horrible public policy."

This situation won't be news to anyone who's followed the work of Greg LeRoy and the folks at Good Jobs First over the years. LeRoy's "Great American Jobs Scam" provides an excellent summary of the cottage industry of site location consultants that has emerged to facilitate the "economic war between the states" that the Times article describes. But the battle over AMC is only one example of egregious tax giveaways from the past week.

In Florida, Darden Restaurants (parent company of the Red Lobster and Olive Garden restaurant franchises) is pushing for new tax breaks. The Orlando Sentinel reports that this Fortune 500 company, which generated $7.1 billion in global sales during its most recent fiscal year, is pushing for legislation that would allow the millions in corporate income tax credits it already receives in Florida to be applied to its sales tax liability. This would save the company as much as $5 million.

Fortunately, the tax legislation has stalled as its key sponsor, Republican State Representative Chris Dorworth, read the ‘revelation’ in the Orlando Sentinel that his own tax break legislation would only apply to Darden Restaurants. He then decided he could not support his own legislation as written.  

Meanwhile, San-Franciso-based Twitter has played tax break hardball with city officials for months, threatening to move to Brisbane if it does not receive substantial tax breaks. Despite facing a tough $350 million deficit and dramatic cuts to health services, the San Francisco Board of Supervisors capitulated to Twitter’s demands this week, passing a $22 million payroll tax break for the company on Tuesday. Roxanne Sanchez, the president of Service Employees International Union Local 1021, opposed the measure, saying, “It’s a taxpayer handout to a $10 billion company at a time we’re cutting basic city services.”

As today's Times article reminds us, corporate tax breaks all too often create benefits for one jurisdiction at the direct expense of another, with no net benefit for the US economy overall. And tax breaks targeted to a specific company set an especially dangerous precedent. As an editorial in the San Francisco Guardian put it, “once you go down the path of caving in to corporate blackmail, it never ends.”

Anti-tax policymakers seeking an excuse to eviscerate the progressive personal income tax sometimes assert that its alleged volatility makes budgeting harder for state lawmakers, and that this volatility leads directly to the sort of difficult spending and tax decisions lawmakers around the nation are confronting today. A recent article in The Wall Street Journal by the often-sensible Robert Frank adds (possibly inadvertently) fuel to the fire for those seeking to make this "volatility" argument, giving the clear impression that California's budgetary woes can be laid at the door of that state's excessive reliance on boom-or-bust capital gains taxes. (No-income-tax states Nevada and Florida can breathe a sigh of relief -- presumably, the ongoing bitter budget battles in those states would be even worse if either state levied an income tax of any kind.)

Yet, as a new ITEP report shows, the "income tax volatility" fears reinforced by Frank's article are misleading in a number of ways. In many states, sales taxes have plummeted as rapidly as income taxes during the recent recession, and academic research suggests that on average, state income taxes are probably not meaningfully more volatile than sales taxes over the long haul. Moreover, the same research shows that progressive income taxes are a far more sustainable and reliable funding source, over the long term, for needed public investments than the other major revenue sources available to states. Finally, the "volatility" argument is usually made in states (like California) in which rainy day funds are either unprotected or inadequately funded to begin with.
 
Read the ITEP report

California Governor Jerry Brown’s proposal to raise $9.3 billion in sorely needed revenue to help close a $26 billion budget gap through 2013 is in jeopardy.  In January, he pitched the idea of allowing voters to decide whether or not to extend temporary tax increases (first enacted in 2009 and set to expire this year) for another five years. 

Governor Brown needs a two-thirds majority of state lawmakers to place such a measure on the ballot, and to date, the governor has failed to garner support from a single Republican lawmaker (he needs four to vote with him).  

California’s constitutional deadline for passing a budget is June 15th.  Originally, Governor Brown had set a self-imposed deadline of March 10th to gain approval for his tax extension plan to ensure time to get the question on the ballot by early June.  That date has come and gone with no avail, so Brown is now seeking ways around the Republican blockade and still hoping something can be worked out in time for June. 

One alternative under consideration is a November vote on the measure which would be placed on the ballot through a petition drive rather than the legislative process.  But, that would mean the vote would come long after the budget deadline forcing lawmakers to cut billions of dollars more from an already depleted state budget. 

All eyes are on California and its popular governor to see if he can work things out in time for a June vote on the tax extension, but time is certainly running out.

Last week Illinois joined New York, North Carolina, and Rhode Island by enacting legislation requiring Amazon.com and other online retailers working with in-state affiliates to collect sales taxes.  Arkansas’s Senate and Vermont’s House recently passed similar legislation, and Arizona, California, Connecticut, Hawaii, Minnesota, Mississippi, and New Mexico are considering doing the same.  Interestingly, lawmakers in each of these states are being spurred to do the right thing by major retailers like Wal-Mart, Sears, and Barnes & Noble.

In most states, Amazon and other online retailers are not currently required to collect sales taxes unless they have a “physical presence” in the state, though consumers are still required to remit the tax themselves.  Unfortunately, very few consumers actually pay the sales taxes they owe on online purchases — in California, for example, unpaid taxes on internet and catalog sales are estimated to cost the state as much as $1.15 billion per year.

The so-called “Amazon laws” recently adopted in Illinois, New York, North Carolina, and Rhode Island are all designed to limit this form of tax evasion by broadening the class of online retailers that must pay sales taxes.  Specifically, under these new laws, any retailer partnering with in-state affiliate merchants is required to pay sales taxes on purchases made by residents of that state.

Up until recently, the reaction to these laws has been mostly hostile.  Grover Norquist has branded them a (gasp) “tax increase,” despite the fact that they’re designed only to reduce illegal tax evasion.  More importantly, Amazon has challenged the New York law in court, and has ended relationships with affiliates in North Carolina and Rhode Island in order to avoid having to pay sales taxes on sales made within those states.  Amazon has also promised to severe ties with its Illinois affiliates, and has threatened to do the same in California if a similar law is adopted there.  These tactics mirror a recent decision by Amazon to shut down a Texas-based distribution center in order to avoid having to remit taxes in that state as well.

But Amazon may not be able to bully state lawmakers for much longer.  Since New York passed its so-called “Amazon law” in 2008, North Carolina, Rhode Island, and now Illinois have already followed suit despite all the threats.  And it appears that Arkansas and Vermont may very well do the same — as proposals to enact Amazon laws in each of those states have already made it through one legislative chamber.  In addition, at least seven other states (listed in the opening paragraph) have similar legislation pending.

According to State Tax Notes (subscription required), Wal-Mart, Sears, and Barnes & Noble are each attempting to partner with affiliate merchants recently dropped by Amazon.  Even more importantly, several of the large retail companies (like Wal-Mart, Target and Home Depot) are joining forces to lobby in favor of Amazon laws. These companies’ interest is in large part due to the fact that they already have to remit sales taxes in the vast majority of states because of the “physical presence” created by their large networks of “brick and mortar” stores.  If more traditional retailers begin to voice support for Amazon laws, the progress already being made on this issue is likely to accelerate.

For more background information on the Amazon.com tax controversy, check out this helpful report from the Center on Budget and Policy Priorities.

This week, California Governor Jerry Brown recommended a five-year extension of temporary tax increases first enacted in 2009 and a reduction of a corporate tax break to help close a budget shortfall of more than $26 billion over the current and next fiscal years.  Governor Brown also proposed more than $12 billion in spending reductions, including deep cuts to health and human services and higher education.

The temporary tax increases, proposed for extension through 2015, include: a 0.25 percentage point personal income tax rate surcharge, a reduction in the amount of the dependent credit, a 1-cent increase in the state sales tax (maintaining the state sales tax rate at 7.25 percent), and a 0.5 percentage point increase in the Vehicle License Fee. 

Governor Brown also proposed raising close to $1 billion by changing a recent law which allows corporations to choose the method for apportioning their profits to California.  Under his plan, most corporations must use what is known as the single-sales factor apportionment formula.

The catch is that the Governor wants voters to make the decision in a special election this June on whether or not to accept the extension of the temporary tax increases.  If the taxes are rejected at the polls, California lawmakers will need to find at least an additional $9 billion in spending cuts.  But, before voters even get the chance to decide the fate of the state’s budget, Governor Brown must secure enough support from state lawmakers (a two-thirds majority is required) to get the extension on the ballot.  

The other hurdle? Californians were asked to support extending these very same taxes two years ago and the proposal was soundly defeated at the polls.  This time around Governor Brown is making the choice clear: either vote to approve the temporary taxes, or see a drastic reduction in K-12 spending which is held harmless in his current proposal.

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.

Earlier this week, voters in states across the nation voted overwhelmingly against implementing major changes to their states’ tax codes. Voters in Massachusetts defeated an effort to slash the state’s sales tax, preserving much-needed revenue to fund education, public safety and other vital services. In Colorado, three anti-tax measures that would have wreaked havoc on the state’s budget were also soundly defeated. Washington State voters rejected a plan that would have created an income tax while rolling back other taxes.

In other states, big business successfully used its money to influence the outcomes of ballot measures on tax issues. Voters in Missouri and Montana passed initiatives designed to ensure that neither state could implement a tax on the transfer of real estate. Neither state currently has a real estate transfer tax, yet the real estate lobby spent millions trying to pass the initiatives. In Washington and Massachusetts, the beverage and alcohol industries poured millions of dollars into campaigns to see that sales taxes levied on their products were rolled back.

And in California, corporations spent millions to defeat a ballot measure that would have repealed several poorly-thought out corporate tax breaks. As the New York Times noted earlier this week, Fox News aired a critical piece on the ballot measure as part of their "War on Business" series, as parent company News Corporation gave $1.3 million to defeat the measure. Fox executives said they "didn't know" the parent company had made these contributions.

Unfortunately, voters in a number of states also ratified measures that will make it harder to raise revenues going forward. California and Washington each face tighter supermajority constraints on revenue-raising, Indiana voters enshrined property tax caps in their constitution, and voters in Massachusetts and Washington retroactively rejected small tax increases enacted by state legislatures in the past year.

Here are the results of initiatives we’ve been following.

Personal Income Tax

Washington: Initiative 1098 - FAILED
Initiative 1098 would have introduced a limited personal income tax applicable only to the richest Washingtonians, reduced the state property tax and eliminated the Business and Occupation tax for many businesses.

Colorado: Proposition 101 - FAILED
Proposition 101 would have reduced Colorado’s income tax rate and eliminated various fees resulting in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Business Tax Breaks

California: Proposition 24 - FAILED
Proposition 24 would have eliminated several business tax breaks enacted in 2008 and 2009 and would have increased state revenues by more than $1.3 billion.

Super Majority Voting Requirements

California: Proposition 25 - PASSED
California: Proposition 26 - PASSED

The passage of California’s Proposition 25 removes the current two thirds super majority requirement needed to pass the state budget (replacing it with a simple majority vote). However, Proposition 26 institutes a new super majority requirement for raising certain fees (classifying them as taxes, which still require a two thirds vote).

Washington: Initiative 1053 - PASSED
Initiative 1053 will ensure that all tax increases (no matter their size) be approved either by a two thirds majority in the legislature or a public vote of the people.

Earnings Tax

Missouri: Proposition A - PASSED
Proposition A requires voters to decide whether two local earnings taxes levied in St. Louis and Kansas City should exist and also prohibits other localities from levying a local income tax.

Sales Taxes

Massachusetts: Question 1 – PASSED
Massachusetts: Question 3 - FAILED

Question 3 would have cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 removes the sales tax on alcohol, which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 - PASSED
Initiative 1107 repeals a recently enacted sales tax increase on a variety of goods including soda, bottled water, and candy.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 - PASSED
This constitutional amendment fully exempts disabled prisoners of war (POWs) from paying property taxes.

Virginia: Question 2 - PASSED
Question 2 changes Virginia’s constitution to exempt disabled veterans and their surviving spouses from paying property taxes.

Property Tax Caps

Indiana: Public Question #1 - PASSED
The amendment to Indiana’s state constitution permanently limits property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. These limits already existed in statute. This ballot measure simply makes them more difficult to repeal.

Colorado: Amendment 60 – FAILED
Amendment 60 would have taken away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes and require school districts to cut property tax rates in half over the next ten years, replacing the lost revenue for K-12 schools with state funding.

Real Estate Transfer Fees

Montana: Constitutional Initiative 105 - PASSED
Initiative 105 prohibits the state from enacting any type of real estate transfer tax.  

Missouri: Constitutional Amendment 3 - PASSED
Amendment 3 prohibits the state from enacting any type of real estate transfer tax.

Government Borrowing

Colorado: Amendment 61 – FAILED
Amendment 61 would have prohibited or restricted all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.

California: Proposition 22 – PASSED
Proposition 22 amends California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.

On Tuesday, voters in 37 states went to the polls to vote for Governor. The results of nine gubernatorial races provide a small glimmer of hope for sensible, balanced, and progressive approaches to addressing the next round of state budget shortfalls.  Two candidates campaigned on raising taxes, four incumbents were re-elected after implementing new taxes to close previous budget gaps, and three governors-elect won races against opponents who sought to dismantle progressive tax structures.

As for those governors-elect who have rejected revenue increases, the next four years will be quite a challenge. In Texas, Governor Rick Perry will face a projected two-year $21 billion budget shortfall.  Likewise in Pennsylvania, Governor-elect Tom Corbett is staring at a $5 billion budget deficit next year.  Faced with these problems, this new crop of state executives can take either a dogmatic cuts-only approach or they can opt for a more flexible approach that allows for raising new revenue by closing tax loopholes or implementing other reforms.

Candidates Who Campaigned on Raising Taxes

In Minnesota, Mark Dayton ran for governor on a progressive tax platform, calling taxes “the lubricant for the machinery of our democracy." He has proposed increasing taxes on the wealthiest 5 percent of Minnesotans to raise revenue to address the state’s continuing budget woes and to improve tax fairness.  Although the Minnesota gubernatorial race remains undecided and Dayton may face a recount, Dayton’s small lead demonstrates the support he has received for purposing such a beneficial progressive tax plan.

In Rhode Island, Lincoln Chafee won a three-way race against Republican John Robitaille and Democrat Frank Caprio.  Like Dayton, Chafee championed tax increases aimed at refilling the state’s depleted coffers.  During the campaign Chafee, whose father lost a Rhode Island gubernatorial race 42 years ago after supporting a state income tax, proposed a one percent sales tax on previously exempted items.  Though more likely to adversely affect low-income families than Dayton’s plan, Chafee deserves credit for supporting a moderate tax plan in this cycle of anti-government sentiment.

Candidates Who Defeated Opponents Targeting Progressive Tax Structures

Besides Dayton and Chafee, three other winners on Tuesday night defeated opponents who sought to drastically cut taxes and reduce spending and government services.  In California, Jerry Brown defeated Meg Whitman, who supported a regressive tax cut that would only benefit taxpayers who claim capital gains income. 

In New York, Andrew Cuomo defeated Carl Paladino, who promised to cut taxes by 10 percent and spending by 20 percent in his first year.  Unfortunately, however, Andrew Cuomo has not fully distanced himself from Paladino’s vilification of taxes.  Instead, Cuomo, along with eleven newly elected Republican Governors, has pledged to freeze taxes, vetoing any hike that comes his way.  This absolutist approach does nothing to alleviate the enormous deficit problems faced by each of these states.

In Colorado, Democrat John Hickenlooper defeated Republican Dan Maes and Independent Tom Tancredo.  Maes, who lost voter support after the Republican primary, promised to lower income taxes and cut spending.  As Maes’ popularity decreased, Tom Tancredo began to gain steam, eventually garnering around 37% of the vote.  In their final debate Tancredo proposed removal of “any tax rebates or incentives.”  For his own part, Hickenlooper never committed to raising or lowering taxes, but did call for a "voluntary" tax on the oil and gas industry to fund higher education.

Incumbents Re-elected After Raising Taxes

The Governors of Maryland, Illinois, Arkansas, and Massachusetts pulled off victories after enacting or supporting new taxes during their previous terms. 

In Maryland, Martin O’Malley, who defeated former Governor Robert Ehrlich, oversaw tax increases in his first term to fix a $1.7 billion deficit.  O’Malley’s plan relied in part on progressive tax increases, including a temporary increase in the income tax rate paid by millionaires. While Republicans criticized the tax increases, the citizens of Maryland approved enough to re-elect O’Malley with over 55% of the vote.

In Illinois, Governor Pat Quinn is the likely winner of a tight race against Republican challenger Bill Brady.  Since becoming Governor in the wake of former Governor Blagojevich’s scandal, Pat Quinn has repeatedly proposed to raise income tax rates to fill budget holes.  Quinn would use the revenue raised to fund education.  Meanwhile Brady, Quinn’s opponent, championed tax cuts that included repealing the sales tax on gasoline and eliminating the inheritance tax.

In Arkansas, Republican Jim Keet was soundly defeated by Governor Mike Beebe in his re-election bid.  During his first term, Beebe implemented a significant hike in tobacco sales taxes, raising the tax on a pack of cigarettes by 56 cents.  The increase was designed to increase revenues by $86 million to fund statewide trauma systems and expanded health care coverage for children.

In Massachusetts, Deval Patrick was re-elected Governor after signing last year’s budget that included an increase in the sales tax rate. Patrick also showed interest in improving fairness in Massachusetts’ tax code. Bay State voters rewarded Patrick for his tough decisions by handily re-electing him.

The stakes will be high for state tax policy on Election Day, with tax-related issues on the ballot in several states. With a couple of notable exceptions (a new income tax in Washington and rollback of corporate tax breaks in California), these ballot initiatives would make state taxes less fair or less adequate (or both).

Personal Income Tax

Colorado: Proposition 101 would reduce or eliminate various fees and immediately reduce the state’s income tax rate from 4.63 to 4.5 percent and eventually to 3.5 percent).  If passed, Proposition 101 will result in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Washington: Initiative 1098 would introduce a personal income tax, reduce the state property tax and eliminate the Business and Occupation tax for small businesses. If passed, this legislation would improve tax fairness in the state with the most regressive tax structure in the country.  For more read CTJ's Digest articles about this initiative.

Business Tax Breaks

California: Proposition 24 would eliminate several business tax breaks enacted in 2008 and 2009 and increase state revenues by more than $1.3 billion.  For more details on these tax breaks, read the California Budget Project's Budget Brief on the initiative.

Super-Majority Voting Requirements

California: Proposition 25 would remove the current two-thirds super-majority requirement needed to pass the state budget (replacing it with a simple majority vote), while Proposition 26 would institute a new super-majority requirement for raising certain fees (classifying them as taxes).  For more details on these initiatives, read the California Budget Project’s initiative summaries.

Washington: Initiative 1053 would, if approved, ensure that no tax increases (no matter their size) become law without either approval by a two-thirds majority in the legislature or a public vote of the people. The Washington Budget and Policy Center gives a helpful summary of the initiative and its potential impact.   

Earnings Taxes

Missouri: Proposition A, if approved, would require that voters be asked every five years to decide whether or not local earnings taxes levied in St. Louis and Kansas City should exist. (If voters then decide to not allow them, they will be phased out over a ten-year period). The Proposition would also exclude any other local government from levying its own earnings taxes. For more on Proposition A, read Missouri Budget Project’s fact sheet.

Sales Taxes

Massachusetts: Question 1 and Question 3
A diverse coalition of businesses, advocacy organizations, citizens groups and political leaders have joined together to defeat Question 3, an initiative that would cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 would remove the sales tax on alcohol which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 would repeal the new sales taxes on a variety of goods including soda, bottled water, and candy. For more information, read CTJ's Digest article on the issue and the Washington Budget and Policy Center’s summary.

Despite the regressive nature of the sales tax, it's an important revenue source. Slashing it in either Washington or Massachusetts without replacing the lost revenue with another source would cripple the ability of those states to provide core services such as education and public safety to their residents.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 would exempt fully disabled prisoners of war (POWs) from paying property taxes. Read Missourians for Tax Justice’s take on this issue.

Virginia: Question 2 would change Virginia’s constitution to exempt veterans and their surviving spouse from paying property taxes if the veteran is 100 percent disabled.

Property Tax Caps

Colorado: Amendment 60 would take away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes.  Currently, voters can approve an increase in property tax rates above the constitutional limit which caps increases at the rate of inflation plus a small measure of local growth.  The amendment would also require school districts to cut property tax rates in half over the next ten years and replace the lost revenue for K-12 schools with state funding (an estimated $1.5 billion will be required from the state, meaning reductions will have to made to other services to support an increase in K-12 spending).

Indiana: Public Question #1 will ask Indianans to decide if their state's constitution should be permanently altered to limit property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. Voters may find it helpful to read this brief from the Indiana Institute for Working Families.

Real Estate Transfer Fees

Missouri: Constitutional Amendment 3 would prohibit the state from enacting any type of real estate transfer tax. Missouri currently doesn’t levy any such tax.  Placing the question before voters is seen as a preemptive move by the Missouri Association of Realtors to ensure that the state can’t create a transfer tax.

Montana: Constitutional Initiative 105 would, if approved, prohibit the state from enacting any type of real estate transfer tax.  The state currently doesn’t levy such a tax. The Billings Gazette has weighed in on this Initiative.

Government Borrowing

California: Proposition 22 would amend California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.  For more information, read the California Budget Project’s brief on the initiative.

Colorado: Amendment 61 would prohibit or restrict all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.

California

Californians have a plethora of fiscal related ballot initiatives to vote on in November. 

In addition to Proposition 24 (ending business tax breaks), voters will be asked whether to impose an $18 vehicle fee to fund the state park system (Prop 21), amend the state Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs (Prop 22), allow for a simple majority legislative vote requirement for passage of the state budget (Prop 25), and reclassify certain fees as taxes meaning that legislative votes on fees would then require the now necessary two-thirds approval for passage of tax increases. 

The California Budget Project has published five informative budget briefs on the propositions that are very helpful tools for voters.

Massachusetts

In Massachusetts, a diverse coalition of businesses, advocacy organizations, citizens groups and political leaders have lined up to defeat Question 3, an initiative that would cut the state’s sales tax rate from 6.25 to 3 percent.  Opponents argue that the resulting annual loss of $2.5 billion from the proposed cut would cripple the state’s ability to provide core services such as education and public safety to Massachusetts residents.  Despite the depth and fundraising power of the opposing coalition, recent polling showed residents are pretty much split on whether or not the proposal is a good idea for the state. 

Missouri

This November, Missouri voters will be asked to make a judgment call on Amendment 2. If passed, this constitutional amendment would exempt fully disabled prisoners of war (POWs) from paying property taxes. Of course, everyone respects the sacrifice that POWs made, but this Amendment raises some important tax policy concerns.

First, should tax policies, especially ones that will assist so few people (estimates are that only 100 people would be impacted), really be written into a state's constitution?

Secondly, is it fair to single out a specific group of people and offer them a tax break? Missouri already allows countless exemptions and offers special treatment to a variety of taxpayers. Perpetuating this treatment of special groups violates fundamental tax fairness principles. In fact, most veterans already qualify for a special property tax credit.

We couldn't agree more with the Kansas City Star when it opines, "Disabled prisoners of war are deserving of honor. But changing property tax laws isn’t the way to do it."

Many gubernatorial candidates campaign on a platform of tax cuts, and few, outside of Minnesota Gubernatorial Candidate Mark Dayton, promote tax increases.  In such a political climate, perhaps the best that voters can hope for are candidates that promise to maintain progressive tax structures. 

California

One such candidate, California gubernatorial candidate Jerry Brown, recently hammered his opponent, Meg Whitman, for supporting a regressive tax cut that would benefit only taxpayers who have capital gains income.

In 2008, 93% of taxpayers who paid capital gains taxes in California earned over $200,000.  While other gubernatorial candidates fight over who will cut taxes more, it is refreshing to see a candidate like Brown refuse to endanger the state's budget by cutting taxes for the wealthiest.

Illinois

Illinois current Governor Pat Quinn is having it out against Republican Bill Brady to see who will move into the Governor's Mansion next year. Brady proposes to eliminate the state's estate tax and the sales tax on gasoline, saying that this will send a message to business that  "Illinois is open again for business and we're here to stay for the long term." Quinn, on the other hand, supports an increase in the state's income tax to help solve the state's enormous fiscal woes.

Maryland

While fiscal prudence may call for hard decisions, campaigning calls for easy sound bites.  Former Governor and current Republican candidate for Maryland Governor Robert Ehrlich wants to repeal Governor O’Malley’s 2007 sales tax increase.  Ehrlich’s proposal would cost the state treasury over $600 million. While Ehrlich himself raised taxes during his tenure, the former Governor is trying to re-brand himself as the anti-tax candidate. 

Like Ehrlich, current Governor O’Malley is also seeking to distance himself from his past constructive and successful tax policies.  However, O’Malley refuses to rule out future tax increases, signaling that he has not forgotten how he expanded health coverage and increased education funding these last four years.

Michigan

The “Michigan Business Tax” has fallen out of grace with Michigan’s gubernatorial candidates.  Both Democrat Virg Bernero and Republican Rick Snyder favor eliminating the business tax and replacing it with some other revenue source. Synder’s plan would partially offset the revenue loss from the business tax cuts by instituting a flat 6% corporate income tax.  Still, Synder recognized the plan would remove $1.5 billion from the state’s coffers. 

Bernero’s plan does little more to make up for the lost revenue.  His proposal includes collecting taxes on internet sales, although he refuses to commit to any gas or service tax increase. Instead, Bernero also seeks to cut state programs and lower costs.  While it is disappointing to see both candidates propose tax and funding cuts, Bernero has pledged to support state funding for anti-poverty and unemployment programs.

Pennsylvania

Despite massive state budget shortfalls in Pennsylvania, both gubernatorial candidates, Republican Tom Corbett and Democrat Dan Onorato pledged, abstractly, not to raise taxes. Neither candidate seems to be sticking to such a pledge. Onorato was gutsy enough to suggest imposing a new tax on shale severance.  Onorato’s proposed tax would allow the state to remain competitive with neighboring states.  Onorato’s Republican counterpart, Tom Corbett, has maintained that he will not raise taxes, but he is reportedly open to increasing payroll taxes. So apparently, Corbett’s pledge only applies to big business.

South Carolina

South Carolina voters are guaranteed to see a new Governor in Columbia that is going to slash budgets instead of raising revenue. Both the major candidates, Democrat Vincent Sheheen and Republican Nikki Haley, are saying that they won't raise taxes despite the fact that the budget is in disarray (falling to mid-1990's levels) and the federal government can't be relied on for more stimulus money to help prop the state up. Sheheen has said, "We can't keep funding everything at the levels of two or three years ago. We can't keep funding everything, period."

Perhaps it comes as no surprise, but Haley does have some pet projects she'd like to see improved despite claiming that South Carolina must live within its means. She says, "When your revenues are down, the last thing you cut is your advertising, so we need to make sure the Commerce Department is strong. We need to strengthen our technical colleges." No matter who wins this election, it's going to be difficult to improve technical colleges and the Commerce Department when money is so tight and lawmakers aren't leaving many options.

Tennessee

Tennessee politicians realize the state has serious budget shortfalls.  Unfortunately, the only question facing Tennessee voters this November will be how much to cut state programs and who to reward with tax cuts.

Last week, the current Democratic Governor Phil Bredesen announced plans to cut next year’s state budget by up to $160 million.  Democratic gubernatorial candidate Mike McWherter lauded the plan, while Republican gubernatorial candidate Bill Haslam criticized the cuts for not being large enough. 

However, the candidates do have differing ideas about creating jobs through tax cuts.  McWherter proposed a $50 million state tax break for small businesses that would reward qualifying companies for creating the next 20,000 jobs.  In contrast, Haslam proposed creating regional economic development centers.  McWherter’s plan is based on a similar program in Illinois, which Democratic Governor Pat Quinn instituted and Republican gubernatorial candidate Bill Brady would like to expand.

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.

Now that the primary election dust has settled and signature gathering deadlines have come and gone, we have a clear picture of the good and bad tax initiatives voters in a number of states will have an opportunity to support or oppose.  Over the coming month, the Tax Justice Digest will provide updates on tax-related ballot campaigns including links to the best resources to help voters understand what to expect when they hit the polls in November.

Indiana voters will soon decide if their state's constitution should be permanently altered to limit property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. The state legislature has already approved this short-sighted measure twice.

Voters would find it helpful to read this brief from the Indiana Community Action Association which dispels false claims about the benefits of these property tax caps, including claims that all homeowners are likely to benefit, that having these caps in the constitution will prevent taxes generally from being raised, and that the caps are well-designed in the first place.

Missouri voters will be asked to decide on Proposition A and the fate of the city earnings taxes levied in Kansas City and St. Louis. If Proposition A is approved, voters will be asked every five years to decide whether or not these earnings taxes should exist. (If voters then decide to not allow them, they will be phased out over a ten year period). The revenue generated from these earning taxes represents about 30 percent of the cities' general fund budgets.

A key supporter (and bankroller) of the initiative, Rex Sinquefield, has said that the money "has to be replaced" if the earnings taxes are eliminated, but he doesn't actually say how that money will get replaced. "That was the reason that we proposed a 10-year phase-out," he says, "so you have a lot of time to figure this out."

If passed, the initiative would exclude any other local government from levying their own earnings taxes, further limiting the ability of local governments to raise funds in a progressive way. Missouri voters would be wise to take a step back and heed this warning from the St. Louis Post Dispatch editorial board: "The loss of (earnings tax) revenue would reverberate beyond the residents of St. Louis and Kansas City. Voters throughout both metropolitan regions would face increased uncertainty as their core cities struggled to find replacement revenue. As go the metro areas, so goes Missouri."

For more on the harmful ramifications of Proposition A, read this fact sheet from the Missouri Budget Project.

Washington State voters will soon have the rare opportunity to improve their state's tax and budget structure in a dramatic way. If Initiative 1098 passes, the state's property tax will be cut by 20 percent, the state's unique Business and Occupation tax will be eliminated for small businesses and a new income tax on the wealthiest of Washingtonians will become the law of the land. The Seattle Post-Intelligencer has endorsed I-1098 "as a big step toward tax fairness and reform, as well as a way of putting teachers into classrooms and poor families onto the state's Basic Health Plan. " ITEP's report Who Pays found that Washington has the most regressive tax structure in the nation and badly needs a tax reform of this sort.

Californians will have the opportunity to repeal three costly business tax breaks by voting to support Proposition 24, “The Tax Fairness Act”.  Enacted in 2008 and 2009, the three business tax cuts — elective single sales factor, tax credit sharing, and net operating loss carrybacks — are scheduled to go into effect in 2011 at an estimated cost of $1.3 billion.  As a new Budget Brief from the California Budget Project explains, these tax breaks benefit relatively few corporations and come at a time when the state can ill afford such a significant loss of revenue.  

In Colorado, most Democratic and Republican lawmakers are united in their opposition to three anti-tax initiatives on the state’s ballot which would drastically reduce state and local revenue and hinder the state’s ability to pay for education, health care, public safety, and other core services. 

Amendment 60 would require school districts to cut property taxes and replace the lost revenue. Proposition 101 would slash the state’s income tax and cut other fees. Amendment 61 would limit or disallow government borrowing.  A Colorado Legislative Staff analysis of the combined impact of the three measures found that the state would lose about $2.1 billion in revenue, while taking on $1.6 billion in K-12 education funding to make up for the local property tax cuts.  As a result, education spending would constitute nearly 99% of the state’s general fund budget.

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.

California's annual budget crisis continues unabated this week. Almost two months into fiscal year 2011, the state legislature still has not enacted a budget. Democratic leaders in the state Assembly and Senate recently offered a joint budget-balancing plan that "spreads the pain" between spending cuts and tax increases, but this plan has received only lukewarm support. Part of the problem, as noted in a recent California Budget Project analysis, is that the tax increases in the Democratic plan would impose virtually no tax hikes on the best-off Californians. This is an especially odd choice given that the wealthiest Californians have enjoyed substantial growth in real incomes at a time when middle-class incomes have been stagnant.

Senate President Pro Tem Darrell Steinberg, one of the architects of the plan, explains this free-pass for the wealthiest Californians as a response to the misleading claim, expressed frequently by Governor Arnold Schwarzenegger, that California's tax system is already too volatile due to its reliance on the capital gains income realized by the best-off taxpayers. Yet as the nonpartisan Legislative Analyst's Office has found, reducing volatility by making the income tax less progressive will almost certainly have an unfortunate tradeoff: reducing the long-term growth (and sustainability) of state revenues.

At a time when the state faces a $19 billion deficit that shows no signs of disappearing in the future, hamstringing long-term revenue growth isn't the first solution to this problem one would think of. As we've noted in the past, making state tax systems less volatile can't be the primary goal of a state tax system. Long-term sustainability should be the main goal — and a progressive income tax, coupled with prudent fiscal management of a meaningful rainy day fund, is a sensible tool for achieving this goal.

Efforts are underway in a variety of states to give voters the opportunity to change their state's tax structure for the better. Advocates are laying the ground work for tax reform in Colorado. Tax justice advocates in Arizona can celebrate that a Proposition 13-like initiative didn't garner enough signatures to be placed on the ballot. California voters will get the chance to repeal various corporate tax loopholes while Washington is closer than ever before to introducing a personal income tax.

In Colorado, folks are thinking about the 2012 ballot already. Representatives of the Colorado Fiscal Policy Institute (CFPI) have filed two initiatives that are currently being reviewed to determine if they abide by the state's "single subject" per initiative rule. According to The Denver Post, "the measures also call for reducing the state sales tax but taxing services as well as goods, changing the income-tax system to a graduated system and making a tax credit for low-income workers permanent." Specifically the proposal would change Colorado's flat rate income tax into a graduated system with a least five brackets. Carol Hedges with CFPI recently said of the initiatives that "the overriding objective is to have our tax system more appropriately matched with economic realities."

Arizonans swerved and missed the tax policy equivalent of a Mack truck slamming into them when it was announced that "Prop. 13 Arizona" failed to garner enough signatures to qualify for the 2010 ballot. The proposal was modeled after California's Proposition 13. The measure would have rolled back the assessed value of property sold before 2004 to 2003 levels, limited property value increases, and taken away voters' rights to override levy limits. This is the second time that the proposal failed to garner enough signatures. For more on capping assessed value, see ITEP's primer on the subject.

In November, California voters will get to vote on the Repeal Corporate Tax Loopholes Act. The measure, if passed, would eliminate several business tax breaks enacted in 2008 and 2009. They include elective single sales factor, tax credit sharing, and net operating loss carrybacks. For more details on these tax breaks, see California Budget Project's Budget Brief on this issue. Perhaps more upsetting than these tax breaks actually passing is the way they were passed. Initially, according to the California Budget Bites Blog, these tax deals were of the "dark-of-night" variety. Now Californians themselves will decide if these costly corporate tax breaks should remain the law of the land.

Washingtonians are closer than they have ever been to establishing a personal income tax. Washington has repeatedly been named by ITEP as the state with the most regressive tax structure largely because of their high reliance on sales taxes and absence of a personal income tax. Initiative 1098 introduces an income tax that has two brackets targeted at high income Washingtonians, reduces the state property tax, and reforms the business and occupation tax. Supporters of the initiative this week turned in well over the 241,000 signatures required to get on the ballot. It appears that Washingtonians will have an exciting and historic opportunity to reform their state's tax structure this fall.

Bills moving through the California legislature would make it much easier to determine whether California’s special tax breaks — costing billions of dollars annually — are worth the trouble.  Specifically, the Assembly would require that the names of publicly traded corporations, and the amounts they received in specific tax breaks, be made publicly available on a searchable website.  The Senate, in turn, is seeking to create a new job creation reporting requirement, and to require that new tax credits include specific, measurable goals and sunset dates.  Business groups have predictably lined up in opposition to these bills.

Movement in the California Senate

In passing SB 1272, the Senate found that “The Legislature should apply the same level of review and performance measure that it applies to spending programs to tax preference programs, including tax credits.”  In order to help make this ideal a reality, SB 1272 requires that each new credit be created with defined goals, as well as performance measures for evaluating the credit’s success in achieving those goals.  The bill also requires that data collection requirements be attached to each new tax credit in order to make such evaluations possible. Finally, in a move similar to one recently taken by Oregon, the bill would require each new tax credit to sunset after seven years. 

SB 1391 has a slightly more narrow focus than SB 1272, requiring any entity claiming a job creation tax credit to report on the number of jobs created as a result of the credit. 

Both SB 1272 and SB 1391 have passed the Senate, and will receive hearings in front of the Assembly Committee on Revenue and Taxation next Monday (June 28).

Movement in the California Assembly

On the Assembly side, AB 2666 would create a requirement that the names and amounts of tax credits received by publicly traded companies be made available on a searchable website.  The bill states that this website would be created with the goal of increasing “public awareness of the amount and scope of tax expenditures for businesses in this state.” 

Work of CTJ Cited

Interestingly, in order to demonstrate the potential value of publicly-available, company-specific tax data, the official bill analysis cites the enormous impact that CTJ’s analyses of SEC data had in bringing about federal tax reform: “Robert McIntyre, working at Citizens for Tax Justice combed through the financial reports of the nation's largest companies and found that 128 of the 250 largest U.S firms paid no federal corporate income tax in at least one year between 1981 and 1983 (17 paid no tax in all three).  The resulting furor pushed Congress to enact the Tax Reform Act of 1986.” 

AB 2666 has already passed the Assembly, and is currently making its way through the Senate.

Business Lobby Does As Expected

Predictably, business groups in the state have already lined up in opposition to these good-government measures.  Four groups have chosen to officially oppose all three bills: the California Chamber of Commerce, California Manufacturers and Technology Association, California Aerospace Technology Association, and TechAmerica.  A slew of other business groups — including the Bankers Association and Retailers Association — have come out in opposition to at least one of the bills.  The fight to enact SB 1272, SB 1391, and AB 2666 into law will no doubt involve a tough uphill battle against these powerful special interests.

You can find information on each of these bills on the California legislature’s website.

Even though the gubernatorial general election season in California is less than two weeks old, the rhetoric between the candidates on fiscal and tax policy is already taking a turn for the worse. Republican candidate Meg Whitman’s campaign is trying to turn a 2 cent gas tax hike in 1981 into “a record of higher and higher taxes, more and more spending.” Statements like this by Whitman about Democratic candidate Jerry Brown’s record and California’s fiscal history are both misleading and betray a troubling lack of nuance in understanding California’s serious budget issues.  

Even before Brown had officially announced his candidacy for Governor in March, Republican gubernatorial nominee Meg Whitman had already fired an opening shot attacking Brown’s public service record in California. In a document entitled “A Voter’s Guide to Jerry Brown,” Whitman attempts to portray Brown as a "fiscal failure" during his time as governor, mayor and attorney general.

Not surprisingly, Whitman’s "voter’s guide" places much of Jerry Brown’s record out of context and ignores the reality of California’s fiscal history. For example, the document attacks Brown for approving a 2 cent increase in the gas tax as governor in 1981. What the guide and Whitman fail to mention is that this tax increase had the support of almost half of State House Republicans and was designed to fix a $2.5 billion deficit in transportation funding.

In an op-ed on June 6th in the San Diego Union Tribune, Brown defended his fiscal record, writing that during his term taxes were reduced by $4 billion overall. Whitman’s campaign attacked again by pointing out his opposition to Proposition 13 and quoting a 1992 New York Times article which said that he had turned a budget surplus into a more than $1 billion deficit. Showing how campaign rhetoric can be both misleading and contradictory, the Whitman campaign excludes the proceeding line of the same New York Times article which states that the nearly $7 billion dollars in cuts due to Proposition 13, which Whitman supports and accuses Brown of opposing, were a major cause of the fiscal problems.

As Dan Walters of the Sacramento Bee observed in a recent op-ed, “In a rational world, Whitman wouldn't be criticizing Brown for raising the gas tax but for cutting state taxes in 1978 as he and the Legislature simultaneously assumed billions of dollars of new financial burden for schools and local government because of Proposition 13's property tax cut.”

Whitman simplistically assumes that all spending and taxes are bad.  In fact, Brown’s bipartisan increase in the gas tax to meet the transportation needs of California citizens was an attempt by a governor to achieve a responsible balance in the budget.  

With recent polls showing Brown and Whitman locked in a dead heat and the recent failure of lawmakers to pass a budget, this is only the beginning of what will become an even more heated debate in the gubernatorial campaign over California’s budget.

During last year’s seemingly endless debate over how to close California’s budget gap, lawmakers inexplicably enacted a corporate tax cut that will cost the state $900 million in fiscal year 2011, and at least $2 billion each year thereafter.  But under recently released plans put forth by the leadership of both the Assembly and the Senate, this tax cut — known as “single sales factor,” or SSF — would very sensibly be delayed in order to avoid digging the state’s already enormous budget hole even deeper. 

Governor Schwarzenegger, predictably, has put forward an alternative plan that would not delay the phase-in of this tax cut, nor would it increase revenues in any other significant way.  Instead, the Governor’s plan would rely on severe cuts in education, child care, and support for the disabled, as well as the complete elimination of the state’s welfare program. 

According to UC Berkeley researchers, if these cuts were enacted (which is, fortunately, very unlikely) somewhere in the neighborhood of 330,000 jobs would be lost, increasing the state’s unemployment rate by about 1.8 percentage points.

Under the Senate plan, recent income tax rate increases and a reduction in the dependent care credit would be extended beyond this December in order to help fill the state’s budget gap.  License fees, alcohol taxes, and tobacco taxes would also increase.  The Assembly, by contrast, would rely primarily on borrowing, but would pay off this borrowing over time with an oil severance tax.

The one thing both chambers seem ready to agree on, though, is that the SSF phase-in should be delayed.  In a nutshell, the optional SSF tax cut enacted last year will allow large multi-state companies to chose whether or not they would like to ignore the amount of property they own in California, and the amount of payroll paid to Californians, when calculating the share of their income subject to California taxes.  Instead, if the company elects to take advantage of SSF, only the location of sales made by the company will be considered.  Since small California corporations make most if not all of their sales inside the state, this cut will provide little if any benefit to those businesses. 

ITEP’s policy brief on the subject explains the pitfalls of SSF in more detail.  It’s worth noting here, though, that California’s optional SSF is even costlier than the more common mandatory SSF, which does not allow companies the option of choosing between two different apportionment methods.

The Sacramento Bee reported this week that “the Legislature's budget analyst, Mac Taylor, argues cogently that shifting to a single-sales factor should be delayed to 2013 and be made mandatory.”  We would argue instead that SSF should be abandoned entirely, but Mr. Taylor’s alternative is undoubtedly far superior to allowing this corporate giveaway to decimate California’s budget during the coming fiscal year.

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.

A new report from Citizens for Tax Justice makes the case for a “performance review” system designed to evaluate the effectiveness of special tax breaks in achieving their stated goals. While CTJ's report primarily focuses on the importance of such a system at the federal level, most of its findings are equally applicable to the states.

The special breaks littered throughout state tax codes — or “tax expenditures,” as they are frequently called — are an enormous and often overlooked part of government’s operations.  Although the primary purpose of a tax system is to raise the revenue needed to pay for public services, every state, as well as the federal government, also uses its tax system to accomplish a variety of other policy goals. Encouraging job creation, subsidizing private industry research, and promoting homeownership are just a few of the countless ends pursued via special subsidies contained in state tax codes. Rather than having anything to do with fair or efficient tax policy, these tax credits, exemptions, and other provisions are actually much more akin to government spending programs — hence the term, “tax expenditures.”

A performance review system takes the commonsense step of asking whether these provisions are doing what policymakers intended of them. Under such a system, tax credits designed to encourage research and experimentation, for example, would be regularly examined to determine the amount of new research undertaken as a result of the credits. Shockingly, the vast majority of states, and the federal government, do not currently attempt to answer fundamental questions of this sort with any type of rigorous evaluation.

Among CTJ’s findings are:

— “Procedural biases,” such as the omission of tax expenditures from the authorization and appropriations processes, allow tax expenditures to slip by with a fraction of the scrutiny given to direct spending programs. State legislative systems requiring supermajority consent to “raise taxes” (or eliminate tax expenditures) are particularly biased in this regard.

— “Political biases,” such as the erroneous belief that government can take a “hands off” approach, or reduce its overall size by offering special tax breaks, also contribute to the current lack of oversight.

— A number of states have made strides in recent years to counteract these biases through performance reviews and other, similar means. Washington State’s efforts represent the most complete attempt at tax expenditure performance review yet to be undertaken in the United States. California, Delaware, Nevada, Oregon, and Rhode Island have also made attempts — with varying degrees of success — to enhance the level of scrutiny applied to their tax expenditures.

— The bleak state budgetary outlook makes the implementation of tax expenditure review all the more urgent. States, like the federal government, can no longer afford to deplete their resources with ill-advised and ineffective tax expenditures. By implementing a tax expenditure performance review system, states can pave the way for a reduction in tax expenditures by identifying those expenditures that are ineffective.

— A formal review system could also help to reconceptualize these provisions in the minds of policymakers, the media, and the public as spending-substitutes, rather than simply as tax cuts. This would further help reduce the rampant biases in favor of tax expenditure policy.

— The precise design of a tax expenditure review system is very important. States should be sure to include all taxes, and all tax expenditures within the scope of the review. Additionally, states should exercise care in selecting the criteria to be used in the reviews — Washington State’s criteria represent a good starting point from which to build. Other key design issues include choosing the appropriate body to conduct the reviews, timing the reviews to coincide with the budgeting process, allowing similar tax expenditures to be reviewed simultaneously, and attaching some type of “action-forcing” mechanism to the reviews so that policymakers must explicitly consider the reviews’ results.

— Tax expenditure reviews are necessary, though they may not be sufficient to correct for the biases in favor of tax expenditure policy. A tax expenditure performance review system can play a vital informational role either on its own, or alongside other, more aggressive tax expenditure control techniques such as sunset provisions or caps on tax expenditures’ total value.

Read the full report.

Read the 2-page summary.

Earlier this week, the Georgia Supreme Court ruled in favor of the City of Columbus and against hotels.com, an online travel company (“OTCs”) that charges customers one rate for booking a hotel room but pays local governments a lodging tax based on cheaper, wholesale room rates.  The Court’s finding mirrors its decision in a case decided in June against Expedia.com.  In both instances, the Court held that the tax for which the OTCs were liable should be based on the retail room rate paid by their customers.

OTCs contract with local hotels to provide rooms for a discounted or wholesale rate.  When a customer books a room online, the OTC charges the customer a “marked-up” rate along with taxes and service fees.  Under Georgia law, municipalities may impose hotel occupancy and excise taxes on the furnishing of any room, lodging, or accommodation.  The Court noted that state law allows cities to impose a tax on the lodging charges actually collected. 

The high court’s decisions are binding across Georgia, so the two Columbus cases could affect other suits filed by governments seeking to collect the proper amount of lodging taxes from OTCs.  The cases have been remanded to the lower courts to determine how much money the online services owe in back taxes and penalties. 

Importantly, numerous other cities – including Houston, San Antonio, and Miami have sued or initiated administrative proceedings against OTCs, asserting that they owe back taxes on their price mark-ups.  While many cases have yet to be fully adjudicated, one other recent case yielded much the same verdict as Columbus’ suit against hotels.com.  In February, multiple OTCs, including Orbitz and Travelocity, were ordered to pay the city of Anaheim, California, $21 million in back taxes, fees and penalties related to the payment of hotel occupancy taxes.

Rulings such as these have motivated OTCs to seek enactment of federal legislation that would ban state and local taxation of hotel room rentals when booked by such a company.  However, as these rulings demonstrate, there is no justification for limiting the base for such a tax to the wholesale price of a hotel room, let alone eliminating taxation altogether.  Hotel taxes are consumption taxes, which should be measured by the value of the consumption to the customer.  Therefore, the tax should be imposed on the retail amount.  For more on this subject and on the OTC’s push for federal legislation, see this helpful report from the Center on Budget and Policy Priorities.

After ten months of work, California’s “Commission on the 21st Century Economy” has finally released its recommendations for overhauling the California tax system.  The Commission has proposed to eliminate the corporate income tax, eliminate the sales tax, sharply reduce the progressivity of the individual income tax, and enact a new “business net receipts tax” (BNRT) that would function in many respects as a new, less transparent sales tax.  The income tax changes are especially appalling, as the Commission’s own presentation (see the last slide) concedes that taxpayers with incomes over $1 million would receive an average tax cut of over $109,000 per year, while those making under $50,000 would receive somewhere in the neighborhood of $3 annually from the plan.

Jean Ross with the California Budget Project (CBP) hit the nail on the head with her remark that the plan constitutes "a massive shift in ... financing public services from the wealthy and corporations to middle-income families [that] is nothing short of stunning."  Ross is by no means the only person displeased with the Commission’s plan.  Business groups, labor, and numerous tax experts have all already come out in opposition to major components of the report.  One LA Times columnist reacted to the magnitude of the outcry by stating: “Sure, you can't please everyone. That's a given on anything controversial. But come on! Maybe at least a few people?”  Fact is, there’s nothing here worth being pleased about.

Throughout the Commission’s deliberations, University of Connecticut law professor (and ITEP Board President) Richard Pomp has been a strong voice both for progressives and for anybody interested in good tax policy.  In a 21-page criticism of the Commission’s work, released earlier this month, Pomp decried the plan’s regressive income tax cuts, its elimination of the corporate income tax, and its reliance on a new, untested, and unstudied business net receipts tax (BNRT).  The purpose of the BNRT, notes Pomp, is to serve as a “non-transparent” consumption tax, meant to raise the revenue needed to finance the Commission’s income tax cuts, and allow the state to finally tax services while instead appearing to only tax California businesses.

Pomp has also written a statement on the Commission’s final package, which should be posted here at some point in the near future. To learn more, you can also listen to Jean Ross thoughts on the Commission's work.

California now has a budget for the fiscal year that started almost a month ago. But for advocates of sustainable tax and spending policy, the hard times are only beginning. As a new report from the California Budget Project explains, lawmakers faced with a $23 billion shortfall chose to rely on spending cuts to close two thirds of the gap.  The list of cuts is grisly.  Health, education, child services, support for the disabled, and just about every other category of state spending will be slashed significantly.  The consequences for Californians are expected to be dire.

Astonishingly, the budget includes virtually no changes on the tax side of the ledger that can meaningfully be described as tax increases. While $3.5 billion of the current-year shortfall will be made up through tax changes, most of this revenue will be realized by accelerating collections rather than increasing the level of taxes. Specifically, $1.7 billion of the "new revenue" for fiscal year 2010 will be realized by accelerating personal income tax withholding so that more income tax will be withheld in the first half of the calendar year. This means, of course, that the legislature has just dug itself a $1.7 billion fiscal hole for the next fiscal year. Assembly Speaker Karen Bass, who's claiming that "in no way should this [budget] be misconstrued as kicking the can down the road,” must not have read this part of the budget agreement.

Bass -- and Governor Arnold Schwarzenegger, who boasted that the budget agreement "puts us on a path toward fiscal responsibility" -- must be equally unaware of a clever provision through which the state is closing $2 billion of the budget gap by forcing local governments to lend the state up to 8 percent of their property tax revenues in the upcoming fiscal year. The idea is that the state will pay back this loan, with interest, by the end of the 2013 fiscal year. In the short run, of course, this move will force local governments to make $2 billion worth of the hard decisions--cut spending or hike taxes and fees--that state lawmakers found themselves unable to deal with this year.

A broad base is an essential element of a good tax system. Fulfilling the principles of "horizontal equity," and "economic neutrality," both depend upon the use of a broad tax base. Unfortunately, the temptation to carve out special tax breaks for politically popular causes, or for powerful constituencies, if often irresistible to lawmakers.

But efforts are currently underway in Michigan to undo some of these special tax breaks, and a tax reform commission in California is at least pretending to consider a reform that would help pave the way for a careful reconsideration of many of that state's tax breaks. Furthermore, policymakers in North Carolina have expressed a strong desire to return to the task of base-broadening this fall, even as efforts to include base-broadening revenue-raisers in this year's budget agreement seem to have failed.

Earlier this month, Michigan Governor Jennifer Granholm stated her desire to eliminate between $500 million and $1 billion in special tax breaks as a way to reduce the state's looming deficit. While accomplishing such a feat will inevitably involve an uphill political battle, Michiganders should be grateful that the Michigan League for Human Services (MLHS) is closely following the action. MLHS Chairman Lynn Jondahl hit the nail on the head when he urged lawmakers to ask themselves, in reference to the state's film tax credit, "Would you be willing to appropriate $6 million to MGM, say, to make this film in Michigan? We're paying you to do something in lieu of filling pot holes or funding mental health treatment. Which do we value more?"

In California, a tax reform commission that so far has shown interest mostly in cutting the progressive income tax is at least listening politely to a different idea. The so-called "blue proposal" currently before the commission, presented as a less regressive alternative to the much-ballyhooed flat-tax proposal supported by Governor Schwarzenegger, would require special tax breaks to be presented in the Governor's budget, saddled with a "sunset" provision, and evaluated based on their effectiveness in achieving their stated objectives. Of course, adopting this approach will amount to rearranging deck chairs on the Titanic if the commission acts on its apparent zeal for moving away from income taxes and towards regressive consumption taxes. And the "blue proposal" has its warts as well: provisions that would impose a spending cap and create a new "net receipts" tax in lieu of the current corporate income tax have progressives feeling, well, blue. But the tax-expenditure element of the "blue proposal" is a welcome dose of thoughtful policy at a time when California surely needs it.

Finally, in a recent development out of North Carolina, base-broadening appears to be off the agenda for the immediate future, though policymakers have expressed a strong interest in returning to the issue this fall. When they do return to the issue, they would be wise to review these recommendations, recently released from the North Carolina Budget and Tax Center, explaining how to broaden the state's tax base while simultaneously offsetting any potentially harmful effects on low- and moderate-income families.

Charged with finding a revenue neutral way to reduce the volatility of California's revenue stream, the "Commission on the 21st Century Economy" recently expanded the scope of its study, and announced its plans to seek an extension until the end of September. This extension (the second sought by the Commission) comes after a successful bid by Commissioner Fred Keeley to add a variety of more progressive options to the discussion. The options to be discussed include: retaining the state's progressive income tax, removing Prop 13 limitations on commercial property tax bills, expanding the sales tax to include services while lowering the sales tax rate, taxing carbon based fuels, and making more careful use of a rainy day fund, especially in regard to capital gains revenue. Keeley's goal is to offer solutions to the state's volatile budgetary situation that don't involve gutting the state's progressive income tax.

This delay of the Commission's recommendations means that California legislators will not be receiving any advice from the Commission during this legislative session. This is an unfortunate development, as the legislature is clearly in need of some guidance. California lawmakers recently unveiled a plan to balance the budget by gutting the state's education programs, while refusing to increase any taxes.

Of all Keeley's proposals, the removal of Prop 13 limitations on commercial property taxes has received particular attention as of late, including an LA Times column detailing some of its abuses as well as its high cost.

Corporate lobbyists in Sacramento could be dealt another blow soon. An effort is underway to repeal by ballot (in November 2010) the billions in corporate tax breaks passed by California legislators over the course of the past ten months.

Late last week, California Governor Arnold Schwarzenegger, in a meeting with the editorial board of the Sacramento Bee, floated the idea of adopting a flat tax with a rate of 15 percent as part of a major overhaul of the state's tax system. While it is unclear which taxes the Governor would replace with such a levy, what is clear is that "flat tax" proposals are a bad idea.

As CTJ Executive Director Bob McIntyre made plain in his testimony before the California Commission on the 21st Century Economy recently, a "flat tax" almost certainly means that poorer taxpayers would be asked to contribute more to government finances and that wealthier taxpayers would be required to put far less into state coffers than they do now.

For a more productive approach to reforming California's tax system (and addressing the state's fiscal woes), see this recent commentary by Jean Ross, head of the California Budget Project.

It's no secret that California's budget situation is dire. With that in mind, the decision by California policymakers to enact three corporate income tax cuts over the past 9 months, costing the state as much as $2.5 billion annually, is nothing short of appalling. A recent report from the California Budget Project (CBP) explains these cuts, detailing especially how their benefits will be skewed toward a few of the largest corporations in the state.

The largest of the three provisions examined by the CBP allows corporations to use a "single sales factor" to determine how their profits are apportioned among different states for corporate income tax purposes. You can read the ITEP Policy Brief on single sales factor here. The CBP notes that this provision alone would cause $1.5 billion to flow from already depleted state coffers into the hands of large corporations. At least 80% of the benefits would go to big business, defined generously here as corporations with gross receipts over $1 billion annually.

The second provision is an allowance for "net operating loss carrybacks". This new measure could reduce state revenues by up to a half billion dollars annually. California is now among a minority of states offering this type of tax break. For more on this topic, see this recent report from the Center on Budget and Policy Priorities detailing why states with NOL carrybacks should eliminate them.

The final provision examined by CBP allows tax credits earned by one corporation to be given to related corporations. This is eventually expected to result in losses of up to $400 billion for the state. A lucky 0.03% of California corporations will enjoy nearly 90% of the benefits.

It's hard to believe that California policymakers considered these items to be a priority despite their state's current budget nightmare. Repealing these breaks is the obvious next step in trying to restore fiscal sanity to the state -- though it will by no means end the state's problems. For a more comprehensive solution, Californians should look toward the elimination of the supermajority requirement for tax increases, and the elimination of Prop 13. These ideas seem to be gaining increasing attention, as exemplified in this recent LA Times Business column.

California's special election this week came with no surprises. Just as the pre-election polling had predicted, California voters roundly rejected most of the ideas sent to them by their representatives -- save the proposition limiting pay increases for elected officials. The most important consequence of the vote was the defeat of a cap on state spending, hastily placed on the ballot as a means of securing the Republican votes needed to pass a budget with two-thirds legislative support.

The rejection of this cap, however, brings with it the early expiration of a variety of recently enacted, but temporary tax increases. Instead of expiring in early to mid 2013, those increases will now cease to exist in early to mid 2011. This development does deal a sizeable blow to California's fiscal outlook, though even with the full tax increases an immense budget deficit would have remained.

Talk over the last few days has focused largely on themassive cuts that will be needed to bring the state's budget into balance. Additionally, the state would like to borrow to fill much of the gap. It hopes to have its loans guaranteed by the federal government in order to avoid the consequences associated with lost confidence in California's ability to pay back those loans.

Unfortunately, at least as of today, responsible, broad-based, progressive tax increases appear to be off the table. With California's budget in shambles for the foreseeable future, however, it's hard to think that the opportunity for meaningful, revenue-raising tax reform is completely out of the question. Such reform, of course, should start with the elimination of the two-thirds requirement for enacting tax increases and passing budgets.

California has an important special election coming up in just a few weeks. After a lengthy struggle over how to fill the state's immense budget gap, a compromise was reached when legislative leaders and the Governor agreed to place on the ballot a measure to cap state spending growth (using a formula based on inflation and population growth).

The most recent numbers suggest, however, that Californians aren't enamored with the idea, and for good reason.

As Jean Ross of the California Budget Project (CBP) put it, "Though touted as 'reform,' Proposition 1A does nothing to address the fact that the revenues raised by our state's tax system are insufficient to fund our current programs and services, much less the level that Californians want and expect... By adding more formulas on top of the state's already hamstrung budget, Proposition 1A will make it even more difficult to balance future budgets." Instead, as Ross points out, California's budget problems would be better addressed through a modernized tax system, and an elimination of the requirement that two-thirds of the legislature approve any tax increase -- an idea that has steadily been picking up some support.

It's hard to believe, but there may actually be a trend in state tax policy more prominent than increasing cigarette taxes. Business tax credits aimed at spurring economic development have been among the most popular ideas in statehouses scrambling for ways to reduce unemployment. Just last week, we described a plan in Minnesota to boost investment tax credits and a budget in California containing a few credits of its own. This week, proposals to do the same in Iowa, Kentucky, and Missouri are under discussion.

In Iowa, Republican lawmakers have suggested paying (via tax credit) half the salary of each new job created by private businesses. Oddly, because this payment would be administered through the tax code rather than as a direct grant, the debate has become confused to the extent that this policy has been labeled as a way to return to a "market-based, capitalistic system".

An excellent op-ed out of Kentucky helps clear things up a bit, noting that Gov. Beshear's proposed expansion of business tax incentives would be a costly, nontransparent, and likely ineffective way of encouraging job growth. The op-ed goes on to argue that a "broader" approach, including better targeted and more closely scrutinized spending programs, could do far more good than creating more tax credits.

Finally, as an expansion in economic development tax credits works its way through Missouri's legislature, the admission of at least one legislator that he is a "recovering tax credit addict" helped to shine some light on the unfortunate politics behind these types of tax credits. These programs can cost a state enormously, and are rarely defensible on principled tax policy grounds. Instead, they constitute a type of spending done through the tax code -- commonly referred to as "tax expenditures" -- which add complexity, shrink the tax base, require higher marginal rates, and offer little if anything in terms of making the system more responsive to individuals' and businesses' ability to pay.

As we mentioned last week, California enacted, as part of its budget compromise, a change in the rules determining what share of a corporation's income is taxable in the state. To be specific, California adopted an optional "single sales factor" apportionment formula, which multi-state corporations support -- because it will help them avoid taxes. Virginia appears to be following suit this week. Both of the state's legislative chambers have approved optional single sales factor apportionment, though only for manufacturers. The Governor has yet to sign the measure, and he has reportedly taken no position on the bill. You can read the ITEP Policy Brief explaining how single sales factor apportionment can reduce the fairness and adequacy of state corporate income taxes here.

Six Holdouts Realize State Budget Shortfall Could Not Be Fixed with Cuts Alone

The governor of California has finally signed a budget. After a prolonged struggle to convince a handful of anti-tax lawmakers that the state's problems were too large to be fixed without additional revenues, a package of spending cuts and tax increases was finally cobbled together. On the tax side, the most notable provisions include a temporary one percent sales tax increase, a temporary hike in state income tax rates, a temporary increase in the vehicle license fee, and a temporary cut in the dependent exemption credit. That's a lot of temporary help for a problem that's not likely to go away.

Negating some of the usefulness of these revenue gains are temporary tax credits for businesses, home buyers, and movie and TV production. Even worse, a permanent tax cut for multi-state corporations was enacted in the form of an optional single sales factor apportionment method. Nonetheless, securing a budget with any additional revenues at all was an important (and difficult) first step.

But the drama in California isn't over. One of the major compromises used to secure the supermajority needed to pass a budget was the inclusion of a provision placing a spending cap on the ballot for a May 19 special election. If voters reject the spending cap, the temporary tax increases will expire in early to mid 2011. If the spending cap is approved, however, the increases will be allowed to continue through early to mid 2013. Needless to say, you can expect plenty more coverage of the California saga as the story develops.

California legislators appear to finally be in the early stages of negotiations over a method to fix the current year's budget shortfall. As has been obvious to most observers for quite some time, California's budget gap is far too large to be fixed with spending cuts alone, and will require some kind of tax increase. Convincing California Republicans to recognize this fact was no easy task, and it now appears that the cost of securing their support could come in the form of a spending cap. Unfortunately, while a tax increase is absolutely necessary to solve California's short-term problems, allowing a spending cap to be slipped into the deal would be nothing short of devastating in the long-term.

The case against the spending cap was articulated brilliantly by Jean Ross of the California Budget Project in a recent op-ed published in the Los Angeles Times. Ross noted that "far from being a cure-all, a hard spending cap would place an arbitrary stranglehold on the state's ability to improve its schools, rebuild its infrastructure, care for its senior population and respond nimbly to future challenges. Disguised as a solution, this cap could quickly become one of California's most serious budgetary problems". She goes on to point out that her organization "found that if this cap had been enacted in 1995, using that year's budget as the base, it would have resulted in a 2008-09 budget $39.7 billion below what was enacted in September. While this would bring the budget into balance, it also would require spending cuts more than twice as large as those proposed by the governor."

Californians familiar with Colorado's TABOR debacle should be especially wary of what Ross points out next: "The hard spending cap also would be incompatible with Proposition 98, which guarantees a minimum level of state funding for K-12 education and community colleges. That guarantee would generally outpace increases allowed under the cap, which would result in education crowding out all other state spending". The parallels with the difficulties created by Colorado's Amendment 23 (which requires increases in K-12 spending of 1% plus inflation each year) couldn't be more obvious.

There isn't any question that California needs more revenue. Just look at the fact that California's bond rating was recently decreased by two grades, or that the state Controller had to start issuing IOU's instead of tax refunds today. But while securing more revenue should be a top priority this year, accepting a spending cap as part of the compromise would be an action that Californians would regret for years.

The news from California just keeps getting worse. Faced with a budget deficit that could reach as much as $42 billion by June 2010 and the prospect that the state will soon deplete its cash reserves, State Controller John Chiang announced last week that the state may have to begin issuing IOU's to state employees and to contractors who do business with the state. There's also the chance that, rather than receive the refunds to which they may be entitled, California taxpayers may receive promises that they'll be paid later as well.

So, while Governor Schwarzenegger is busy vetoing the Assembly's latest budget plan, because, he maintains, it "punish[es] people with increased taxes," millions of Californians must now prepare themselves to pay, in essence, higher taxes than they expected to pay this year. Such an outcome hardly seems justifiable, given the likelihood that those residents entitled to refunds are low- and moderate-income families, families that would almost certainly use those tax refunds to pay off bills or to make long-planned purchases.

In light of these developments, the state's Legislative Analyst, Mac Taylor, is now urging policymakers to put tax increases before the states' voters as early as April, so that they can avoid the supermajority-induced gridlock that has plagued Sacramento in recent years.

Of course, California isn't alone in suffering through fiscal crises brought on by unsound tax limits and undemocratic procedural rules. Coloradoknows them quite well too, thanks to the so-called Taxpayer Bill of Rights (TABOR) approved by state voters in 1992. Unless some major changes are made this year, it will likely endure some considerable woes in the years ahead. Why is that? Well, as Erika Stutzman of Boulder's Daily Camera observes, during recessions, "double-whammy style, [ Colorado hits] the 'ratchet' effect: TABOR's requirement that the previous year's budget be used to determine next year's budget." So, if spending falls this year, that lower level of spending will serve as the baseline for growth in all future years. Quite sensibly then, Ms. Stutzman backs legislative changes to TABOR to prevent that from happening.

As you can see from just a brief skimming of the Tax Justice Digest's California archives, the fight to fill California's enormous budget deficit has been a struggle of epic proportions. Despite widespread agreement among both the Governor and a majority of legislators that some type of tax increase will have to be employed if catastrophic reductions in state services are to be avoided, a minority of tax-phobic legislators have been able to hold hostage the process as a result of California's requirement that all tax increases be approved by a super-majority of the legislature. Having struggled for months under the unworkable limitations of the super-majority requirement, California legislators took the desperate action of cobbling together and passing a (perhaps illegal) budget fix that raises taxes in a manner so convoluted that it may circumvent the super-majority requirement (that is, if it holds up in court).

The gist of the plan is this: raise the sales tax, enact an oil extraction tax, and impose a surcharge on everybody's income tax bill. Then, at the same time, eliminate the gasoline tax so that, on the whole, the proposal produces no increased revenue for the state. But getting rid of gas taxes is hardly something California can afford, especially given the well-publicized suspension of numerous transportation projects this week. In order to fix this, the gas tax is then re-imposed (at a higher rate than before), but is re-labeled as a "fee", rather than as a "tax". Presumably, this is allowed because gas taxes are largely dedicated to the very specific purpose of recovering the costs of providing transportation -- in contrast to taxes which usually finance government expenditures more generally.

Given the desperate nature of the situation, the Governor appears to have given his consent to this convoluted technique. But before you start thinking that we've heard the end of California's budget debate, think again; the Governor has already announced his intent to veto this particular proposal because of his belief that it includes too few spending cuts and does too little to stimulate California's economy. Presumably, then, if another similar proposal manages to make it through the legislature that is more tailored to the Governor's liking, we may be set for a court battle over the legality of this revenue-raising scheme.

For now, only one thing is clear: California needs to greatly magnify the amount of attention that has been given to ending the absurd super-majority requirement.

The Newest Version of the California Budget Debacle

With the election out of the way, California Governor Arnold Schwarzenegger is displaying some optimism that Republican legislators will reconsider their opposition to any and all tax increases. So far, Republicans have been content with slashing services, borrowing heavily, and employing clever accounting games to get the current year's budget into balance. With more shortfalls staring the state in the face, however, the Governor has called a special session in which he has proposed a variety of tax increases, as well as spending reductions.

The Governor's previous plan to temporarily increase the sales tax by 1-cent has evolved into a plan to hike the sales tax (still temporarily) by 1.5 cents.

In addition, the Governor proposes:
- closing loopholes in the sales tax that allow a variety of personal services to go untaxed,
- instituting an oil extraction tax (California is the only major oil-producing state that lacks such a tax),
- raising the tax on alcoholic beverages,
- and enacting some modest increases in vehicle registration fees.

His plan would also include sizeable cuts in school budgets and health care services for low-income Californians.

Of course, the sales tax, alcohol tax, and vehicle registration fee increases would all hit low-income Californians hardest just as the budget cuts would. The fact that more progressive options have not yet surfaced is a major disappointment. Nonetheless, it seems clear that the state will have to raise revenue in some way, and the fact that a Republican governor traditionally opposed to tax increases has recognized that is a major step forward.

Unfortunately, though, that step forward has been accompanied by another step backwards, as the governor is simultaneously proposing to give millions in tax breaks to film and television companies.

And making matters even worse, California's budget hole could become deeper if the federal government does not act to reverse a little-noticed IRS ruling on the corporate income tax that we publicized last week.

Tax Commission Likely to Play Major Role in Future of California's Tax System

Alongside the budget struggles sure to dominate California headlines for the next few weeks is another tax story that could ultimately end up being even more important. The Governor, together with House Speaker Karen Bass recently agreed to form a "Commission on the 21st Century Economy" with the explicit goal to "stabilize state revenues and reduce volatility". While the Commission's recommendations won't be made until April 15, 2009, there has already been some speculation about what those recommendations will be. So far, expanding the sales tax base to include more services seems to be at the top of the list. Less encouraging, however, is talk of reducing the progressivity of the income tax.

Enacting an income tax would obviously be a step in the right direction for states like Nevada, New Hampshire, and Florida, but it would only be the first step. As ITEP's latest policy brief explains, states' income taxes must also be progressive, in order to balance out the regressive impact of the other types of taxes that states levy, like sales taxes and property taxes. States that do not have a progressive personal income tax will find it nearly impossible, over the long run, to fund public services in a way that is sustainable and fair.

At the very least, this means states' income taxes should provide meaningful exemptions to poor taxpayers and use a graduated rate structure to ensure that the very wealthy are paying their share. Unfortunately, though, as a new report from the Center on Budget and Policy Priorities documents, some states with personal income taxes are actually taxing the poor deeper into poverty. In fact, the Center's report finds that, in 18 of the 42 states that levy income taxes, two-parent families of four with incomes under the federal poverty level actually paid state income taxes in 2007. It also finds that 15 states make single parents with two children living below the poverty line pay state income taxes.

There are some straightforward solutions to this. For example, 23 states and the District of Columbia offer earned income tax credits (EITCs) which reduce income taxes for poor families and sometimes provide a refundable credit that further offsets the regressive impact of other state taxes. Plenty of states with personal income taxes could also make their rate structures more progressive, which would ensure that high-income families pay a bit more, as a share of their income, than low- and middle-income families.

Also troubling is that some states that do the right thing and use fairly progressive income taxes -- such as Rhode Island and California -- are considering fundamental changes to those taxes. As ITEP's Jeff McLynch observes in yesterday's Providence Journal, policymakers in Rhode Island should be strengthening the progressive character of their state's income tax, rather than seeking to diminish it.

It's never too early to begin preparing for future ballot battles, particularly when they are likely to dramatically affect states' abilities to fund public services that residents depend on. Here are three states that might see major ballot battles in 2009 and 2010.

Maine: TABOR Question Appears Likely in 2009

It looks like Maine voters may face a bruising battle over state spending limits in 2009. The "Maine Leads" consulting firm claims to have gathered enough signatures to place a "Taxpayer Bill of Rights" (TABOR) spending cap on the 2009 ballot.

Supporters of this initiative have apparently learned very little from the lessons of two other states making headlines in recent weeks.

Colorado voters gave TABOR a chance, but because of the excessive restrictions it placed on their government's ability to provide valued services, a major, permanent scaling back of the requirement is being voted on this November.

Similarly, though California lacks a TABOR spending cap, the state has plenty of experience with supermajority requirements in its legislature (which TABOR would impose on any tax increase). After the recent budget debacle in California, serious talk has recently surfaced of ending their 2/3 requirement for the approval of state budgets (as explained below). Maine would be wise not to follow down California's obviously failed path.

Fortunately, a strong opposition to the TABOR campaign can be expected. The Maine Center for Economic Policy is very familiar with the issue, having already worked on the front lines of a similar battle when TABOR was on the ballot in 2006. At that time, they authored a report worth revisiting, aptly titled: "TABOR: Not Right for Colorado, Not Right for Maine.

Utah: A Return to a More Progressive Income Tax in 2010?

The Utah Rings True Coalition is beginning the process of getting a graduated rate income tax onto the 2010 ballot. The current, 5% flat rate income tax that took effect this year is defended by numerous lawmakers in the state, despite the huge breaks such a system offers to wealthy taxpayers. The group will have over a year to gather the 92,000 signatures needed.

Utah Voices for Children has authored a variety of important policy briefs on the flaws of the flat-rate system. You can find them here.

California: Recent Budget Gridlock Renews Calls to End 2/3 Requirement for Budgets in 2010

With the recent gridlock surrounding the state budget still fresh in everyone's minds, multiple legislative leaders have voiced an interest in placing on the 2010 ballot a proposal to end supermajority requirements for passing state budgets. Referring to the recent delays the supermajority requirement created in enacting their 2009 budget, Senate leader Darrell Steinberg said "We can't keep doing this. This is ridiculous. It's unproductive."

And support for ending the supermajority requirement isn't coming only from the majority party. Republican state Senator Tom McClintock has said that "The two-thirds vote for the budget has not contained spending, and it blurs accountability! If anything, in past years, it has prompted additional spending as votes for the budget are cobbled together."

After a 76 day delay, California may finally have a budget for fiscal year 2009, as legislative leaders appeared to have struck a deal to close the Golden State's $15.2 billion budget deficit over the weekend. Those hoping for anything resembling sound public policy to emerge from these last-ditch negotiations will likely be sorely disappointed. It is being reported that, save for the suspension of a few business tax breaks, the agreement includes no major tax increases. Rather, it is premised on cuts in spending and accounting tricks likely to make next year's budget morass even deeper.

Specifically, it appears that the agreement will rely on "accelerated revenues" -- to the tune of approximately $5 billion -- to help close the budget gap. Those revenues are to be accelerated from fiscal year 2010 through stepped-up withholding and higher estimated tax payments. In short, California legislators seem to have decided to address their chronically under-funded budget by making next year's budget even more chronically under-funded.

The reason for the delay, and the reason the budget contains few substantive changes in tax policy, is clear. The California constitution requires a two-thirds supermajority in order to pass a budget, thus enabling Republicans in the legislative minority to block the kind of tax increases necessary to bring the budget into balance.

If there is any silver lining to this budgetary cloud, it is that individuals and organizations from across the political spectrum have started to raise real questions about whether such a supermajority requirement serves any purpose. Late last month, the Bay Area Council, a San Francisco-based and business-sponsored advocacy organization, called for a state constitutional convention to consider changes to California's budget process. Given the outcome of this particular budgetary negotiation and the fact that California has been unable to pass a budget on time in 23 of the last 32 years, it's not hard to see how some might be fed up with this approach to the budget. Indeed, such delays have real consequences for real people, as Jean Ross, the head of the California Budget Project, explained recently.

Of course, because it has served California so well, Senator John McCain, the Republican nominee for President, would like to see a similar super-majority requirement used at the federal level to constrain tax policy for the entire nation. There are certainly lessons to be learned from California's latest budget mess, but limiting one's options in the face of enormous budget deficits is not one of them.

Four of the nation's most populous states, together home to more than one out of every four Americans, are facing serious budget problems. Important new developments occurred in each of those states this week, the theme of which is perhaps best conveyed through California Republican Mike Villines' question: "How many times can we say no to taxes?" State residents will soon learn that this is really saying "no" to keeping alive public services like education, transportation and health care that families depend on.

See the following posts on the budget situations in California, Florida, New York, and Virginia.

Today marks the 53^rd day of the new fiscal year in which California is operating without a budget. With the state $15.2 billion in the hole, all sides concede that the budget gap cannot be filled with spending cuts alone. Unfortunately, the debate has devolved significantly from where we thought it might have been headed back in June. A proposal to expand the sales tax base to include the state's growing service sector has been defeated, and a proposal to increase income tax rates on wealthy Californians has just been defeated by a vote of 45-30.

The new sides of the debate are as follows. Republicans have flatly rejected the idea of increasing any taxes, a fact central to the nearly two months of gridlock that has gripped the state. Instead, they support borrowing money and cutting spending to fix the budget gap. Governor Schwarzenegger has called such a solution a "get-out-of-town budget" that simply "kicks the can down the road and lets someone else worry about it later on".

Curiously, then, the Governor's proposal combines spending cuts with a temporary sales tax hike that would last three years, after which point the rate would be lowered 0.25 percentage points below the current rate. But like the Republicans' plan, a temporary tax hike followed by a tax cut certainly seems to leave a problem for "someone else to worry about later on". Since the Democrats' plan to hike income tax rates on the wealthy has been soundly defeated, it seems that their support may shift in favor of the sales tax hike as the next best option. In order to gain passage, however, a handful of Republicans will also have to back the plan -- a prospect that, at the moment, seems pretty dim.

Aside from the problem of how to fix this year's budget, the other major hang-up has been over what measures should be taken to prevent future shortfalls. Republicans have proposed a strict spending cap that only allows revenues to grow at a rate consistent with growth in population and the inflation rate. Such caps always amount to an unrealistic restraint on government since the cost of health care, education, corrections facilities, and various other state services often grow faster than population or inflation. Fortunately, Democrats have rejected this plan. As a substitute, the Governor has proposed that excess tax revenue in strong-growth years be tucked away into a rainy day fund, rather than spent. That fund would be allowed to grow to as much as 12.5% of the state's budget.

Earlier this week, the Institute on Taxation and Economic Policy (ITEP) released a brief report using IRS data and revealing that the most unequal states in the country also happen to be states that lack the type of progressive tax provisions that could reduce this inequality and raise badly needed revenue. The most unequal states either don't have a personal income tax or have one in need of improvement. Consequently, these states are left with tax systems that, on the whole, are unsustainable, inadequate, and unfair over the long-run.

The IRS data show that, in 2006, ten states -- Wyoming, New York, Nevada, Connecticut, Florida, the District of Columbia, California, Massachusetts, Texas, and Illinois -- have greater concentrations of reported income among their very wealthiest residents than the country as a whole. Yet, the tax systems in these states generally ignore that very important reality. Of those ten states, four lack a broad-based personal income tax and three either impose a single, flat rate personal income tax or have a rate structure that all but functions in that manner. Three do use a graduated rate structure, but of these, two have cut income taxes for their most affluent residents substantially over the past two decades.

Given this mismatch, it should not be too surprising that over half of these states face severe or chronic budget shortfalls. After all, the lack of an income tax, the lack of a graduated rate structure, or moves to make the income tax less progressive all mean that a state's revenue system will not completely reflect the concentration of income among the very wealthy and therefore will not yield as much revenue.

Case in point: New York. As the Fiscal Policy Institute observes, over the last 30 years, the state has reduced its top income tax rate by more than 50 percent. Most recently, in 2005, it allowed to lapse a temporary top rate of 7 percent on taxpayers with incomes above $500,000 per year. Today, the state must confront a budget deficit of more than $6 billion for the coming year and more than $20 billion over the next three. New York residents seem to understand the disconnect between the enormous disparities of wealth in their state -- where the richest 1 percent of taxpayers account for 28.7 percent of reported income -- and the state's fiscal woes. A poll released this week shows that nearly 4 out of 5 people surveyed support increasing the state's income tax for millionaires. Hopefully, Governor David Paterson is listening. As it stands, he'd rather cap property taxes than ensure that millionaires pay taxes in accordance with their inordinate share of New York's economic resources.

Democratic lawmakers presented a budget proposal this week that will allow California to finally close its massive $15.2 billion budget deficit. Their goal is to shift the burden of closing the deficit onto business and higher income state residents instead of cutting public services. Among its more notable provisions, the plan would reinstate a 10 percent income tax bracket for married couples with incomes over $321,000 and an 11 percent bracket for couples with incomes over $642,000. These are the rates that were in place in the mid-1990s under conservative Republican Governor Pete Wilson.

California Republicans have pledged to block tax increases in any and all circumstances. This position forces Republicans to embrace a program of draconian cuts to education, health care, transportation, and public safety. They are likely to get their way, thanks to Proposition 13, the infamous ballot referendum approved by the state's voters 30 years ago. One of the changes it made requires that the legislature approve any income tax increase by a two-thirds majority.

California has faced ongoing budget deficits since 2002 that it has rolled over from year to year mainly through borrowing, exemplified by a recent proposal to borrow from future lottery revenues. California has the lowest bond rating of any state besides Louisiana, and it does not currently have money to fulfill obligations past September.

Property Tax Limitation Backfires

Proposition 13 has caused the state to have a structural imbalance between revenues and expenditures that is not likely to close without fundamental changes. Another restriction it mandated limits property tax increases to 2 percent per year. Because local authorities are unable to raise the revenues they need, they rely on state aid to finance their services.

Prop 13 mandates that only a change of land ownership will bring its assessed value in line with market value. Now, with home values in sharp decline all over California, homeowners are witnessing the curious and maddening phenomenon of their property taxes continuing to increase. This is because the assessment ratios are still far below market price and have room to continue growing 2% per year.

Democrats and Republicans in Sacramento should consider not only slightly higher income taxes on California's wealthiest, but also a fundamental restructuring of the state's dysfunctional tax code, starting with the elimination of Proposition 13.

Throughout California's latest fiscal crisis, some have argued that the state's entire $15.2 billion budget deficit should and can be resolved through spending cuts alone. This should come as little surprise. After all, California is the state that gave the nation its most well known tax limitation - Proposition 13, which turned 30 this month.

Those more in touch with reality - and those who have long struggled with the legacy of Proposition 13 - understand, however, that additional tax revenue must be part of the solution to California's financial troubles. As Jean Ross, Executive Director of the California Budget Project, pointed out in the Sacramento Bee earlier this week: "California's budget faces a chronic problem. Simply put, our tax system doesn't raise enough money to support the services Californians want and deserve." Ross further notes that one of the sources of that problem is clear; taken together, the numerous personal income, corporate income, and other tax cuts enacted over the past 15 years now drain $12 billion per year out of the state's budget.

State Board of Equalization Chair Janet Chu offers another approach to bolstering the state's tax system in the San Jose Mercury News. She proposes expanding the state's sales tax base to include an array of services, a move that would yield upwards of $8.7 billion and help bring California's tax system into the twenty-first century. Ross and Chu may be traveling slightly different roads, but their intended destination is the same - adequate revenues.

Fortunately, Assembly Speaker Karen Bass seems to be heading in the same direction, though she doesn't appear to have a very good map just yet. She indicated last week that she supports raising taxes by $6.4 billion, but offered few details on how that goal would be reached. Of course, as the Bee observes, with the start of the state's fiscal year fewer than three weeks away, the time for Bass and other legislative leaders to become more engaged in the budget process is now.

As was discussed in an earlier issue of the Digest, California is facing a serious budget crisis that many observers hoped would force the state to address some of the fundamental problems with its tax system. Last week, Governor Schwarzenegger proposed a plan he asserted would remedy the deficit problem, but that plan would do nothing to improve the state's tax system. Rather than proposing a broadening of the sales tax base, as has been discussed, the Governor would like to expand the lottery with new games, bigger prizes, and less restrictive marketing rules. The new revenues expected to be generated by these changes would be made available immediately by selling the securitized future earnings from the lottery to investors.

Attempting to fill such a huge budget hole with lottery revenues has already raised the concerns from members of the legislature and of the Legislative Analyst's Office (LAO) who fear that increasing the prominence of the lottery will disproportionately affect the poor, both through financial loss and increased social problems. Even more importantly, though, the LAO expects the Governor's plan will produce far less revenue than he has claimed. With lottery revenues this year declining to a five year low, the Governor's plan to double revenues within ten years appears overly optimistic. Legislative Analyst Elizabeth Hill believes that if revenues fall short of the Governor's estimates, public schools could lose out on as much as $5 billion over the next twelve years.

Complicating matters further is that if the Governor's proposal does not gain the approval of the voters, his back-up plan is a temporary 1 cent increase in the sales tax rate. A new survey from the Public Policy Institute of California suggests this outcome is actually very likely... 62% of likely voters oppose the lottery plan, while 57% of likely voters favor the sales tax hike. Aside from being starkly regressive, Hill estimates that the sales tax increase, which would not take effect until midway through the fiscal year, would fall $2 billion short of raising the amount needed to fill the budget gap.

Due to concerns about the huge uncertainties in the Governor's plan, Hill recommends that borrowing against future lottery earnings be significantly scaled back and combined with a temporary hike in the sales tax rate. While this proposal would be a much safer bet for California's children, it would squander an opportunity to meaningfully address the problems with the state's tax system.

A temporary hike in the sales tax rate is only a band-aid fix. California's sales tax rate is already among the highest in the nation. The real problem is that far too few purchases, including most services, are needlessly exempt from the tax. Broadening California's sales tax to include services, and eliminating other unnecessary exemptions in the tax code, could provide a boost in revenues while simultaneously enhancing the sustainability and fairness of the revenue base. Unfortunately, the Governor seems much more concerned with finding the path of least resistance than with doing the hard work involved in enacting forward-thinking policy changes.

With state budget shortfalls having recently become so prevalent, it has been interesting to watch how different states have chosen to address their budgetary woes. Fortunately, a collection of influential groups in Michigan, including the Michigan League for Human Services, is seeking to fill their state's budget gap with a combination of policy changes much better thought-out than the regressive band-aid fixes proposed in New Hampshire (cigarette tax hikes) or California (lottery revenues). The plan, proposed by the Michigan League for Human Services and backed by a slew of influential groups, proposes to raise roughly $400 million through a series of relatively small changes, each of which already gained approval at some point from either the Governor or the legislature in the 2005 or 2007 legislative session.

Among the proposed list of reforms is the elimination of numerous unjustified sales tax exemptions. Vending machine snacks, international phone calls, and purchases made at prison stores are among the items that would be subject to the sales tax under the proposal. Another major component of the proposal would decouple state business depreciation rules from the federal rules, as was advocated in an earlier Digest piece.

While certainly not a comprehensive list of what could be done, the proposal is notable for its eclectic approach that simultaneously aims to improve efficiency and boost state revenues. States considering unimaginative hikes in consumption tax rates or damaging cuts in public services would do well to instead follow the lead of this proposal and seriously examine what kind of needed tweaks to their tax systems could boost revenues.

With a projected budget deficit that some believe may reach $20 billion, policymakers in California can avoid the harsh reality no longer. They must either address some of the fundamental problems that plague their tax system or impose draconian cuts in vital public services.

One of the shortcomings with California's tax system that has received a great deal of attention in recent weeks is the state's sales tax and its relatively narrow base. Like many states, California taxes only a handful of services, despite the prominence of that form of consumption in today's economy. The Chair of the State Board of Equalization, Judy Chu, released an analysis late last month demonstrating that California could generate as much as $10 billion in additional revenue by expanding its sales tax base. Senate President Don Perata has previously expressed support for such a change and new Assembly Speaker Karen Bass may also be open to the idea -- as well to other reforms. Now it seems that Governor Schwarzenegger may have taken the report's ideas to heart too, as the Los Angeles Times reports he has been meeting with business leaders in recent weeks to build support for changes in tax policy.

Unfortunately, California's budget woes haven't just highlighted problems with state tax policy. They have once again shed light on a legislative process that makes constructive responses to fiscal crises incredibly difficult. In particular, tax increases require a two-thirds supermajority vote to pass the legislature, a rule that gives disproportionate power to the legislative minority and that fosters intransigence among those opposed to tax increases no matter how dire the state's fiscal situation.

Just in time for tax day, recent reports from California, Connecticut, and North Carolina remind us that the overall distribution of taxes in most states is tilted heavily in favor of the wealthiest. Those least able to pay almost always pay a much larger share of their incomes towards taxes. For instance, California's tax system, despite featuring a highly progressive income tax, requires the poorest fifth of taxpayers to devote 11.7 percent of their incomes to taxes on average. At the same time, the richest one percent of Californians pays just 7.1 percent of their incomes in taxes.

Indeed, Meg Gray Wiehe of the North Carolina Budget and Tax Center could have been writing about almost any state when she recently opined that "when lawmakers consider any changes to North Carolina's current revenue system, they should account for the effect the change will have on low- and moderate-income taxpayers. If fairness is not at the center of every tax policy debate, reform efforts will fall short on achieving long-term adequacy. Focusing on fairness will help the state meet its needs without relying on those with the least to contribute." To read more about how states can make their tax systems more equitable, see ITEP's Guide to Fair State and Local Taxes.

Earlier this month, Apple announced that it had surpassed Wal-Mart as the largest music retailer in the United States, citing data from market research firm NPD for the first two months of 2008. The announcement will hopefully help to draw more attention to a long-standing shortcoming in some states' tax systems -- namely, their inability to tax electronic commerce properly. Simply put, the form a transaction takes should not affect the amount of tax it might incur. Someone who downloads the latest Mariah Carey album from iTunes should pay the same state sales tax as someone who purchases the CD at his or her local record store, and a hotel reservation made through Orbitz should result in the same amount of revenue to the state as one made over the phone or in person.

Yet, flaws in state tax laws mean that purchases of intangible goods -- like a downloaded version of E=MC2 -- are often not subject to the same sales taxes levied on purchases of tangible goods. For example, California loses an estimated $500 million in sales tax revenue each year because it makes such a distinction between tangible and intangible goods. A proposal to move towards ending that distinction was defeated in the Assembly's Revenue and Taxation Committee this past week, the victim of lobbying by the American Electronics Association, Yahoo, Microsoft, and others.

Similarly, states and localities continue to lose vital tax dollars due to hotel reservations made via the Internet. That is, online travel companies like Hotels.com frequently avoid paying the correct amount of taxes by maintaining that they only owe tax based on the wholesale price they paid to the hotels for the room reservations they offer, rather than the retail price they charge their customers. Different jurisdictions have taken different approaches to this problem. A number of cities have brought lawsuits against hotel resellers, while the state of South Carolina recently served one such company with a bill for $6.3 million in unpaid sales taxes. On the other hand, Florida, predictably, has the worst idea. A bill before one House committee -- and backed by Expedia -- would let online travel companies keep this tax break, at a cost of $22 million in forgone revenue.

California In his State of the State address earlier this month, California Governor Arnold Schwarzenegger outlined his plans for closing the state's $14.5 billion budget gap. As the California Budget Project's summary shows, his plans consist principally of slashing spending on a wide array of public services. Indeed, the Governor maintains that his budget plans would address the shortfall without raising taxes, an approach that has rightly been criticized by numerous observers, including the state's independent Legislative Analyst, Elizabeth Hill.

Earlier this week, the California Assembly approved a plan that would provide access to basic health care for the nearly 4 million Californians who currently lack it. One of the key elements of the plan is a tax credit, available to low- and moderate-income families who purchase health care on their own and intended to ensure that their healthcare costs do not exceed a certain share of their incomes.

While the plan has the support of Governor Arnold Schwarzenegger, much about it remains in flux. The state Senate will not consider the plan until mid-January at the earliest and a means of funding the more than $14 billion in costs it would incur are not included in the enabling legislation. As it now stands, funding for the plan will be decided by a ballot initiative in November 2008. Still, the Assembly's plan is one more example of states stepping into the void created by federal inaction on this critical matter. The California Budget Project provides a brief summary of the plan here.

Last month, the California Legislative Analyst's Office (LAO) released a report examining the state's largest tax expenditure, its personal income tax deduction for mortgage interest. At an annual cost of $5 billion, the deduction loses as much personal income tax revenue as some states collect in a given year, yet Californians -- particularly low- and moderate-income taxpayers -- don't seem to be getting much for their money.

Nearly half of the benefits from the mortgage interest deduction go to the richest 10 percent of taxpayers in the state and, as the report points out, the deduction probably isn't doing all that much to improve homeownership rates. Accordingly, the report offers a number of recommendations -- such as converting the deduction to a credit -- for making this particular tax expenditure more cost-effective, ideas that Daniel Borenstein of the Contra Costa Times recently endorsed.

Of course, such critical thinking about California's tax system will be even more essential in the months ahead, as it now appears that the Golden State will face a budget deficit as big as $14 billion in the coming fiscal year.

Over the past year we've told you about the growing popularity the earned income tax credit (EITC) at the state and federal levels. This credit offers financial assistance to low-income workers based on family size and income. The credit usually receives strong bipartisan support and keeps many families from living in poverty. Now twenty-three states plus the District of Columbia offer some type of EITC in addition to the federal one. One criticism of the credit is that people don't know they could be eligible to receive benefits -- thus millions of dollars in credits goes unclaimed. Legislation signed into law last week in California goes a long way to ensuring that working folks are notified about the federal credit. Assembly bill 650 mandates that "an employer [will] notify all employees that they may be eligible for the federal earned income tax credit." Other states would do well to follow in California's groundbreaking footsteps.

On August 24, California Governor Arnold Schwarzenegger signed into law the state's contentious 2007 budget (which was nearly 2 months overdue). It's especially difficult to pass a budget in the Golden State because a supermajority is required for passage. In order to gain the two-thirds majority needed in the Senate, the Governor committed to slashing $703 million in spending through his line-item veto power. The California Budget Project reveals that about 75 percent of the vetoes came directly from Health and Human Service programs. And there's no reason to think these problems will go away on their own. The Legislative Analyst's Office predicts a shortfall of $5 billion for next year and the year after that.

In California, the state Senate fell one vote shy Wednesday of adopting a budget and may not resume deliberations until August 20^th. Republicans maintain that some $700 billion in spending cuts are necessary to balance the budget, yet continue to back a tax package that, by the estimate of Senate President Don Perata, could cost the state $600 million to $1 billion annually. Among the principal elements of that tax package are $100 million in tax credits for movie and television production companies, $175 million in credits for research and development, and changes to the state's corporate income tax apportionment formula.

As the Sacramento Bee points out, this delay will likely force the state to suspend Medi-Cal payments to the 500 hospitals and 11,000 nursing homes and other facilities that serve the 6.8 million Californians who participate in the program. It may lead to a similar stoppage in funding for subsidized day care across the state, leaving 250,000 low-income families without caregivers for their children while they are at work. Interested readers can visit the California Budget Project's website for the latest on the showdown.

The California Budget Project marked the approach of Tax Day by asking "who pays California taxes" and found that the state's tax system remains stacked in favor of wealthy families and big corporations. The CBP report finds that California taxes fall disproportionately on the lowest-income California families. Even with the recent imposition of a "millionaire's tax" income tax supplement, the wealthiest Californians pay far less of their income in tax than low- and middle-income families must pay.

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

Caps:
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.

Income Taxes:
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.

This November, South Dakotans will vote on the latest too-good-to-be-true policy solution... Amendment D, a constitutional amendment that would change how property is assessed for tax purposes. In most states a property's taxable value depends on what its really worth. Amendment D would confuse matters by creating two different property tax systems. Property that is sold would be assessed based on its value at the time of the sale. Property that does not change hands would be assessed by rolling back its value to 2003 levels and then increasing growth by an arbitrary 3% or the rate of inflation.

The ideas driving Amendment D are nothing new. In fact, almost identical laws have passed in New Mexico, Florida and California. These laws created a situation where one home located next to an identical home could be assessed at twice the value of the adjacent home, merely because it was sold more recently. As this excellent letter to the editor points out, South Dakota currently has several measures in place to support homeowners when property taxes are due. An expansion of the current homestead credit or a property tax circuit breaker would help those most in need of assistance.

A voter initiative in Missouri to increase the cigarette tax by 80 cents is back on the November ballot. At first, the ballot was declared invalid after many of the signatures were disqualified. However, the Cole County Circuit Court has overturned that decision, and the voters will now decide the issue this fall. The initiative is joined at the polls this fall by similar measures in Arizona and California. Many of the proponents of these measures argue that they reduce smoking. However, cigarette taxes are very regressive, forcing low-income smokers to pay a much higher percentage of their income in cigarette taxes than high-income smokers. A 2005 policy brief by ITEP showed that cigarette taxes are ten times more burdensome for low-income smokers than for the wealthy.

Further, both Arizona and California plan to use the revenue generated by this bill to pay for public services unrelated to smoking. As Bruce Fuller, a professor of education and public policy at the University of California at Berkeley, points out: "Most will agree this is a regressive tax[...] We all like to beat up on smokers, but if the program truly benefits all families, including upper class, then you're taxing blue-collar people to pay for everyone." Reducing smoking rates is a laudable goal, but lawmakers must find a way to do so that is fair and equitable.