District of Columbia News


The DC Tax Reform Story Everyone Missed


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By now, the familiar media narrative about the nation’s capitol is one of glittering condos, staggering inequality, and the fraught race relations between newcomers and older residents. The trope shapes the coverage of everything from sports to politics, education to public transportation. When it comes to our nation’s capital, every reporter is Charles Dickens.

And so it was last week, when the DC City Council passed an ambitious tax reform package. “D.C. Council votes to keep ‘yoga tax’ as part of tax-cutting budget deal,” wrote The Washington Post, portraying the deal as an epic showdown between established progressive backbenchers and ritzy health-conscious transplants. (To be fair, The Post’s coverage of the recent tax bill has been far more substantive than reporting from other outlets, which wrote about the yoga tax controversy without providing context.)

The story most people missed? Washington, D.C. managed to pass a mostly sensible and progressive tax cut package that will deliver the biggest benefits to middle- and low-income residents – and the ‘yoga tax’ is just one small part of a much larger plan. What’s more, the DC City Council largely followed the recommendations of a nonpartisan commission designed to study the issue. 

The council also voted to expand the District’s Earned Income Tax Credit (EITC) for childless workers. Working low-income taxpayers who qualify for the federal credit will receive a D.C. credit worth 100 percent of the federal benefit (increased from 40 percent of the federal).  But, the policy change actually expands upon the federal program by allowing childless workers to continue receiving the tax credit above and beyond the federal income limits.   The tax cut lowers the income tax rate for those earning $40,000 to $60,000, from 8.5 percent to 7 percent (the rate will go down to 6.5 percent if the city meets revenue targets). The measure also increases the standard deduction and personal exemption to federal levels by 2017, with interim increases going into effect in 2015.

The EITC is one of the most effective anti-poverty programs, and is an economic winner as well: The Center for Budget and Policy Priorities estimated that the EITC put about $128 million into the DC economy in 2011.  Workers receive the tax credit based on their wages. If the credit exceeds the amount of tax a worker owes, then that worker receives the difference as a refund.

Hell Frozen Over

Pictured: Hell.

Of course, cutting taxes is easy – paying for tax cuts is the difficult part. Here again, the D.C. proposal shines. Instead of relying on regressive sales tax rate increases that disproportionately hurt the lower and middle classes, as states like Kansas have done in recent years, the District took the route supported by academic research and sound policy: they broadened the sales tax base. The city expanded the sales tax to cover additional services, such as construction contracting, storage units, carwashes, health clubs and tanning salons – yes, including yoga studios. Expanding the sales tax to cover services as well as goods in an increasingly service-based economy makes a lot of sense.

The D.C. Council, known more in recent years for political tawdriness than prudent fiscal management, has made the right move for the city’s residents and the city’s fiscal future. Many of the proposed cuts are tied to future economic growth, and will not take effect if this growth doesn’t materialize.

If there’s something not to like, it’s the Council’s decision to increase the threshold for application of the estate tax from $1 million to $5.25 million (the federal threshold). This proposal will benefit a handful of families and cost the city almost $15 million in lost revenue. Even this proposal, however, is tied to future revenue increases.  Businesses also got a significant cut in rates, from 9.975 to 9.4 percent, with the goal of reaching 8.25 percent by 2019. 

So hats off to the D.C. City Council for proving that tax cuts don’t have to be a giveaway to the rich, and that tax reform doesn’t have to soak the poor. Other jurisdictions should follow their lead.


Will Anti-Tax Yogis Sink Tax-Reform in D.C.?


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There is a bit of an uproar in Washington D.C. over a City Council proposal to begin requiring consumers to pay sales tax on yoga classes, gym members and similar activities.

Fitness centers, yoga studios and their allies have started a clever campaign decrying the proposed “fitness tax,” or “yoga tax”, arguing that “D.C. residents should [not] be monetarily penalized for being healthy.” Another anti-tax petition complains that “[f]itness activities are already really expensive.”

Here’s why their views are grossly misguided:

The real question is whether yoga and other fitness activities should be given a special tax-free status that is unavailable to most other items purchased by consumers. The proposal also would tax car washes, bowling alleys and billiard parlors. These new sales taxes are part of a broader package of reforms that actually cut taxes for residents while broadening the sales tax base to raise more revenue. Exempting fitness centers from sales taxes shifts the cost of funding public services onto every other small business in Washington D.C., making every other item city residents purchase more expensive in the long run.

The tax reform process began a few months ago after the Washington D.C. Tax Revision Commission recommended a host of changes to virtually all major taxes levied by the city. The D.C. City Council quietly approved many of these changes last week.

The process is not quite complete—the Council will take a second vote on the plan before sending it to Major Vincent Gray for his signature—but most observers think the plan will ultimately be ratified.

The bill will cut city taxes by at least $165 million a year, through a combination of cuts in personal and business income taxes and estate taxes—and the aforementioned expansion of the sales tax base.

The income tax changes include components designed to benefit low- and middle-income families, including expanding the Earned Income Tax Credit and personal exemptions, and reducing the tax rate paid by upper-income families earning less than $1 million.

Of course it is the proposed sales tax changes that are making the most waves. But, as the DC Fiscal Policy Institute’s Ed Lazere notes, the proposed base expansion is a sensible step toward a fairer and more sustainable sales tax: there’s no sound rationale for carving out special tax exemptions for tanning salons, bowling alleys, car washes and health clubs while requiring every other retailer to collect sales taxes.

Wherever you live, the sales tax rate is almost certainly higher than it was 20 years ago, and that’s largely because lawmakers have been forced to hike the rate to make up for the inexorable long-term decline in sales tax yields caused by most states’ unwillingness to tax services. If D.C. lawmakers ultimately approve the proposed base expansions, they will face less long-term pressure to jack up the sales tax rate on everything else to which the tax currently applies.


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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On the heels of state Earned Income Tax Credit (EITC) expansions in Iowa, Maryland, and Minnesota and heated debates in Illinois and Ohio about their own credit expansions,  the Institute on Taxation and Economic Policy released a new report today, Improving Tax Fairness with a State Earned Income Tax Credit, which shows that expanding or enacting a refundable state EITC is one of the most effective and targeted ways for states to improve tax fairness.

It comes as no surprise to working families that most state’s tax systems are fundamentally unfair.  In fact, most low- and middle-income workers pay more of their income in state and local taxes than the highest income earners. Across the country, the lowest 20 percent of taxpayers pay an average effective state and local tax rate of 11.1 percent, nearly double the 5.6 percent tax rate paid by the top 1 percent of taxpayers.  But taxpayers don’t have to accept this fundamental unfairness and should look to the EITC.

Twenty-five states and the District of Columbia already have some version of a state EITC. Most state EITCs are based on some percentage of the federal EITC. The federal EITC was introduced in 1975 and provides targeted tax reductions to low-income workers to reward work and boost income. By all accounts, the federal EITC has been wildly successful, increasing workforce participation and helping 6.5 million Americans escape poverty in 2012, including 3.3 million children.

As discussed in the ITEP report, state lawmakers can take immediate steps to address the inherent unfairness of their tax code by introducing or expanding a refundable state EITC. For states without an EITC the first step should be to enact this important credit. The report recommends that if states currently have a non-refundable EITC, they should work to pass legislation to make the EITC refundable so that the EITC can work to offset all taxes paid by low income families. Advocates and lawmakers in states with EITCs should look to this report to understand how increasing the current percentage of their credit could help more families.

While it does cost revenue to expand or create a state EITC, such revenue could be raised by repealing tax breaks that benefit the wealthy which in turn would also improve the fairness of state tax systems.

Read the full report


The States Taking on Real Tax Reform in 2014


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Note to Readers: This is the fifth post of a five-part series on tax policy prospects in the states in 2014. Over the course of several weeks, The Institute on Taxation and Economic Policy (ITEP) highlighted tax proposals that were gaining momentum in states across the country. This final post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax policy proposals are not all bad news this year.  There are some promising efforts underway that would fix the structural problems with state tax codes and improve tax fairness for low- and middle-income families. All eyes are on Illinois as lawmakers grapple with how to raise much needed revenue after their temporary income tax hike expires. Many are hoping the timing is now right for a real debate about a graduated income tax. Washington DC’s Tax Revision Commission has proposed a number of sensible reforms. And, lawmakers in Hawaii and Utah are expected to seriously debate ways to improve their states’ tax fairness.

Illinois - Though there has been much legislative activity in Springfield about corporate tax breaks, the arguably more important issue facing lawmakers is the state’s temporary income tax rate increase that is set to decrease in 2015. Given this upcoming rate reduction, lawmakers and the public are weighing in on alternative ways to fund vital services, including the merits of a progressive income tax.

District of Columbia - DC’s Tax Revision Commission set the stage for real tax reform this Spring when it recommended expanding the sales tax base, enhancing the city’s Earned Income Tax Credit (EITC) for childless workers, boosting the personal exemption and standard deduction, reforming the District’s income tax brackets, and phasing-out the value of personal exemptions for high-income taxpayers. The Commission’s proposal is hardly perfect: it includes an expensive giveaway for people with estates worth over $1 million, as well as a slight cut in the city’s top income tax rate (in exchange for making that temporary rate permanent).  But the plan still contains a lot of good ideas worthy of the word “reform.”

Hawaii - Hawaii levies the fourth highest state and local taxes on the poor in the entire country, but some lawmakers would like to change that.  Proposals to enact an Earned Income Tax Credit (EITC) managed to pass both chambers of the legislature last year before eventually being abandoned, and lawmakers gave serious consideration to other low-income tax credit changes as well.  The Hawaii Appleseed Center’s recent report (PDF) on enhancing low-income tax credits, and options to pay for those enhancements, provides a wealth of information for the many lawmakers and advocates who intend to pick up where they left off last year.

Utah - Last year’s effort to improve Utah’s regressive tax system (PDF) by enacting an Earned Income Tax Credit (EITC) ultimately fell short, though a bill that would have created such a credit did make it out of the state’s House of Representatives.  That push will be resumed this year.


Is Tax Reform Coming to the District?


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This week the DC Council will be hearing tax reform recommendations from the experts they appointed to study the District’s tax system. While far from perfect, the DC Tax Revision Commission’s suggested changes include many sensible reforms. Here’s a quick overview of what’s being discussed.

The Commission recommends expanding the District’s Earned Income Tax Credit (EITC) for workers without children—the one group for whom this important anti-poverty and pro-work program currently provides little benefit.

Some middle-income taxpayers would benefit from lowering the middle tax bracket’s rate from 8.5 to 6.5 percent. And both lower- and middle-income families would benefit from a substantially increased personal exemption and standard deduction.

In order to partially fund these targeted low- and middle-income tax cuts, the Commission also recommends phasing out (PDF) the District’s personal exemption for high-income taxpayers, and making permanent the city’s temporary top tax bracket on incomes over $350,000 (albeit at a reduced rate).

And as with many tax reform efforts, the DC Commission’s plan also includes a long-overdue expansion of the District’s sales tax to include more personal services. Haircuts, tanning studios, car washes, and various other services (PDF) would finally be included in the sales tax base.

Among the more troubling aspects of the Commission’s plan is its price tag. The Commission wants to cut into the District’s revenues by $48.8 million, despite the fact that the DC Council only set aside $18 million to fund the Commission’s recommendations. And not all of the tax cuts contained in the Commission’s proposal are justified. A $15.8 million estate tax cut is unlikely to benefit (PDF) the District’s economy, and a $57 million corporate and business tax rate cut won’t do any good, either.

Against this backdrop, the Commission’s decision to recommend increasing the sales tax rate from 5.75 to 6 percent is an odd one. The $22 million in revenue raised by this regressive tax increase could easily be generated in a fairer way by scaling back the estate and corporate tax cuts, and/or by retaining the 8.95 percent rate on incomes over $350,000, as opposed to the lower 8.75 percent rate the Commission suggests.

Overall, the Commission’s proposal is a good starting point, but there’s still plenty of room for the DC Council to improve upon it before enacting any reforms into law.


A New Wave of Tax Cut Proposals in the States


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Note to Readers: This is the third of a five-part series on tax policy prospects in the states in 2014.  Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on proposals to cut personal income, business, and property taxes.

Tax cut proposals are by no means a new trend.  But, the sheer scope, scale and variety of tax cutting plans coming out of state houses in recent years and expected in 2014 are unprecedented.  Whether it’s across the board personal income tax rate cuts or carving out new tax breaks for businesses, the vast majority of the dozen plus tax cut proposals under consideration this year would heavily tilt towards profitable corporations and wealthy households with very little or no benefit to low-income working families.  Equally troubling is that most of the proposals would use some or all of their new found revenue surpluses (thanks to a mostly recovering economy) as an excuse to enact permanent tax cuts rather than first undoing the harmful program cuts that were enacted in response to the Great Recession.  Here is a brief overview of some of the tax cut proposals we are following in 2014:

Arizona - Business tax cuts seem likely to be a major focus of Arizona lawmakers this session.  Governor Jan Brewer recently announced that she plans to push for a new tax exemption for energy purchased by manufacturers, and proposals to slash equipment and machinery taxes are getting serious attention as well.  But the proposals aren’t without their opponents.  The Children’s Action Alliance has doubts about whether tax cuts are the most pressing need in Arizona right now, and small business groups are concerned that the cuts will mainly benefit Apple, Intel, and other large companies.

District of Columbia - In addition to considering some real reforms (see article later this week), DC lawmakers are also talking about enacting an expensive property tax cap that will primarily benefit the city’s wealthiest residents.  They’re also looking at creating a poorly designed property tax exemption for senior citizens.  So far, the senior citizen exemption has gained more traction than the property tax cap.

Florida - Governor Rick Scott has made clear that he intends to propose $500 million in tax cuts when his budget is released later this month.  The details of that cut are not yet known, but the slew of tax cuts enacted in recent years have been overwhelmingly directed toward the state’s businesses.  The state legislature’s more recent push to cut automobile registration fees this year, shortly before a statewide election takes place, is the exception.

Idaho - Governor Butch Otter says that his top priority this year is boosting spending on education, but he also wants to enact even more cuts to the business personal property tax (on top of those enacted last year), as well as further reductions in personal and corporate income tax rates (on top of those enacted two years ago). Idaho’s Speaker of the House wants to pay for those cuts by dramatically scaling back the state’s grocery tax credit, but critics note that this would result in middle-income taxpayers having to foot the bill for a tax cut aimed overwhelmingly at the wealthy.

Indiana - Having just slashed taxes for wealthy Hoosiers during last year’s legislative session, Indiana lawmakers are shifting their focus toward big tax breaks for the state’s businesses.  Governor Mike Pence wants to eliminate localities’ ability to tax business equipment and machinery, while the Senate wants to scale back the tax and pair that change with a sizeable reduction in the corporate income tax rate. House leadership, by contrast, has a more modest plan to simply give localities the option of repealing their business equipment taxes.

Iowa - Leaders on both sides of the aisle are reportedly interested in income tax cuts this year. Governor Terry Branstad is taking a more radical approach and is interested in exploring offering an alternative flat income tax option. We’ve written about this complex and costly proposal here.

Maryland - Corporate income tax cuts and estate tax cuts are receiving a significant amount of attention in Maryland—both among current lawmakers and among the candidates to be the state’s next Governor.  Governor Martin O’Malley has doubts about whether either cut could be enacted without harming essential public services, but he has not said that he will necessarily oppose the cuts.  Non-partisan research out of Maryland indicates that a corporate rate cut is unlikely to do any good for the state’s economy, and there’s little reason to think that an estate tax cut would be any different.

Michigan - Michigan lawmakers are debating all kinds of personal income tax cuts now that an election is just a few months away and the state’s revenue picture is slightly better than it has been the last few years.  It’s yet to be seen whether that tax cut will take the form of a blanket reduction in the state’s personal income tax, or whether lawmakers will try to craft a package that includes more targeted enhancements to provisions like the Earned Income Tax Credit (EITC), which they slashed in 2011 to partially fund a large tax cut (PDF) for the state’s businesses. The Michigan League for Public Policy (MLPP) explains why an across-the-board tax cut won’t help the state’s economy.

Missouri - In an attempt to make good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year, House Republicans are committed to passing tax cuts early in the legislative session. Bills are already getting hearings in Jefferson City that would slash both corporate and personal income tax rates, introduce a costly deduction for business income, or both.

Nebraska - Rather than following Nebraska Governor Dave Heineman into a massive, regressive overhaul of the Cornhusker’s state tax code last year, lawmakers instead decided to form a deliberative study committee to examine the state’s tax structure.  In December, rather than offering a set of reform recommendations, the Committee concluded that lawmakers needed more time for the study and did not want to rush into enacting large scale tax cuts.  However, several gubernatorial candidates as well as outgoing governor Heineman are still seeking significant income and property tax cuts this session.

New Jersey - By all accounts, Governor Chris Christie will be proposing some sort of tax cut for the Garden State in his budget plan next month.  In November, a close Christie advisor suggested the governor may return to a failed attempt to enact an across the board 10 percent income tax cut.  In his State of the State address earlier this month, Christie suggested he would be pushing a property tax relief initiative.  

New York - Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Governor Cuomo unveiled a tax cutting plan in his budget address that will cost more than $2 billion a year when fully phased-in. His proposal includes huge tax cuts for the wealthy and Wall Street banks through raising the estate tax exemption and cutting bank and corporate taxes.  Cuomo also wants to cut property taxes, first by freezing those taxes for some owners for the first two years then through an an expanded property tax circuit breaker for homeowners with incomes up to $200,000, and a new tax credit for renters (singles under 65 are not included in the plan) with incomes under $100,000.  

North Dakota - North Dakota legislators have the year off from law-making, but many will be meeting alongside Governor Jack Dalrymple this year to discuss recommendations for property tax reform to introduce in early 2015.  

Oklahoma - Governor Mary Fallin says she’ll pursue a tax-cutting agenda once again in the wake of a state Supreme Court ruling throwing out unpopular tax cuts passed by the legislature last year.  Fallin wants to see the state’s income tax reduced despite Oklahoma’s messy budget situation, while House Speaker T.W. Shannon says that he intends to pursue both income tax cuts and tax cuts for oil and gas companies.

South Carolina - Governor Nikki Haley’s recently released budget includes a proposal to eliminate the state’s 6 percent income tax bracket. Most income tax payers would see a $29 tax cut as a result of her proposal. Some lawmakers are also proposing to go much farther and are proposing a tax shift that would eliminate the state’s income tax altogether.


DC Council Gets it Half Right on Property Taxes


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Much like their colleagues to the north, District of Columbia lawmakers are giving serious thought to cutting taxes now that an election is approaching.  According to the Washington Post, “10 of the council’s 13 members [are] running for re-election or higher office this year.”  It should come as little surprise, then, that the Council recently voiced unanimous support for a generous (but ill-conceived) property tax break for one of the city’s most politically popular groups—its senior citizens.  More encouraging, however, was the Council’s decision to delay action on an even more problematic bill that would have showered most of its benefits on owners of the city’s most valuable homes.

The first bill, introduced by Councilmember Anita Bonds, completely eliminates the property tax for any long-term DC resident over age 75 as long as they earn less than $60,000 per year.  But as Ed Lazere of the DC Fiscal Policy Institute (DCFPI) points out: “If you're 74, you get nothing … If you're 75, you have your taxes entirely limited.”  While it’s true that some senior citizens struggle with their property tax liabilities because they are “house-rich” but “cash-poor,” this isn’t a problem limited to taxpayers over age 75.

Rather than wiping out property taxes altogether for those taxpayers fortunate enough to have lived a long life, the District is better off providing this kind of relief more broadly through its property tax “circuit breaker” credit.  The credit, which is currently being expanded, will soon be available to both renters and homeowners of all ages earning up to $50,000 per year.  It also uses a more sophisticated formula than Bonds’ proposal to ensure that Washingtonians’ property tax bills do not exceed the income they have available to pay those bills.  An expert commission created by the Council recently recommended making no further changes to DC’s property tax system, but if the Council nonetheless wants to charge ahead with property tax cuts, the city’s circuit breaker credit is the better tool for the job.

The second bill, introduced by Councilmember (and current mayoral candidate) Jack Evans, would have tightened the District’s existing property tax cap to prevent tax increases of more than 5 percent per year.  As the Institute on Taxation and Economic Policy (ITEP) explains, these kinds of tax caps are poorly targeted, extremely costly, and often grossly inequitable.  Most of the tax breaks doled out under such a cap would flow to owners of expensive homes.  For example, DCFPI estimates that nearly two-thirds of the benefits of Evans’ proposal would go to owners of homes worth over $550,000, despite the fact that this group makes up just 31 percent of all DC homeowners.  Further inequity arises when, for example, a resident who has owned their current home for a number of years (and racked up substantial tax cap benefits over that time) ends up enjoying a significantly lower tax bill than the first-time homebuyer in an identical rowhouse next door.

Mayor Vince Gray opposes the 5 percent property tax cap because of its “negative financial impact on the District’s revenues, its inequitable treatment of District homeowners and because it does not increase the District’s competitiveness regionally.”  These objections are well stated, though all of them also apply, to a lesser extent, to the over-75 giveaway sought by Councilmember Bonds.


State News Quick Hits: Expert Advice Versus Politics in DC, NE, NY and KY


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The District of Columbia’s Tax Revision Commission heard from the Institute on Taxation and Economic Policy (ITEP, CTJ’s partner organization), last week about options for lessening the regressivity of DC’s tax system. In testimony before the Commission, ITEP’s Matt Gardner explained how enhancements to DC’s standard deduction, personal exemption, and Earned Income Tax Credit (EITC) could be enacted without breaking the bank, as long as they’re paired with reforms like phasing-out exemptions and deductions for high-income taxpayers, or eliminating the District’s unusual tax break for out-of-state bond interest.

We got our first glimpse this week of what tax reform could mean for Nebraskans next year.  Members of Nebraska’s Tax Modernization Committee sketched out details of a potential tax reform proposal, but will wait until next month to finalize the plan.  And so far, it looks like the Committee will be sticking to modest, sensible ideas like expanding the sales tax to some household services, indexing tax brackets for inflation, and cutting property taxes (slightly). Considering that Governor Dave Heineman’s commitment to doing away with the personal income tax (or at least significantly cutting it) is the reason for the Committee’s existence, it is a positive sign that its members are steering clear of more radical changes to the income tax.

New York Governor Andrew Cuomo’s first appointed tax commission, the one charged with finding revenue-neutral options to reform the state’s tax system, released its recommendations last week for making the state’s tax code “simpler and fairer”.  Our friends at the Fiscal Policy Institute and New Yorkers for Fiscal Fairness called the recommendations “a smorgasbord of reforms with a little something for everyone."  The ideas include: expanding the sales tax base to services and currently exempted goods and using the new revenue to cut taxes for low- and middle-income families; reforming the corporate and bank franchise tax; and exempting middle-income families from New York’s estate tax. The question now is whether the Governor, (who can hardly find a tax he doesn’t hate), will consider these recommendations. Or, whether he will only focus on ideas coming from a second tax committee he appointed, with former Governor George Pataki at its helm, which is tasked with finding ways to simply cut $2 to $3 billion in taxes next year.

Last September, recommendations from Kentucky’s Blue Ribbon Commission on Tax Reform were released. ITEP deemed the Commission’s 453 page final report filled with tax reform recommendations “worth legislative consideration.” Yet, the Lexington Herald-Leader is reporting that, like the eight other previous tax studies, this report is simply “gathering dust.” Some lawmakers say that 2014 isn’t the year for tax reform, citing a difficult “political climate.” Let’s hope the tide changes and all the Commission’s work doesn’t go unutilized given the fiscal stress the state is already under.


State News Quick Hits: Brownback Under Fire, and More


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Governor Sam Brownback’s tax policies are being challenged by a state legislator who’s running to unseat him, Paul Davis. "Gov. Brownback's `real live experiment' is not working," Davis said, using Brownback’s own description of the extreme tax changes he signed into law. Davis was referring to rising unemployment rates and a new Kansas Department of Revenue report showing revenues are falling below projections. Kansas lawmakers have slashed taxes over the past two legislative sessions and, despite what supply-siders would have you believe, tax cuts really don’t pay for themselves.

The Institute for Illinois’s Fiscal Stability at the Civic Federation in Chicago issued a report describing the lack of movement on fiscal issues as a “lost opportunity” for the state (we agree). Laurence Msall, president of the Civic Federation said, “This year was a lost opportunity as legislators failed to prepare for the extreme financial challenges everyone knows are on the immediate horizon. We see some progress this year on the backlog of unpaid bills, but nothing to address the unresolved pension crisis or to plan for the revenue loss coming next year.”  Next year, the state’s income tax rate is scheduled to be reduced and with that even larger shortfalls in the state’s budget are expected.

Following up a story from last week about Archer Daniels Midland Company (ADM) asking for $20 million in tax breaks from Illinois, Illinois Governor Pat Quinn is now saying that he won’t approve any ADM tax breaks until the state’s pension system has been reformed.

For evidence of why special “tax incentives” don’t work in boosting state economies, look no further than this Washington Post story on the tax breaks that the District of Columbia tried to give LivingSocial last year.  Shortly after being offered $32.5 million to expand its DC presence, the tech company did exactly the opposite, cutting its DC payroll from nearly 1,000 employees to just over 600.  Today, just 244 DC residents work for the company.  Had LivingSocial seen a rising demand for its product, it would no doubt have expanded its payroll and happily collected a $32.5 windfall courtesy of DC taxpayers. But promises of a special tax break aren’t enough on their own to convince a smart business owner to expand.

 


It Wasn't Property Taxes that Cost DC Residents their Homes


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No one should be taxed out of their homes. It’s a sentiment that finds support across the political spectrum: homeowners, especially senior citizens and low-income families, should not lose their homes because of their property tax bills. Yet as a Washington Post investigation revealed this week, the DC city government’s use of “tax lien sales,” through which the government allows a small number of private agencies to act as debt collectors for unpaid property tax levies, has given “predatory” private investors license to foreclose on the homes of hundreds of city residents over the past five years.  As a result, some low-income and elderly homeowners have been left with nowhere to live and with no equity in the homes many had owned outright.

The Post article profiles Bennie Coleman, a 76-year-old widower who ultimately lost his house after not paying a $134 property tax bill. When Coleman didn’t pay his bill, the city imposed a tax lien on the property, and then sold the lien to a private investor who was allowed to charge Coleman double-digit interest until the debt was paid. But the interest and penalties charged by this predatory investor pushed the total debt up to $5,000, and the investor foreclosed on the property.

Within a day of the Post report’s publication, Mayor Vincent Gray was vowing that “we cannot allow those kinds of things to happen again,” and City Council chair Jack Evans was preparing emergency legislation to limit private investors’ use of tax lien sales.

As the Post’s coverage makes clear, the cause of these foreclosures was not an out-of-control tax system, but rather the practice of allowing private debt collectors to charge exorbitant fees on top of the often minimal property tax debt. As it happens, Washington DC’s property tax system goes further than many states in minimizing property taxes on at-risk families and seniors: the city allows low-income families to claim a property tax credit of up to $750, and also allows low-income seniors to simply defer unaffordable property tax bills.  Until recently, the tax credit was only available to families with incomes under $20,000 – an amount unchanged for 35 years – leaving out many families living at or below the federal poverty level.  But just this summer, the DC City Council made significant improvements to the property tax credit, increasing income eligibility to $50,000 (about 200 percent of poverty for a family of four) and boosting the credit to $1,000.

In most states, there are only limited mechanisms in place to relieve unaffordable property tax bills for low-income taxpayers. And as an ITEP survey finds, virtually every state could take sensible steps to enact more generous low-income property tax relief programs.

The clear lesson of the abuses documented by the Post is that Washington DC's system for collecting unpaid property taxes must be overhauled. But a more basic lesson any state’s policymakers can learn from this harrowing tale is that it’s vital to design property tax rules in a way that don’t jeopardize low-income, fixed-income and senior homeowners through judicious use of “circuit breakers” and tax deferrals.


New DC Tax Changes: Progressive Property Tax Cuts, Gas Tax Reform, Etc.


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A number of important changes to the District of Columbia’s tax laws will go in effect in the months ahead as part of a budget passed by the DC Council earlier this summer.  A detailed budget toolkit assembled by the DC Fiscal Policy Institute’s (DCFPI) notes that the budget raises $72 million in new revenues, but that it does so largely through traffic cameras and improved tax enforcement—not broad-based tax increases.  Some of the more notable tax changes in the budget include:

Expanding the District’s property tax “circuit breaker” credit, known as Schedule H.  Much like an electrical circuit breaker, DC’s Schedule H “circuit breaker” is designed to protect taxpayers from a property tax “overload”—a situation where property taxes grow too high relative to their incomes.  Prior to this summer, DC’s circuit breaker credit hadn’t been updated for 35 yearso.  Under the expanded credit, the income cut-off for eligibility will rise from $20,000 to $50,000 and the credit’s maximum benefit will grow from $750 to $1,000.

Reforming the gasoline tax.  The District joins Maryland, Massachusetts, Vermont, and Virginia in reforming its gas this year in order to improve its long-term revenue growth.  By switching from an unsustainable fixed-rate tax to one equal to 8 percent of gas prices, DC will be better positioned to pay for the gradually rising cost of public infrastructure in the years ahead.  The Institute on Taxation and Economic Policy (ITEP) testified in support of this reform in June.

Cutting the sales tax rate.  On October 1, the District’s general sales tax rate is scheduled to fall from 6 to 5.75 percent.  While the change will be progressive overall, DCFPI’s proposal to expand either the standard deduction or personal exemption would have been better targeted to lower- and moderate-income District residents, as opposed to largely benefiting tourists and nonresident commuters.

Exempting interest income on out-of-state government bonds.  The least defensible tax change contained in the DC budget is the reinstatement of an unusual and regressive tax break for people investing in out-of-state bonds.  North Dakota is the only state offering such a break.  Three out of every four dollars of tax exempt interest flows to households with total incomes over $200,000.

For more information on DC’s budget and the tax changes it contains, be sure to read DCFPI’s budget toolkit.


Good News for America's Infrastructure: Gas Taxes Are Going Up on Monday


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The federal government has gone almost two decades without raising its gas tax, but that doesn’t mean the states have to stand idly by and watch their own transportation revenues dwindle.  On Monday July 1, eight states will increase their gasoline tax rates and another eight will raise their diesel taxes.  According to a comprehensive analysis by the Institute on Taxation and Economic Policy (ITEP), ten states will see either their gasoline or diesel tax rise next week.

These increases are split between states that recently voted for a gas tax hike, and states that reformed their gas taxes years or decades ago so that they gradually rise over time—just as the cost of building and maintaining infrastructure inevitably does.

Of the eight states raising their gasoline tax rates on July 1, Wyoming and Maryland passed legislation this year implementing those increases while Connecticut’s increase is due to legislation passed in 2005California, Kentucky, Georgia (PDF) and North Carolina, by contrast, are seeing their rates rise to keep pace with growth in gas prices—much like a typical sales tax (PDF).  Nebraska is a more unusual case since its tax rate is rising both due to an increase in gas prices and because the rate is automatically adjusted to cover the amount of transportation spending authorized by the legislature.

On the diesel tax front, Wyoming, Maryland, Virginia (PDF) and Vermont passed legislation this year to raise their diesel taxes while Connecticut, Kentucky and North Carolina are seeing their taxes rise to reflect recent diesel price growth.  Nebraska, again, is the unique state in this group.

There are, however, a few states where fuel tax rates will actually fall next week, with Virginia’s (PDF) ill-advised gasoline tax cut being the most notable example. Vermont (PDF) will see its gasoline tax fall by a fraction of a penny on Monday due to a drop in gas prices, though this follows an almost six cent hike that went into effect in May as a result of new legislation. Georgia (PDF) and California will also see their diesel tax rates fall by a penny or less due to a diesel price drop in Georgia and a reduction in the average state and local sales tax rate in California.

With new reforms enacted in Maryland and Virginia this year, there are now 16 states where gas taxes are designed to rise alongside either increases in the price of gas or the general inflation rate (two more than the 14 states ITEP found in 2011).  Depending on what happens during the ongoing gas tax debates in Massachusetts, Pennsylvania, and the District of Columbia, that number could rise as high as 19 in the very near future.

It seems that more states are finally recognizing that stagnant, fixed-rate gas taxes can’t possibly fund our infrastructure in the long-term and should be abandoned in favor of smarter gas taxes that can keep pace with the cost of transportation.

See ITEP’s infographic of July 1st gasoline tax increases.
See ITEP’s infographic of July 1st diesel tax increases.


State News Quick Hits: Neo-Vouchers in Alabama, and More


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Kentucky’s Blue Ribbon Commission on Tax Reform released its very useful findings in December, but regrettably little action has resulted from the comprehensive document. Many of the Commission’s recommendations were bold and forward-looking, like the proposal to expand the sales tax base to services  (PDF) and simultaneously institute an earned income tax credit (PDF). But Commissioners themselves aren’t confident that anything will come from their hard work developing those recommendations. Commissioner Sheila Schuster recently said, “I haven’t heard anything since the end of the (legislative) session that would suggest that it’s got legs... So it’s pretty discouraging.”

Legislators in many states are putting the cart before the horse when it comes to budgeting for the next fiscal year. This article (subscription required) from the Wall Street Journal tells of states like Maryland and Virginia who have already passed spending bills that assume new revenues from online Internet sales tax collections when Congress passes the Main Street Fairness Act. Of course, the Act has actually only passed the Senate, and by all accounts the bill faces an unclear future in the House.

This November, Colorado voters will vote on raising their state’s income tax to better fund education. The details of that increase have yet to be worked out, but former state representative Don Marostica has taken to the pages of the Denver Post to argue in favor of his preferred alternative: ditching the state’s flat income tax in favor of a more progressive, graduated income tax used by most states. Marostica explains that “businesses and middle-class Coloradans alike would be better off with a two-step income tax to provide the resources for top teachers and great facilities. The No. 1 priority for businesses seeking a new location is a well-educated, fully prepared workforce. … Yet we're under-investing in education, in part because we've prioritized low taxes ahead of everything else.”

Bad tax ideas are in the news in the District of Columbia.  Mayor Vincent Gray recently reiterated that he wants to cut taxes for DC investors who do their investing outside of the District.  But it’s Councilwoman Anita Bonds’ idea that recently made headlines. Bonds wants to give a super-sized tax break to most people over 80 years old: a full exemption from property taxes, provided their income is below $150,000 per year and they’ve lived in the District for 25 years or more.  But property tax relief should be distributed based on income, not age. Rather than cutting taxes for the well-off elderly, DC lawmakers would be wise to follow the advice of the DC Fiscal Policy Institute and expand the city’s low-income property tax credit for DC residents of all ages.

Earlier this spring, Alabama lawmakers approved a bill establishing a state income tax credit (up to $3,500) to reimburse parents for the cost of sending children to private school or transferring them to a better performing public school.  The legislation also created a tax credit for corporations and individuals who contribute to scholarship funds. These kinds of credits are often referred to as back-door or neo-vouchers as they divert taxpayer money away from public schools, indirectly via the tax code.  Due in part to concern over the unknown cost of the credits and seemingly in part due to public displeasure with the new program, Alabama Governor Robert Bentley (who had been a supporter of the bill) attempted to delay the implementation of the school tax credits last week.  He told lawmakers they “had better be listening to the people” who he says are not supportive of using public tax dollars to fund private school education.  However, the House decided this week to ignore the Governor’s request; they rejected his suggested amendment and took a vote to show they could override any veto attempts.

A new report from the Center on Budget and Policy Priorities (CBPP) outlines the anti-tax agenda of the American Legislative Exchange Council (ALEC) and ALEC scholar and economist, Arthur Laffer.  It explains the multitude of problems with their policy recommendations and the so-called research they produce to make the case for those recommendations.  The CBPP report builds on the Institute on Taxation and Economic Policy’s (ITEP) work debunking Arthur Laffer as it examines the “weak foundation of questionable economic and fiscal assumptions and faulty analysis promoted by ALEC and its allies.”

The DC Fiscal Policy Institute explains how closing corporate tax shelters has significantly improved the District of Columbia’s finances.  The city saw its strongest growth in corporate income tax collections in almost two decades, due in part to a reform called “combined reporting” (PDF) that makes it more difficult for companies to disguise their profits as being earned in other states, particularly those with low or no corporate income tax.

This Columbus Dispatch article cites academic research, policy experts and the Congressional Budget Office to examine Ohio Governor Kasich’s repeated assertion that tax cuts lead to jobs, including critiques that “when one dives deeper into the numbers, the correlation between income-tax cuts for small-business owners and more jobs is strained at best.”  The story also covers that larger supply-side economics debate, which the Institute on Taxation and Economic Policy (ITEP) has engaged with here and elsewhere.

Tax hikes on low- and moderate-income working families are under debate in both Vermont and North Carolina where lawmakers have proposed reducing the benefit of their states’ Earned Income Tax Credits (EITCs) (see this PDF on state EITC policy). Vermont’s Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs. In North Carolina, lawmakers are advancing a bill that would cut the EITC from 5 to 4.5 percent of the federal credit and potentially let it expire altogether – a rejection of Washington’s recent five-year extension of a more robust federal EITC. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute as well as a new brief from the North Carolina Budget and Tax Center both cite ITEP’s Who Pays data to make a case for why each state should maintain its EITC.

North Carolina’s newly-elected Governor, Pat McCrory, is keeping everyone guessing about his plans for tax reform in the Tarheel State.  During his state of the state address this week, McCrory said tax reform would be a priority of his administration but was short on specifics, saying only that he wants to lower rates, close loopholes and make North Carolina’s tax code more business friendly. The state’s Senate leadership has been touting a plan to eliminate the personal and corporate income taxes and replace the lost revenue with a higher sales tax and new business license fee.  It remains to be seen whether the Governor will follow the Senate’s lead or puts forth his own version of reform.


Beltway's New "Lexus Lanes" a Symbol of Broken Tax Policy


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On Saturday, a stretch of the legendary I-495 Beltway encircling Washington, DC will grow from eight lanes to twelve.  But this modest expansion of the region’s famously inadequate transportation network isn’t designed to benefit everyone.  With so many federal and state lawmakers terrified to raise taxes for the public good, the Beltway’s new “express lanes” will be paid for in a different way—specifically, by the wealthier drivers who can afford to buy their way out of the congested lanes (Kia Lanes, perhaps?), and into these heavily tolled, so-called Lexus Lanes.

AAA Mid-Atlantic initially opposed the new Lexus Lanes, since by definition they only work when the rest of the transportation system is failing.  But an “acceptance of reality … about the sad state of transportation funding” led AAA to eventually change its mind and embrace the lanes on the grounds that they’re better than nothing.

Sad indeed.  The Institute on Taxation and Economic Policy (ITEP) has shown that much of our nation’s transportation funding woes can be traced back to the short-sighted design of federal and state gas taxes, and that there are straightforward ways to fix these glaringly broken taxes.  But raising and reforming the gas tax can be politically difficult, and thus here we are, with Band-Aid fixes like Lexus Lanes instead.


Sweet Tax Deals for Tech Companies in D.C.


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Many residents of Washington, D.C. have found a good restaurant or shopping deal through an online facilitator like LivingSocial. These websites work by putting consumers in touch with local retailers looking to entice new customers with appealing discounts. But recent action from the D.C. Council could reverse the script, leaving the city’s citizens on the hook for a misguided and revenue-draining attempt at capturing high-tech businesses. After passing a sweet tax deal for one company, the Council is now considering slashing income taxes for just about anyone affiliated with a high-tech company at the expense of the working taxpayers of D.C.

The first tech-tax action taken by the D.C. Council was ensuring that LivingSocial, a high-tech company founded in D.C., remained within the city limits. While the leadership of LivingSocial have long trumpeted their D.C. roots—the chief executive, Tim O’Shaunghnessy, is the son-in-law of Washington Post Co. Chairman Donald E. Graham—they have also made no secret about the organization’s consideration (or threat) of leaving the city for a less “expensive” location. “We’ll make a commitment to the District if the District will make a commitment to us,” O’Shaunghnessy told the Washington Post.

This past week the city government solidified that commitment with LivingSocial in a deal that is far sweeter than anything LivingSocial offers its members. On July 10, the D.C. Council unanimously approved an agreement that keeps the fledgling company’s headquarters (and at least half of its new hires place of residence) within the District’s lines in exchange for a $32.5 million tax break. The deal provides LivingSocial with corporate and property tax abatements over a five-year period beginning in 2015.

What’s more troubling for the city and its residents, however, is a separate proposal to give away tax dollars to investors in online companies. The Technology Sector Enhancement Act of 2012 would allow so-called “angel investors” (qualified employees or stockholders in a qualifying tech company) to only pay a 3 percent tax rate when selling their stake in the company for a profit. Both new and preexisting investments would be covered by the new rate. Additionally, the bill exempts qualified companies from business franchise taxes for five years after the date the company first has taxable income.

Under D.C.’s current tax system, capital gains are taxed like any other income, with the maximum marginal tax rate at 8.95 percent. In fact, the special tax rate (3 percent) for tech investors would be even lower than the lowest income tax rate (4 percent) paid by working D.C. residents. As the D.C. Fiscal Policy Institute has explained, the city would be creating a “Warren Buffett problem” by taxing high-income tech investors at far lower rates than all working D.C. residents. 

Moreover, as the Institute on Taxation and Economic Policy (ITEP) has previously noted (PDF), capital gains are among “the most unequally distributed sources of personal income.” By giving special treatment to such income, governments shift the responsibility for funding government services more heavily onto lower- and middle-income taxpayers.

In addition, the tax giveaway to high-income taxpayers could also be a huge drain on the city’s already stretched-thin budget. A financial impact statement from the city’s Chief Financial Officer notes that such tax cuts will reduce both corporate franchise and capital gains tax collections and that the negative impact “could be substantial.” Unfortunately, the cost of this legislation has not been projected in any detail. The financial impact study merely states that the revenue losses “cannot be reliably estimated at this time.” But the report does explicitly note that if a company were to have a successful IPO “the revenue losses could be significant.”

Such substantial revenue reductions have dire consequences for public investments. And as is often explained (though frequently forgotten), it is those public investments—an educated workforce, first-rate transportation infrastructure and quality health care—that are far more likely than tax incentives to attract high-value-added industries to cities and states.

The D.C. Council was set to vote on the tech tax cut the same day as the LivingSocial deal, but lobbying from anti-poverty groups in opposition to the legislation resulted in the vote being tabled until September. Let’s hope that in the meantime the Council puts some more thought into whether tax breaks for some of the District’s most fortunate residents should really be a top budgetary priority.


Stadium Subsidies: Playing Games With Taxpayer Dollars


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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!)

 

 


Naughty States, Nice States: The Institute on Taxation and Economic Policy's 2011 List


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Naughty

Michigan’s legislature and Governor Snyder top the naughty list by giving away more than $1.6 billion in tax cuts for business and paying for it with tax increases on low-and middle-income working and retired families.

Florida continued to dole out more corporate pork this year, including a property tax break that happens to benefit huge commercial land owners, like Disney World and Florida Power and Light, and other corporations (that also happen to be major donors to the state’s Republican governor and legislative majority party).

Minnesota’s legislature missed an opportunity to do the right thing when it rejected a tax increase on the state’s wealthiest residents. The plan was proposed by Governor Dayton and supported by 63 percent of Minnesotans over the alternative, which was cuts to spending on education, health care and other vital public services.

Anti-tax activists in Missouri were hard at work again. This year they were collecting signatures for a ballot initiative that would eliminate the state’s personal income tax and replace it with a broadened and increased sales tax.

Nice

Connecticut’s Governor Malloy and the legislature adopted a $1.4 billion tax increase that improved tax fairness in the state and protected public investments like education and health care.  Most notably, the state added an Earned Income Tax Credit, a significant tax break for low-income working families.

District of Columbia lawmakers greatly reduced the ability of corporations to dodge their fair share of taxes by adopting combined reporting (which makes it harder to hide profits in other states) and a higher corporate minimum tax. The Council also temporarily increased taxes for individuals making more than $350,000 a year and limited itemized deductions, which are most often taken by high income filers.

Hawaii lawmakers also limited upside-down tax giveaways (itemized deductions) for their state’s richest residents and passed other tax changes to raise much needed revenue.

A Little Bit Naughty and Nice

New York’s Governor Andrew Cuomo reversed his campaign vow not to raise taxes and supported a tax increase on residents earning more than $2 million a year.   The plan, passed by the legislature, also included a tax break for those with income under $300,000.

However, New York lawmakers passed the governor’s cap on property taxes this summer, which is predictably creating crises and forcing dramatic cuts in local education, medical, and public safety services.

Illinois raised significant revenue earlier in the year through temporary personal and corporate income tax rate increases, all designed to stave off harsh spending cuts, but then turned right around and gave away hundreds of millions of dollars to Sears and CME, allegedly to keep them in the state.


DC Council Raises Taxes On High Earners


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The DC Council voted on Tuesday to temporarily increase the marginal income tax rate on those making over $350 thousand a year from 8.5% to 8.95%, in a move that will raise an estimated $106 million in revenue over the next 4 years (when the measure will sunset).

Due to harsh economic times, the DC Council has faced a difficult task in balancing the District’s budget, causing it to make $108 million in cuts to critical human services support and other low income programs in the fiscal 2012 budget.

A modest tax increase on high income taxpayers may seem like a relatively straightforward step for the Council to take in a time of such austerity, yet the vote was highly contentious, with the measure just barely passed, seven to six

As part of the deal, supporters of raising taxes on high income earners agreed to undo a recently added tax code provision that progressive tax advocates liked.  Just this summer, the Council voted to start taxing the interest that individuals earn on non-DC municipal bonds they own, no matter how long ago the bond was purchased. The deal eliminates the retroactivity and means that only out of state bonds purchased after this year will no longer prove their District owners a tax break.  Although it also means a decrease in the amount of revenue generated, the elimination of the tax exemption on bond interest going forward will enhance the progressivity of DC’s tax system (just like it has for every other state).

DC’s tax increase on high income taxpayers is still only a small step toward making DC’s upside down tax system fairer. According the Institute on Taxation and Economic Policy’s Who Pays report, the middle 20% of taxpayers (those making between $33 and $57 thousand) pay on average 10.5% of their income in District income and other taxes, while the top 1% of taxpayers (those making over $1.5 million) pay an average of only 6.4%.

This small but positive step toward more progressive taxation builds on other smart revenue increases enacted by the DC Council in June, such as the implementation of combined reporting for businesses and setting budget limits on the value of itemized deductions.


DC Council Passes Budget with Progressive Tax Increases


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The DC City Council passed a budget last week that DC Council Chairman at Job with Just Eventincludes a variety of smart tax policy changes.  Among them are a reform designed to limit tax avoidance by multi-state corporations, and a provision curtailing some of the generous tax breaks enjoyed by the city’s wealthiest residents.

One of the more notable tax changes contained in the Council’s budget is a provision implementing the "combined reporting"  of income by corporations with income from more than one state.  This reform will greatly reduce the ability of corporations to shelter their DC profits from tax by shifting them, on paper, to low- or no-tax states.  Corporations paying little or no DC taxes will also be subject to a slightly higher corporate minimum tax under the Council’s plan. 

Unfortunately, the Council also decided to return some of the revenue generated by these changes to multi-state corporations in the form of a new deduction, scheduled to take effect in five years (outside the city’s four year budget window).

Another positive provision in the budget limits the value of itemized deductions for taxpayers earning over $200,000 per year.  This limitation closely resembles a recommendation The Institute on Taxation and Economic Policy made in a pair of recent reports.

Under the Council’s budget, DC’s income tax code will also be amended to eliminate the deduction for income earned on out-of-state bonds.  No state offers such an exemption today, and the DC Fiscal Policy Institute has pointed out  that the impact of this change will be generally progressive, since most out-of-state bonds are held by individuals with over $100,000 in annual income.

Finally, the DC budget also contains a number of less progressive revenue measures to help the city weather the lingering economic downturn.  Among those changes are the permanent extension of a recent 0.25 percentage point sales tax increase, and an increase in the parking garage tax.

DC’s budget awaits the signature of Mayor Gray.  Once signed by the Mayor, the budget can only be prevented from becoming law if the U.S. House, the U.S. Senate and President Obama all three agree to block it within 30 days.

Photo via Allison_DC Creative Commons Attribution License 2.0


Report Explains How (and Why) States Must Close Hotel Tax Loophole


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Expedia, Orbitz, and Priceline are exploiting a major sales tax loophole, and in some states are possibly breaking the law in doing so.  Last week, the Center on Budget and Policy Priorities (CBPP) released a report explaining how this loophole works, and pegging its aggregate size at somewhere in the neighborhood of $400 million per year.  The report urges states and localities to pursue legal action, legislative action, or both in order to remedy this situation.

In the vast majority of cases, online travel companies (OTCs) like Expedia and Priceline currently remit sales and lodging taxes only on the “wholesale” room rate they pay to hotels — not the “retail” room rate they actually charge travelers.  In doing so, the OTCs claim that the difference between the retail and wholesale price is simply a “facilitation fee” that should not be subject to sales taxes.  But as CBPP rightly points out:

“The OTCs are providing the same kinds of marketing and room booking services that the hotels themselves engage in.  If the hotels may not deduct a pro-rated amount of their advertising and website operation expenses from the retail room charge prior to calculating applicable hotel taxes when they incur such expenses directly, there is no possible justification for compelling such a deduction when hotels pay an OTC to provide the same services.”

CBPP recommends that states and localities either sue to recoup the taxes owed by OTCs, or if current statutes are sufficiently unclear with respect to the taxes owed by OTCs, enact new legislation clarifying that taxes should be paid based on the full retail price of the room.  New York City and Washington DC have both taken this latter course of action, while a half dozen states and numerous localities have chosen to pursue legal action.

Read the CBPP report for more detail, including state-by-state revenue estimates, an explanation of why this reform won’t harm tourism, and a closer look at what states and localities must do to close this inequitable and costly tax loophole.


A Balanced Approach: Revenues Make Up Over 40 Percent of DC Mayor Vince Gray's Budget Fix


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Recently, DC mayor Vince Gray released his proposal to balance the District’s budget.  In sharp contrast to the cut-heavy budgets being debated in most places around the country, Gray’s budget would use increased revenues, including taxes, to close over 40 percent of the gap.  Particularly encouraging are Gray’s proposals to raise taxes on corporations and high-income earners.

One of the most significant revenue-raisers in Gray’s budget is the creation of a new tax bracket of 8.9 percent on incomes over $200,000.  DC’s current top bracket of 8.5 percent kicks-in at just $40,000 of taxable income. 

Gray’s plan also wisely decouples the District’s income tax code from one of many federal income tax cuts extended last year — the repeal of the “Pease” limitation on itemized deductions for high-income taxpayers.  ITEP has recommended decoupling from the repeal of Pease on multiple occasions.

In addition to these reforms, Gray’s budget also recommends implementing combined reporting of corporations' profits in different jurisdictions, and increasing the minimum franchise tax on firms with gross revenue over $1 million. 

Consumption taxes are relied upon to generate most of the remaining revenue boost contained in Gray’s budget.  Specifically, Gray is seeking to make the city’s temporary sales tax increase permanent, raise the parking garage tax from 12 percent to 18 percent, increase the off-premise alcohol tax from 9 percent to 10 percent, and expand the city’s sales tax base to include purchases of live theater tickets.

Unfortunately, while Gray’s budget is quite reasonable on the revenue side, its spending proposals are much harder to stomach.  As the DC Fiscal Policy Institute has pointed out, human services and other low-income programs fare very poorly under the plan.  These programs account for only one-fourth of the city’s budget, yet two-thirds of the spending reductions pitched by Gray would come from slashing this part of the District’s safety net.


State Transparency Report Card and Other Resources Released


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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.


New 50 State ITEP Report Released: State Tax Policies CAN Help Reduce Poverty


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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.


New ITEP Report Examines Five Options for Reforming State Itemized Deductions


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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.


Sales Tax Holidays: Good for Little More than a Laugh


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We’re in the heart of sales tax holiday season now.  Despite cooler heads prevailing in DC and Georgia, where sales tax holidays have been scrapped due to gloomy budget projections, Massachusetts and North Carolina have recently decided to move ahead with their holidays, and Illinois has decided to join the party for the first time.

By now, you may be familiar with all the reasons why sales tax holidays are a bad idea (read this ITEP policy brief if you’re not).  Aside from those groups with a vested interest in the holidays (e.g. retailers looking for free advertising, politicians looking to build their anti-tax credentials, and confused parents thinking these things actually save them money), just about everyone seems to agree that sales tax holidays are a worthless political gimmick.  Stateline pointed out last week that analysts as varied as those at Citizens for Tax Justice and the Tax Foundation have come to an agreement on this point.

But as long as sales tax holidays remain popular enough to remain impervious to most state budget crises, we might as well take a moment to marvel at some of their more glaring absurdities.  For example, this year, Massachusetts’ sales tax holiday will apply to alcohol.  College students in the state clearly have quite an effective lobbying presence in Boston.  Interestingly, neither tobacco nor meals will be included in the holiday.

In Illinois, which doesn’t have any experience with sales tax holidays, one columnist speculates that his wife isn’t alone in erroneously believing that the back-to-school holiday applies only to children’s clothes.  Indeed, adult clothes are included as well; as are aprons and athletic supporters.  Work gloves, however, will still be subject to tax.  You’d think that the Illinois Department of Revenue already has enough on its plate without having to worry about such minutia.

Finally, in South Carolina, it looks like the state’s Tax Realignment Commission is going to recommend quite a few changes to the state’s tax holidays.  For starters, the state’s bizarre post-Thanksgiving tax holiday on guns has to go, according to the Commission.  And changes could be in store for the August holiday as well.  The State reports that if the Commission gets its way, “this could be the last year to get your wedding gown, baby clothes, pocketbooks and adult diapers at a discount on back-to-school tax-free weekend.”  Interestingly, the South Carolina representative who first introduced the sales tax holiday idea actually agrees, claiming that he wanted only the holiday to apply to stereotypical “back to school” purchases – that is, things other than wedding gowns and adult diapers.

 


Yoga Lobby Tries to Block Tax Fairness Initiative


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ITEP, CTJ, and dozens if not hundreds of other organizations have argued for years that a well-designed sales tax should apply to nearly all retail sales, including both goods and services. We have shifted over the years from an economy in which most people sell goods to an economy in which most people sell services. Taxing only the sale of goods is an antiquated and inadequate approach for any state or local government to take.

So why don't all states with sales taxes expand them to apply to services? The answer has nothing to do with what's good policy and has everything to do with politics. Pretty much every business that provides a service can conjure up some argument as to why this particular service is vital to the health and happiness of the state's residents, and from there will argue that a tax (no matter how minimal) will destroy their ability to provide this service.

The most recent example comes from Washington, DC. The DC yoga lobby flexed their political muscle yesterday, urging yoga consumers (apparently known as yogis) across the District of Columbia to oppose expanding the District’s sales tax base to include yoga services and gym memberships.  The “DC Yogis Against the Yoga Tax” — which appears to be a coalition of yoga studios, teachers, and consumers — argues in their boilerplate letter to the Council that “most yogis and gym members are middle income-ers who've simply made it a priority to invest in their health and well-being.  The DC Council should reward their behavior, and encourage more people to take responsibility similarly for their own well-being.” 

Their plea then subtly attempts to downplay the revenue that could be gained by a tax on yoga, implying that such a tax would encourage people to abandon yoga, and therefore result in losses in productivity, self-reliance, and basic human functioning — all of which would adversely impact DC’s coffers.

If you live in the District of Columbia, we suggest that you write to your council member to tell them you support this tax proposal, which is essentially just an attempt to expand the base of the sales tax.

For more information, the DC Fair Budget coalition has additional details on the proposed sales tax base expansion, as well as on fiscal 2011 revenue options more broadly.  Also see the DC Fiscal Policy Institute’s take on sales tax base expansion, and on the recent outcry from the yoga community.

DC's yoga lobby is not unique. Maryland’s recent attempt to tax a handful of services met similar obstacles.  After proposing a list of perfectly sensible expansions of the sales tax base, industry lobbyists skillfully removed their clients from the list, one-by-one, until only the computer services industry remained (and of course, in time, the computer services industry was eventually able to avoid taxation as well). 

During all of this, the circling of the Annapolis capital building by lawn care trucks provided one of the most memorable and oft-cited examples of the influence that special-interests can have in a tax policy debate. 

For more on the importance of taxing services, be sure to read this recent op-ed by Sharon Parks of the Michigan League for Human Services.  In it she explains the history and merits of taxing services in Michigan, and advocates strongly for the proposal put forth by Michigan Governor Jennifer Granholm to expand the state’s sales tax base to include a host of new services, and to return some of the revenue gained to Michiganders via a 0.5 percentage point decrease in the sales tax rate.


ITEP's "Who Pays?" Report Renews Focus on Tax Fairness Across the Nation


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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.

It's one thing for the federal government to allow a one-time amnesty for Americans who've hid their income from the IRS in offshore accounts. (See related story.) The "stick" is effective (prison) and the "carrot" is not overly generous (since these Americans will pay taxes, interest, and penalties).

But lately several states are providing their own tax amnesties that are very different and very misguided. According to a recent article in State Tax Notes (subscription required), the thirteen state tax amnesties already conducted or promised this year ties the 2002 record for most amnesties offered in one year.  Assuming that DC Mayor Adrian Fenty signs the budget (which contains a tax amnesty) that was recently passed by the DC Council, that record will be broken.  Pennsylvania and Michigan, however, still have a chance to avoid adding to the list of states enacting these short-sighted measures. Amnesties have been proposed within each state's legislature.

As we've argued before, allowing delinquent taxpayers to pay the taxes they owe with little or no penalty is unfair to those diligent taxpayers who paid their taxes on time.

This unfairness is compounded greatly if the interest owed on the late tax bill is reduced, or even waived entirely, as was done this year in Delaware.  Waiving the interest owed on late tax bills essentially means that delinquent taxpayers are granted an interest-free loan by the state, for no reason other than the fact that the state is now desperately in need of money. Had all taxpayers been aware of the possibility of this interest-free loan, the rate of noncompliance would undoubtedly have skyrocketed. 

Repeatedly offering amnesties, as is increasingly becoming the norm, harms the ability of states to enforce their tax laws.  With record numbers of tax amnesties having been offered in the last seven years, delinquent taxpayers can usually assume that they'll be offered an easy way out eventually -- if only they're patient enough.  As one revenue official from Kansas recently put it, "if you have amnesties too often, you're literally training taxpayers not to pay."


Regressive Tax Hikes, Spending Cuts, & Combined Reporting Used to Close DC Budget Gap


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As in most places around the country, the District of Columbia recently concluded debates over how to close its budget deficit.

Council member Jim Graham proposed what was perhaps the best idea of the debates -- a modest income tax increase on incomes over a half million dollars.  As Ed Lazere, Executive Director of the DC Fiscal Policy Institute (DCFPI) recently stated, "If you are thinking about how to balance the budget while sparing the local economy, there is a pretty good consensus among economists that raising taxes among high-income folks is probably the best way to go, because it does not tend to affect their consumption."

Ultimately, however, Graham's proposal failed to gain support, and the city instead decided to increase sales, cigarette, and gas taxes, in addition to dramatically cutting spending.  While some kind of tax increase was undoubtedly necessary, the particular increases chosen by the council will disproportionately impact low-income families.  The same can be said of some of the city's spending cuts.  For example, Temporary Assistance for Needy Families (TANF) was modestly reduced under the new budget, though much larger proposed cuts in the program were avoided.  Education was hit especially hard -- to the tune of $30 million.

Fortunately, in addition to revenue raisers and spending cuts just described, the District also decided to require "combined reporting" of corporate income for tax purposes.  This measure should provide some additional revenue for the city, while also improving the fairness of the District's corporate income tax.

As the DCFPI points out, some of the cuts made by the council could have been mitigated if federal restrictions on the city's use of its rainy day fund were relaxed.  The DCFPI has a wealth of information on the DC budget debates on their website.


District of Columbia: More Movement Towards Progressive Deficit Reduction


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In recent months, New York has enacted -- and numerous other states, such as Connecticut, New Jersey, Minnesota, and Hawaii have debated -- an increase in the income taxes paid by wealthier residents as a means of responding to the current fiscal crisis. Recognizing a good idea when he sees it, DC Councilman Jim Graham has put forward a plan to raise the top tax rate in the District to 8.9 percent, but only for those taxpayers with incomes above $500,000.

An informative new report from the DC Fiscal Policy Institute (DCFPI) details the merits of the plan and concludes that, "[b]ecause it would raise revenues progressively, without adversely affecting low-income residents, the Equitable Income Tax Act is a reasonable approach to boosting revenue in this challenging budget year." DCFPI offers numerous other resources for those interested in following local tax and budget debates, in particular its FY10 Budget Toolkit.


Washington, Meet Washington


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From coast to coast, state and local governments are coming face-to-face with the consequences of turmoil in the nation's housing and financial markets, as tax collections are falling well short of expectations and are opening up substantial budget gaps. The country's two Washingtons -- the city of Washington, DC and the state of Washington -- provide two troubling examples. Last month, Washington State's Economic and Revenue Forecast Council announced that it was reducing its revenue projections by $530 million, bringing the anticipated 2009-2011 budget deficit to $3.2 billion. Similarly, Washington, DC's Chief Financial Officer, Natwar Gandhi, revealed at the end of September that the District would likely face a deficit of roughly $131 million in fiscal 2009. Fortunately, sensible solutions to these problems are available. Both the Washington Budget & Policy Center and the DC Fiscal Policy Institute have offered outlines for addressing the respective shortfalls, including using a portion of existing reserve funds, reconsidering ineffective tax exemptions or incentives, and at least temporarily raising taxes. You can read their recommendations here and here.


New ITEP Report: State Tax Policy a Poor Match for Economic Reality in Key States


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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.


D.C. Sets the Standard with Increase in its Earned Income Tax Credit


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The District of Columbia this week increased its already highest in the nation Earned Income Tax Credit (EITC) from 35% to 40% of the federal EITC. This change will provide much needed relief to low-income families in the District who are feeling the pinch of rising prices during the current economic slowdown. It also sends a message to policymakers everywhere about the effectiveness of the EITC as a method for offsetting regressive sales and property taxes for those with the most need. Twenty-three states and the District of Columbia currently have an EITC. Nine of those states, however, have EITCs of less than ten percent of the federal. In addition, three states fail to make their credits refundable -- meaning those lowest-income families with little income tax liability are unable to see any benefit. While all these states should be praised for at least having an EITC, this recent change to the EITC in D.C. provides a great example towards which these states with less generous credits should strive.


DC: Another "No New Taxes" Pledge Bites the Dust?


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The fiscal storm clouds are already gathering for newly-elected District of Columbia Mayor Adrian Fenty. A Washington Post article reports that the city faces an unanticipated revenue shortfall of $300 million over the next two years. No big deal ... except that as a candidate seeking to distinguish himself from a crowded Democratic primary field this past spring, Fenty took a "no new taxes" pledge, arguing that that the books could be balanced with that old favorite, eliminating "waste, fraud and abuse." The new projected shortfalls are, of course, only projections ... but they serve as a dramatic reminder of the dangers of not leaving all fiscal policy options on the table.


ITEP Speaks Out On Sales Tax Holidays


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Sales tax holidays are growing in popularity this year with four more states, Alabama, Maryland, Tennessee and Virginia, joining nine others and the District of Columbia in waiving sales and use taxes for a limited time during July and August. To see a list of participating states and tax holiday dates, click here.

As ITEP staff told USA Today earlier this week, "This tax break makes sense for lawmakers because it's cheap and avoids real reform." State legislatures claim that tax holidays alleviate the tax burden on working families and jump-start local retail businesses. In reality, however, sales tax holidays are a political gimmick that probably helps consumers less than proponents claim.


ITEP Testimony on D.C. Tax Reform Legislation


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ITEP Testimony on D.C. Tax Reform Legislation

ITEP's analysis of Bill 16-35 shows that it would impact the District's tax system in two important ways. First, the bill would make the District's tax system less unfair by reducing the income tax on low- and middle-income D.C. residents. Second, it would reduce the revenues available to fund public services by about $86 million if implemented in 2004...

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