Oregon News


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


State News Quick Hits: State Lawmakers Not Getting the Message


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Less than a year after enacting a significant (and progressive) revenue raising tax package, Minnesota Governor Mark Dayton signed off last week on more than $400 million of tax cuts. The new legislation repeals several changes put into place last year including removing warehouse storage and 2 other primarily business services from the sales tax base and eliminating a new gift tax. The tax cuts also include reductions in the personal income tax via aligning the state’s tax code more closely to federal rules. Low- and moderate-income working families will also see a small benefit from two changes made to the state’s Working Families Credit (Minnesota’s version of a state Earned Income Tax credit (EITC).

A mother of two in Kentucky has made an impassioned plea to her state legislators to support the creation of a state Earned Income Tax Credit (EITC). More than half of all states have enacted such a credit, which is proven to increase workforce participation and improve health outcomes for children. As Jeanie Smith writes in her op-ed, “I know that we could have put that tax credit to good use. We could have used it toward the textbooks for my husband, or to take the stress out of a month's bills.” There are lots of strong arguments for adding a state EITC to Kentucky’s quite regressive tax code (PDF), and the Governor has proposed establishing a state EITC as part of his tax reform plan. Hopefully, Jeanie’s articulation of what a state EITC would mean for her and other families like hers will persuade those not yet on board.

The Montgomery Advertiser recently ran a very powerful editorial about the problems with low taxes. Lawmakers should give careful thought to one of the questions the editors pose in the piece: “We don’t pay a lot in taxes in Alabama and historically have taken a perverse pride in that. But is this really a bargain, or is it a fine example of false economy, of short-changing public investment to the detriment of our people?”

Our colleagues at the Institute on Taxation and Economic Policy (ITEP) have long been critical of gimmicky sales tax holidays that provide little help to the poor or the economy. But Florida lawmakers don’t appear to have gotten the message, as the state House’s tax-writing committee recently advanced four “super-sized” sales tax holidays for purchases as varied as school supplies and gym memberships. Altogether, the package would drain $141 million from the state’s budget that could otherwise be been spent on education, infrastructure, and other public investments.

Newspapers in Oregon and North Carolina published editorials using data from ITEP and CTJ’s latest report on state corporate income taxes to highlight the need for corporate tax reform in their states. Check out The Oregonian’s editorial, “Extremes of Corporate Tax System Show Need for Reform” and one from the Greensboro News & Record, “Next to Nothing.”


Oregon Governor has Bad Intel on Corporate Tax Breaks


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State tax giveaways for business are reaching a fever pitch in the Pacific Northwest. Washington lawmakers last month enacted an $8.7 billion “mega-deal” package of state and local tax breaks designed to keep the state’s aerospace industry, dominated by Boeing, in the state. The sheer scale of the package, which is designed to last until 2040, has prompted some to wonder whether the time has finally come to end the tax-incentive arms race between the states. 

But across the Columbia River in Oregon, Governor John Kitzhaber is having none of this talk. Computer chipmaker Intel has just inked a new package of guaranteed tax breaks, not through legislative action but through direct negotiation with Governor Kitzhaber. In brief, Intel gets a guarantee that it will be able to use the coveted “single sales factor” manufacturing tax break for 30 years– even if the legislature repeals it for everyone else doing business in the state.

In return for a tax break that will outlive many current Oregon voters, Intel agrees to do...nothing they weren’t already doing. As the Oregon Center on Public Policy points out, the company has already begun construction of a new research facility in the state, and the result of this agreement is simply that they will continue building the facility. Intel senior leaders admit that Intel’s current investments on this site are “nothing new...just continued expansion of the site.”

Why does Governor Kitzhaber have the power to unilaterally negotiate tax deals with Fortune 500 companies? Because the legislature gave him that power. In a special legislative session last year, the legislature enacted a bill (PDF) initially designed to authorize a similar tax break package for the Nike corporation, but ultimately crafted to allow any large company to negotiate directly with the governor on tax incentive packages, as long as those negotiations took place before the end of 2013. (Reminder to mom-and-pop businesses in Oregon: you’ve got just two short weeks left to set up your personal meeting with Kitzhaber if you want to secure similar tax breaks– better get with the program!)

The good news is that in the limited time Kitzhaber has had access to his “magic wand” for granting tax breaks, he’s only done it for Intel and Nike. So when Kitzhaber turns over a new leaf and starts pushing for comprehensive tax reform after the next gubernatorial election, he’ll have to spend a bit less time undoing the damage he’s wrought in 2013.

What makes this all the more astonishing is that Kitzhaber and the legislature have no idea whether these companies are paying a meaningful amount of income tax to Oregon to begin with—and there’s anecdotal evidence that they don’t. A 2011 report from Citizens for Tax Justice and the Institute on Taxation and Economic Policy shows that Intel was one of over a dozen Fortune 500 companies that, despite being hugely profitable between 2008 and 2010, managed to pay not even a dime of state corporate tax nationwide during this three-year period.

Public disclosure of corporate tax payments (PDF) remains a terrific, if largely unfulfilled, step toward reform, and it’s worth asking: if Kitzhaber, to say nothing of Oregon taxpayers, knew just how little income tax Intel is paying right now to Oregon, would this horrific deal have ever seen the light of day?


What's the Matter with Oregon's New Tax Deal?


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After three days of debate and backroom deals, lawmakers in Oregon delivered hundreds of millions of dollars in unwarranted tax cuts to businesses as part of the state legislature’s 2013 special session on Wednesday.

The Governor’s objective for calling the special session was to increase education spending, reduce public employee pensions, and limit regulation of genetically modified agriculture, among other priorities. But buried in one of the five bills that came up for consideration – all of which passed on Wednesday – were tax rate cuts for partnerships, limited liability companies, and "S corporations.”

As we and the Oregon Center for Public Policy have demonstrated, these cuts far outweighed increased assistance for working families, which came in the form of a modest increase in the state Earned Income Tax Credit (EITC). Moreover, the budget math only works for the first two years. Oregon’s own Legislative Revenue Office expects the costs of those business tax cuts to grow rapidly starting in 2015, eating away at the limited new revenues in the deal. This will likely create another budget crunch a few years down the road. And despite the political rhetoric about jobs and small business surrounding the tax cuts, the beneficiaries are almost exclusively individuals in the top 1 percent.

Rep. Brent Barton, D-Oregon City, himself a lawyer in private practice, asked an important question about the deal: "What is the message that this Legislature is sending when we cut my taxes 20 percent? We cut taxes on thousands of lawyers, doctors, lobbyists, accountants on the same day that we cut benefits for retirees. What message does that send?"

Unfortunately, advocates for working Oregonians will have little time to recover from the special session fight before they’re confronted with Governor Kitzhaber’s next pet project: weakening Oregon’s so-called “over-reliance” on income taxes.

 


Special Session in Oregon Over Pensions and Revenues


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At the request of Oregon Governor John Kitzhaber, the state’s legislature will convene a special session on September 30th to pass a negotiated pension reform and revenue package which lawmakers failed to act on during the regular session this year.  The Governor and key lawmakers have been back and forth for months trying to come up with a “grand bargain” that would please members of both sides of the aisle, allowing the state to move forward on reforming the public pension system and raising revenue to boost education spending.  Lawmakers reached an impasse early this summer because most Democratic lawmakers were willing to raise revenue, but were not eager to support cuts to public employee’s benefits while most Republicans were open to significant changes to the state’s public pension system, but would only accept revenue increases if they are balanced with tax cuts for “small” businesses.  And, even though Democrats have majorities in the House and Senate, thanks to Oregon’s supermajority requirement to enact tax increases, a handful of Republicans were needed to strike a deal. 

Now it appears the impasse has broken.  The Governor and the majority and minority leaders of the House and Senate reached a deal on a plan that will initially raise more than $200 million (over two years) in new revenue for education, further reduce costs to the state’s pension system, give tax breaks to some businesses, and slightly increase the state’s Earned Income Tax Credit.

Is it time to celebrate?  Not so fast.  Our friends at the Oregon Center for Public Policy (OCPP) are calling the deal a “Grandly Flawed Bargain” due to three major flaws with the revenue package:

  • The initial revenue gains shrink substantially after the current budget period.
  • The tax cuts included in the revenue package are highly tilted to the wealthiest 1 percent who will benefit from the new business tax break.  And, the special business tax breaks are the reason for the revenue collapse after the first budget period.
  • Despite proponents’ claims, the revenue package will not create jobs.

The bargain contains two progressive revenue raising elements: eliminating the personal exemption credit for high-income taxpayers; and capping the additional deduction for medical expenses available to older taxpayers and phasing it out for upper-income households.  And, it gives a small tax cut to working families by bumping the state’s Earned Income Tax Credit up from 6 to 8 percent of the federal credit.  But, most of the progressive changes are more than offset and overshadowed by the new optional personal income tax rate structure for taxpayers with pass-through business income, which will amount to more than a $100 million tax break each year for those filers once fully phased-in.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), crunched the numbers OCPP highlights in its report.  ITEP found that the so-called revenue raising package largely amounts to a significant tax cut for the wealthiest 1 percent of Oregonians who report pass-through business income on their returns. This group receives almost 70 percent of the tax cuts contained in the package while low- and moderate-income taxpayers (the bottom 40 percent) who benefit from the increased EITC get less than 10 percent of the total tax cut.

More than 60 percent of the wealthiest 1 percent of taxpayers will actually pay more under the plan thanks to the changes to the personal exemption credit.  So, it is a small number of wealthy business owners sharing the big cut that’s going to cost more than any part of the plan.     

OCPP is recommending lawmakers consider removing the costly wealthy business owner tax break from the bargain package in order to ensure adequate revenue for education, not only for this year but for years to come.  It would also make the tax package more fair, giving tax cuts only to low- and moderate-income working families while raising revenue from the state’s wealthiest residents.

 


Nike's Tax Haven Subsidiaries Are Named After Its Shoe Brands


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Did you know that “Nike Waffle” isn’t just a shoe? It’s also a tax shelter.

Nike, like companies such as Apple, Dell and Microsoft, has a huge stash of offshore profits that it hasn’t paid U.S. taxes on. We also know that Nike, like these other corporations, has paid little or nothing in foreign taxes on these profits either. And we also know that all these companies have many offshore subsidiaries in tax-haven countries.

Nike’s latest annual report, released earlier this week, shows just how blatant multinational corporations have become in using offshore tax havens to avoid their U.S. tax responsibilities.

Nike reports that its cache of “permanently reinvested offshore profits” ballooned from $5.5 billion to $6.7 billion in the past year — meaning that the company moved $1.2 billion of its profits offshore. Nike also discloses that if it were to pay U.S. taxes on its offshore stash, its federal tax bill would be $2.2 billion, a tax rate of just under 33 percent. Since the federal income tax is 35 percent minus any taxes corporations have paid to foreign jurisdictions, it’s easy to deduce that Nike has paid virtually no tax on its offshore profit hoard.

Nike’s long list of offshore subsidiaries includes twelve shell companies in Bermuda alone, ten of which are named after one of Nike’s own shoes! To wit: Air Max Limited, Nike Cortez, Nike Flight, Nike Force, Nike Huarache, Nike Jump Ltd., Nike Lavadome, Nike Pegasus, Nike Tailwind and Nike Waffle!

Why does Nike want to pretend that its product names live in Bermuda? To avoid paying taxes, of course. When multinationals move their brand names and other “intellectual property” to tax-haven subsidiaries, they can have their subsidiaries “charge” the U.S. parent companies big royalties for using the names. These transactions reduce U.S. taxable income and rob state and federal governments of tens of billions of dollars each year.

You might think that American multinational corporations might be just a little embarrassed by such nefarious behavior. But no, they mostly aren’t. Nike, in particular, is thumbing its corporate nose at the IRS and ordinary taxpayers by making its tax avoidance maneuvering so obvious and having a little fun at our expense.

Frontpage Photo of Nike Shoes via Daniel Y. Go Creative Commons Attribution License 2.0 


Earned Income Tax Credits in the States: Recent Developments, Good and Bad


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Note to Readers: This is the last in a six part series on tax reform in the states. Over the past several weeks CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) has highlighted tax reform proposals and looked at the policy trends that are gaining momentum in states across the country.

Lawmakers in at least six states have proposed effectively cutting taxes for moderate- and low-income working families through expanding, restoring or enacting new state Earned Income Tax Credits (EITC) (PDF). Unfortunately, state EITCs are also under attack in a handful of states where lawmakers are looking to reduce their benefit or even eliminate the credit altogether.

The federal EITC is widely recognized by experts and lawmakers across the political spectrum as an effective anti-poverty strategy. It was introduced in 1975 to provide targeted tax reductions to low-income workers and supplement low wages. Twenty-four states plus the District of Columbia provide EITCs modeled on the federal credit. At the state level, EITCs play an important role in offsetting the regressive effects of state and local tax systems.

Positive Developments

  • Last week, the Iowa Senate Ways and Means Committee approved legislation to increase the state’s EITC from 7 to 20 percent. Committee Chairman Joe Bolkcom said, “This bill is what tax relief looks like. The tax relief is going to people who pay more than their fair share.”

  • The Honolulu Star-Advertiser recently reported on the push to create an EITC and a poverty tax credit (PDF) in Hawaii. The story cites data from ITEP showing that Hawaii has the fourth highest taxes on the poor in the country and describes the work being done in support of low-income tax relief by the Hawaii Appleseed Center.  The poverty tax credit would help end Hawaii’s distinction as one of just 15 states that taxes its working poor deeper into poverty through the income tax.

  • In Michigan, lawmakers are looking to reverse a recent 70 percent cut in the state’s EITC.  That change raised taxes on some 800,000 low-income families in order to pay for a package of business tax cuts.  Lawmakers have introduced legislation to restore the EITC to its previous value of 20 percent of the federal credit, and advocates are supporting the idea through the “Save Michigan’s Earned Income Tax Credit” campaign

  • Pushing back against New Jersey Governor Christie’s reduction of the EITC from 25 to 20 percent, last month the Senate Budget and Appropriations Committee approved a bill to restore the credit to 25 percent. Senator Shirley Turner, the bill’s sponsor, said there was no reason to delay its passage as some have suggested because low-income New Jersey families need the credit now.  "People would put this money into their pockets immediately. I think they would be able to buy food, clothing and pay their rent and their utility bills. Those are the things people are struggling to do."

  • Oregon’s EITC is set to expire at the end of this year, but Governor Kitzhaber views it as a way to help “working families keep more of what they earn and move up the income ladder” so his budget extends and increases the EITC by $22 million. Chuck Sheketoff with the Oregon Center for Public Policy argues in this op-ed, “[t]he Oregon Earned Income Tax credit is a small investment that can make a large difference in the lives of working families. These families have earned the credit through work. Lawmakers should renew and strengthen the credit now, not later.”

  • In Utah, a legislator sponsored a bill to introduce a five percent EITC in the state. The bipartisan legislation is unlikely to pass because of funding concerns, but the fact that the EITC is on the radar there is a good development. Rep. Eric Hutchings said that offering a refundable credit to working families “sends the message that if you work and are trying to climb out of that hole, we will drop a ladder in."

Negative Developments

  • Last week, North Carolina Governor McCrory signed legislation that reduces the state’s EITC to 4.5 percent. The future looks grim for even this scaled down credit, though, since it is allowed to sunset after 2013 and it’s unlikely the credit will be reintroduced. It’s worth noting that the state just reduced taxes on the wealthiest .2 percent of North Carolinians by eliminating the state’s estate tax, at a cost of more than $60 million a year. Additionally, by cutting the EITC the legislature recently increased taxes on low-income working families, saving a mere $11 million in revenues.

  • Just two years after signing legislation introducing an EITC, Connecticut Governor Dannel Malloy is recommending it be temporarily reduced “from the current 30 percent of the federal EITC to 25 percent next year, 27.5 percent the year after that, and then restoring it to 30 percent in 2015.” In an op-ed published in the Hartford Courant, Jim Horan with the Connecticut Association for Human Services asks, “But do we really want to raise taxes on hard-working parents earning only $18,000 a year?”

  • Last week in the Kansas Senate, a bill (PDF) was introduced to cut the state’s EITC from 17 to 9 percent of its federal counterpart. This would be on top of the radical changes signed into law last year by Governor Sam Brownback which eliminated two credits targeted to low-income families including the Food Sales Tax Rebate.

  • Vermont Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs, a move described as taking from the poor to give to the poor. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute cites ITEP Who Pays data to make the case for maintaining the EITC.  Calling the Governor’s idea a “nonstarter,” House and Senate legislators are exploring their own ideas for funding mechanisms to pay for the EITC at its current level.

Evidence Continues to Mount: State Taxes Don't Cause Rich to Flee


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

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

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

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

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

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

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

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

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

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


Ballot Measures in Eleven States Put Taxes in Voters' Hands


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

Arizona

  • Proposition 204 would make permanent the one percentage point sales tax increase originally approved by voters in 2010.  The increase would provide much-needed revenue for education, particularly in light of the worsened budget outlook created by a flurry of recent tax cuts.  But it’s hard not to be disappointed that the only revenue-raising option on the table is the regressive sales tax (PDF), at a time when the state’s wealthiest investors and businesses are being showered with tax cuts.
  • Proposition 117 would stop a home’s taxable assessed value from rising by more than five percent in any given year.  As our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains (PDF), “Assessed value caps are most valuable for taxpayers whose homes are appreciating most rapidly, but will provide no tax relief at all for homeowners whose home values are stagnant or declining. As a result, assessed value caps can shift the distribution of property taxes away from rapidly appreciating properties and towards properties experiencing slow or negative growth in value - many of which are likely owned by low-income families.”

Arkansas

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

California

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

Florida

  • Amendment 3 would create a Colorado-style TABOR (or “Taxpayer Bill of Rights”) limit on revenue growth, based on an arbitrary formula that does not accurately reflect the growing cost of public services over time.  As the Center on Budget and Policy Priorities (CBPP) explains, Amendment 3 is ““wolf in sheep’s clothing” because it would phase in over several years, which obscures the severe long-term damage it would cause.  Once its revenue losses started, however, they would grow quickly. To illustrate its potential harm, we calculate that if the measure took full effect today rather than several years from now, it would cost the state more than $11 billion in just ten years.” The Orlando Sentinel's editorial board urged a No vote this week writing that voters “shouldn't risk starving schools and other core government responsibilities that are essential to competing for jobs and building a better future in Florida.”
  • Amendment 4 would put a variety of costly property tax changes into Florida’s constitution, including most notably an assessment cap (PDF) for businesses and non-residents that would give both groups large tax cuts whenever their properties increase rapidly in value.  Moreover, as the Center on Budget and Policy Priorities (CBPP) explains, “Amendment 4’s biggest likely beneficiaries would be large corporations headquartered in other states, with out-of-state owners and shareholders,” including companies like Disney and Hilton hotels.

Michigan

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

Missouri

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

New Hampshire

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

Oklahoma

  • State Question 758 would tighten an ill-advised property tax cap (PDF) even further, preventing taxable home values from rising more than three percent per year regardless of what’s happening in the housing market.  As the Oklahoma Policy Institute explains, “Oklahomans living in poor communities, rural areas, and small towns would get little to no benefit, since their home values will not increase nearly as much as homes in wealthy, suburban communities.”  And since many localities are likely to turn to property tax rate hikes to pick up the slack caused by this erosion of their tax base, those Oklahomans in poorer areas could actually end up paying more.  
  • State Question 766 would provide a costly exemption for certain corporations’ intangible property, like mineral interests, trademarks, and software.  If enacted, the biggest beneficiaries would include utility companies like AT&T, as well as a handful of airlines and railroads.  The Oklahoma Policy Institute explains that the exemption, which would mostly impact local governments, would have to be paid for with some combinations of cuts to school spending and property tax hikes on homeowners and small businesses.  And the impact could be big.  As one OK Policy guest blogger explains: “In 1975, intangible assets comprised around 2 percent of the net asset book value of S&P 500 companies; by 2005, it was over 40 percent, and the trend is likely to continue. If SQ 766 passes, Oklahoma will find itself increasingly limited in its ability to tax properties.”

Oregon

  • Measure 84 would gradually repeal Oregon’s estate and inheritance tax (PDF) and allow tax-free property transfers between family members.  If the measure passes, Oregon would lose $120 million from the estate tax, its most progressive source of revenue.   According to many legal interpretations of the measure, the second component - referring to inter-family transfers of property - would likely open a new egregious loophole allowing individuals to avoid capital gains taxes (PDF) on the sale of land and stock by simply selling property to family members.  Oregon’s Legislative Revenue Office released a report last week that showed 5 to 25 percent of capital gains revenue could be lost as a result of the measuring passing. The same report also found no evidence for the claim that estate tax repeal is some kind of millionaire magnet that increases the number of wealthy taxpayers in a state.
  • Measure 79, backed by the real estate industry, constitutionally bans real estate transfer taxes and fees.  However, taxes and fees on the transfer of real estate in Oregon are essentially nonexistent, prompting opponents to refer to the measure as a “solution in search of a problem.”
  • Measure 85 would eliminate Oregon’s “corporate kicker” refund program which provides a rebate to corporate income taxpayers when total state corporate income tax revenue collections exceed the forecast by two or more percent. Instead of kicking back that revenue to corporations, the excess above collections would go to the state’s General Fund to support K-12 education. Supporters of this measure acknowledge that a Yes vote will not send buckets of money to schools right away since the kicker has rarely been activated.  But, it is a much needed tax reform that will help stabilize education funding and peak interest in getting rid of the Beaver State’s more problematic personal income tax kicker.

South Dakota

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

Washington

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

 

  • The Detroit News’ editorial board recently criticized a plan to cut Michigan’s personal income tax rates which, despite its hefty $800 million price tag, managed to pass the state’s House.  The editors called it risky election year pandering.
  • Oregon is launching a pilot program to figure out how road and bridge repairs will be funded when cars no longer run on gasoline and drivers no longer pay the gas tax.  One possible solution is a tax directly on miles traveled rather than gallons consumed, but the last time the state tested that out, it “didn’t sit well with the public” because the GPS-like technology made people worry the government would be spying on them.
  • Rhode Island Governor Lincoln Chafee signed a state budget that includes a small foray into sales tax base expansion.  Starting July 1, taxi and limo rides and pet grooming services will be subject to the state’s seven percent sales tax rate, as will clothing and shoes costing more than $250.
  • The Associated Press offers a smart analysis of tensions within state Republican parties and their impact on a variety of state legislative activities, including tax policy debates. Written by a senior AP reporter in Missouri, it reveals (among other things) that moderate Republicans played a role in thwarting some of the more conservative members’ plans.
  • Kansas Governor Brownback’s insistence on steep tax cuts has met more resistance.  A group called Traditional Republicans for Common Sense has come out against  even a watered down version of Brownback’s vision in the legislature. One of the group’s members (a former chair of the state’s GOP) said, “Now is not the time for more government intervention. Topeka needs to stay out of the way and make sure proven economic development tools – like good schools and safe roads – remain strong so that the private sector can thrive.” 
  • Stateline writes about the problems with “the spending that isn’t counted” – meaning special breaks that lawmakers have buried in state tax codes.  The article highlights efforts in Oregon and Vermont to develop more rational budget processes where tax breaks can’t simply fly under the radar year after year.  CTJ’s recommendations for reform are in this report.
  • In this thoughtful column, South Carolina Senator Phil Leventis writes, "I have been guided by the principle that government should invest in meeting the needs and aspirations of its citizens. This principle has been undermined by an ideology claiming that government is the cause of our problems and, accordingly, must be starved.” He praises tax study commissions and says being “business friendly” cannot be the only measure of state policy.
  • An op-ed from the Pennsylvania Budget and Policy Center (PBPC) calls on lawmakers to address the issue of rampant corporate tax avoidance, and to do so responsibly. It raises concerns that legislation currently under consideration to close corporate loopholes could be a “cure worse than the disease.”  The legislation takes some good steps but is paired with business tax cuts that could cost as much as $1 billion over the next several years.  PBPC argues for a stronger and more effective approach to making corporations pay their fair share such as combined reporting, which makes it harder for companies to move profits around among subsidiaries in different states.
  • Just four days after Amazon agreed to begin collecting sales taxes in Nevada in 2014, the company announced a similar agreement with Texas that will take effect much sooner – on July 1st.  As The Wall Street Journal reports, “With the deal, the Seattle-based company is on track to collect sales taxes in 12 states, which make up about 40% of the U.S. population, by 2016.”

Picture from Flickr Creative Commons.


WSJ Accidentally Admits that 'Millionaires Go Missing' Because of Economy, Not Taxes


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Millionaires Go MissingWe couldn’t help but laugh when we saw the title of last week’s Wall Street Journal editorial.  For those of you that have followed the “millionaire migration” debate, it should be a very familiar one.

First, a little background: Over the last couple years, the Wall Street Journal has run three editorials claiming that state income tax hikes in Maryland and Oregon were major factors in the shrinking of those states’ millionaire populations.  According to the Journal, while the recession did reduce the number of rich folks in those states, the tax hikes enacted by the “redistributionists” and “class warriors” (to use their words) just had to have something to do with it as well.  No self-respecting rich person would sit around and pay more in taxes when they could quit their job, pull their kids out of school, and move to a state with lower taxes on the rich – like South Dakota.

Our sister organization, ITEP, went to great lengths to point out the problems with the Journal’s migration theory, responding to those editorials in three separate reports, one letter to the editor, and a Huffington Post piece.  All of those publications analyzed official state data and reached the same conclusion: there’s no evidence to suggest that the shrinking of Maryland and Oregon’s millionaire populations was anything other than a predictable result of the recent recession.

That’s what makes last week’s Journal editorial so amusing.  It’s been a little over two years since the Journal first popularized the Maryland millionaire migration myth with a 2009 piece titled “Millionaires Go Missing.”  Apparently, members of the Journal’s editorial board have short memories, because they’ve recycled that same title, but used it to argue the opposite point (and the one ITEP insisted was the case all along): new federal tax data shows that the recession caused a huge decline in the number of millionaires all across the country.  “Told you so” just doesn’t seem sufficient.

Looking back, it’s really unfortunate how much influence the Journal’s made-up story about “Maryland’s fleeced taxpayers fighting back” (as the sub-title of their 2009 article read) actually had.  It resulted in countless misinformed debates about a “millionaire migration” phenomenon that never even existed, and played no small role in the eventual defeat of efforts to extend a very good tax policy in Maryland.

But even against that backdrop, perhaps we should all feel just a bit relieved right now.  At least the Journal opted not to use the new federal data to concoct a fiction about wealthy Americans migrating to low-tax Mexico.  Well, at least not yet.


Oregon Bends Tax Credit Cost Curve


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It’s no secret that once enacted, tax breaks receive far too little scrutiny from state lawmakers.  Consider the debacle in Missouri, for example, where the state accidentally spent $1 billion more on tax credits beyond what lawmakers originally intended, in large part because the state's budget rules left lawmakers with very few options for properly overseeing those tax breaks.

In an attempt to encourage lawmakers to spend more time discussing the true costs and benefits of tax breaks, Oregon enacted a law in 2009 requiring the vast majority of its tax credits to sunset within two, four, or six years.  Last week, with the first batch of credits scheduled to expire at the end of this year, the Oregon legislature sent Governor Kitzhaber a bill that will scale back the size of the expiring tax breaks by some 75 percent over the next two years – from $40million to $10million.  Similarly, the credits' six-year, $500million price tag (had the legislature simply extended all the credits) will fall to roughly $136million.

Among the credits reduced by the legislation are the film tax credit, the biomass credit, and the research and development credit.  The much maligned business energy tax credit (BETC) will also be replaced with new and smaller credits designed to encourage conservation and renewable energy.

Unfortunately, there is one troubling addendum to this story.  Just days after passing these tax credit reductions, the legislature also gave approval to a costly new credit based on the federal New Markets Tax Credit (NMTC).  The NMTC is ostensibly designed to encourage business investment in low-income communities, but as our friends at the Oregon Center for Public Policy (OCPP) point out, the credit often flows straight to the pockets of wealthy investors building upscale hotels and condominiums in areas that are hardly impoverished. 

Moreover, the OCPP notes that this credit “will subsidize projects that will occur anyway,” and “despite all the talk about creating jobs, the bill does not attach job standards to receipt of the subsidy.”  Additionally, “nothing in the bill matches the rhetoric that investments will be made in small businesses. The bill has no provision limiting the investments to small businesses.”  On the bright side, there’s still time for Governor Kitzhaber to veto the NMTC, and regardless of whether or not the NMTC becomes law, Oregon’s tax credit spending will be much lower in the years ahead than would otherwise have been the case.

This success is thanks in no small part to the role Oregon’s 2009 sunset law played in pushing these costly tax breaks into the spotlight.

For more information on steps states can take to enhance the level of scrutiny applied to tax breaks, read CTJ’s report, How to Enact (and Maintain) Tax Reform.


State Governments Rush to Squander Improved Revenue Outlook


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

California

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

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

Delaware

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

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

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

Michigan

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

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

New Jersey

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

Oregon

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

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

Wisconsin

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


New ITEP Report on States With Deductions for Federal Income Taxes Paid


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Earlier this week, the Institute on Taxation and Economic Policy released a new report, Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head.  The report highlights an unusual tax break that currently exists in only six states (Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon): a state income tax deduction for federal income tax payments.  Collectively these states stand to lose over $2.5 billion in tax revenues in 2011 due to these tax breaks, with losses ranging from $45 million to $643 million per state.

Unfortunately, the high price tag of this tax giveaway yields remarkably little benefit to low-and middle-income families.  In states where the deduction is uncapped, the best off 1 percent of taxpayers enjoy up to one-third of the benefits from this provision, while the top 20 percent enjoy up to 80 percent of the benefits.  Wisely, several states have eliminated or scaled back this expensive and poorly targeted deduction in the last few years.  North Dakota, Oklahoma, and Utah have all eliminated the deduction, and Oregon lawmakers voted recently to further limit their deduction.

Deductions for federal income taxes seriously undermine the adequacy and fairness of state income taxes. These deductions also leave state budgets vulnerable to changes in federal tax law.  As the recession lingers and states look to enhance their long term fiscal solvency, elected officials in states with a deduction for federal income taxes paid have a real opportunity to close fiscal shortfalls in a way that has minimal impact on low-and middle-income families.

Read the Report


The Millionaire Migration Myth: Don't Fall for This Anti-Tax Scare Tactic


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State lawmakers across the country have heard again and again that wealthy taxpayers will pull up stakes and move in response to just about any progressive state tax increase. This couldn't be further from the truth.

Read the full ITEP article in the Huffington Post


Authors of New York Study Claiming Millionaires Fleeing Reach New Low and Just Make Up Numbers


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In the past year, we've documented ad nauseum the lengths that anti-tax advocates will go to in order to convince lawmakers that the so-called "millionaire's tax" is prompting wealthy taxpayers to move to other states. In Maryland, New Jersey and Oregon, these groups have selectively presented data in order to "show" that resident millionaires are packing up their Lear Jets and moving to Florida. And in each case, we've shown that when the data are presented honestly and fully, there's simply no evidence that millionaires are voting with their feet.

But the latest such effort, by the Partnership for New York City, breaks new ground by simply making data up. For example, the report says that "Since the imposition of New York's surcharge in 2009, there has been a 9.4 percent decrease in the state's taxpayers who earn $1 million or more, decreasing from 381,786 in 2007 to 345,892 in 2009." Take a minute and read that quote again. What the Partnership is implying is that millionaires had the magical ability to see into the future and start moving out of New York in 2007 and 2008 as a result of a tax increase that hadn’t even happened yet.

Next, it’s worth taking a closer look at that 381,786 figure, the supposed amount of millionaires in New York in 2007. Interestingly enough there is state-by-state data available from the IRS which shows that there were actually only 375,265 returns with federal adjusted gross income over $200,000 in 2007. Of course, not all 375,265 returns were all millionaires. So the 381,786 figure sited by the Partnership is troubling to say the least.

What is even more troubling is that there isn’t actual data available (from New York or the federal government) for 2009 showing the number of tax returns by income group. Which leaves us with a very troubling question — where does the Partnerships earlier figure of 345,892 millionaires in 2009 actually come from?

The answer: they're using a forecast of the number of households in each state with wealth, not income, of $1 million or more. See the data. Released last September by a marketing firm, these estimates tell us a few interesting things. One is that between 2007 and 2009, the nation as a whole lost 13.9 percent of its net-worth "millionaires" between 2007 and 2009, which makes the 9.4 percent loss for New York seem not that impressive. Another is that 43 of the 50 states lost proportionally more of their net-worth "millionaires" over this period than did New York. So, leaving aside the minor detail that income taxes are based on income rather than wealth, which makes these marketing data utterly irrelevant to the point the Partnership is trying to make, any objective look at this data would suggest that New York is doing better than most other states.

For more on the many flaws of the Partnership’s paper, read this brief from the Fiscal Policy Institute. Suffice to say, the theory that New York millionaires are moving because of a targeted tax increase is based on deeply flawed (and perhaps even made up) data.


Super Bowl Ad about Taxes from Corporate Astroturf Group


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The last place you would ever expect a discussion of tax policy is in the sea of Super Bowl commercials about beer, cars, and Doritos, yet the organization Americans Against Food Taxes spent over $3 million to change that last Sunday.

The ad, called “Give Me a Break”, features a nice woman shopping in a grocery store,  explaining how she does not want the government interfering with her personal life by attempting to place taxes on soda, juice, or even flavored water. The goal of the ad is to portray objections to soda taxes as if they are grounded in the concerns of ordinary Americans.

But Americans Against Food Taxes is anything but a grassroots organization. Its funding comes from a coalition of corporate interests including Coca-Cola, McDonalds and the U.S. Chamber of Commerce.

It is easy to understand why these groups are concerned about soda taxes, which were once considered a way to help pay for health care reform. The entire purpose of these taxes is to discourage the consumption of their products. As the Center on Budget and Policy Priorities explains in making the case for a soda tax, such a tax could be used to dramatically reduce obesity and health care costs and produce better health outcomes across the nation. Adding to this, the revenue raised could be dedicated to funding health care programs, which could further improve the general welfare.

These taxes may spread, at least at the state level.  In its analysis of the ad, Politifact verifies the ad’s claim that politicians are planning to impose additional taxes on soda and other groceries, writing that “legislators have introduced bills to impose or raise the tax on sodas and/or snack foods in Arizona, Connecticut, Hawaii, Mississippi, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont and West Virginia.”

It's true that taxes on food generally are regressive, and taxes on sugary drinks are no exception according to a recent study. It's a bad idea to rely on this sort of tax purely to raise revenue, but if the goal of the tax is to change behavior for health reasons, then such a tax might be a reasonable tool for social policy. We have often said the same about cigarette taxes, which are a bad way to raise revenue but a reasonable way to discourage an unhealthy behavior.

With so many states considering soda taxes and the corporate interests revving up their own campaign, the “Give Me a Break” ad may just be the opening shot in the big food tax battles to come.


New Resources


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A new website, Oregon Open for Business, was launched this week to help dismiss claims that Oregon's recent voter-approved tax increases are driving corporations away from the state.  The website tracks the numerous businesses, including Google, Facebook, Genentech, IBM and Subaru, that have moved to or expanded their presence in Oregon in the past year.

The Pennsylvania Budget and Policy Center and Keystone Research Center introduced a  joint blog this week called Third and State.  The new progressive blog will present "sharp and timely commentary" on Pennsylvania's economy and help explain how the state budget and other policies impact the lives of Pennsylvanians.


More on the Journal's Bogus Oregon Migration Story


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Two weeks ago, while most people were headed home for the holidays, the Wall Street Journal put out an extremely misleading and factually inaccurate editorial suggesting that up to 10,000 wealthy Oregonians fled the state because of a recent tax increase.  Both ITEP and the Oregon Center for Public Policy (OCPP) quickly responded with information refuting this claim.

The Journal’s claim hinges on the fact that 10,000 fewer Oregonians were affected by a tax increase on incomes over $250,000 than the state’s Legislative Revenue Office (LRO) originally expected.  Armed with just this single piece of information, the Journal enthusiastically jumped to the conclusion than 10,000 wealthy Oregonians must have moved to states like Texas, which lack an income tax.  But as ITEP points out in its report, Oregon’s shortage of high-income filers was accompanied by an even larger surplus of filers lower down the income distribution.  This strongly suggests that wealthy Oregonians simply earned less income (due to the recession) than the LRO expected.  And indeed, the LRO made this point explicitly when it released the data that eventually sparked the Journal’s editorial.

The analyses produced by ITEP and the OCPP were subsequently picked up by The Providence Journal, The New Republic, the Center for Budget and Policy Priorities (CBPP), and numerous other outlets.

But the Wall Street Journal has continued to stick to its baseless narrative, publishing two letters to the editor echoing its claim about the damage done by Oregon’s tax increase.

If past experience is any guide, talk of tax-induced migration from Oregon isn’t likely to fade any time soon.  As ITEP reminds readers in its report, this most recent editorial very closely resembles a pair of editorials the Journal released in 2009 and 2010 claiming that Maryland’s millionaires had fled the state because of a similar tax increase.  Just as with this editorial, the Maryland editorials were both misleading and factually inaccurate, though they were still very influential in the debate over taxing high-income earners in Maryland and other states.  The steady stream of misinformation from the Journal isn’t likely to subside any time soon.


Wall Street Journal Wrong Again on State Migration


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The Wall Street Journal recently published an editorial suggesting that a state income tax increase caused up to 10,000 wealthy taxpayers to flee the state of Oregon.  A new report from ITEP, however, explains why this assertion is totally unsupported by data from the Oregon Legislative Revenue Office (LRO).

Specifically, the Journal claims that because 10,000 fewer taxpayers were affected by a recent state income tax increase than the LRO originally anticipated, it must be the case that most of those 10,000 taxpayers packed their bags and moved to Texas.  But as ITEP's report explains, the decline wasn't due to migration; instead, Oregonians simply earned less than the LRO thought they would (because of the recession), and as a result fewer taxpayers were affected by the new tax rates on income over $250,000 (or $125,000 for single filers).

ITEP also criticizes the Journal for continuing to spread the myth that "one-third" of Maryland's millionaires "vanished from the tax rolls after rates went up" on millionaires in 2008.  ITEP has noted the fallacy of this claim on two separate occassions, and even the Journal itself has conceded as much in the past (see page 2 of ITEP's report).

Read the Report

For a review of the most significant state tax actions across the country this year and a preview for what’s to come in 2011, check out ITEP’s new report, The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes.

"Good" actions include progressive or reform-minded changes taken to close large state budget gaps. Eliminating personal income tax giveaways, expanding low-income credits, reinstating the estate tax, broadening the sales tax base, and reforming tax credits are all discussed.  

Among the “bad” actions state lawmakers took this year, which either worsened states’ already bleak fiscal outlook or increased taxes on middle-income households, are the repeal of needed tax increases, expanded capital gains tax breaks, and the suspension of property tax relief programs.  

“Ugly” changes raised taxes on the low-income families most affected by the economic downturn, drastically reduced state revenues in a poorly targeted manner, or stifled the ability of states and localities to raise needed revenues in the future. Reductions to low-income credits, permanently narrowing the personal income tax base, and new restrictions on the property tax fall into this category.

The report also includes a look at the state tax policy changes — good, bad, and ugly — that did not happen in 2010.  Some of the actions not taken would have significantly improved the fairness and adequacy of state tax systems, while others would have decimated state budgets and/or made state tax systems more regressive.

2011 promises to be as difficult a year as 2010 for state tax policy as lawmakers continue to grapple with historic budget shortfalls due to lagging revenues and a high demand for public services.  The report ends with a highlight of the state tax policy debates that are likely to play out across the country in the coming year.


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.

Anti-tax and anti-government advocates seem to have captured a lot of the attention in recent months when it comes to organizing and public displays of attitudes toward government.  But backers of a robust government (and the higher taxes needed to fund that government) have been making their voices heard just as consistently.

The most dramatic example, of course, is the convincing victory of a variety of progressive tax proposals that were on the Oregon ballot this past January.  Another example recently highlighted in the Digest is the support for higher taxes among Utahns demonstrated by recent polling. And of course, there’s the $32 billion in state tax increases that various states’ elected representatives have enacted to help balance state budgets during this current recession.

A recent blurb that ran in the Montgomery Advertiser regarding a pro-tax, pro-education rally in Baldwin County, Alabama (hardly a traditional bastion of “liberal,” “big government” sentiment) provides yet another gentle reminder of the continuing support for government services that persists in the hearts and minds of so many Americans.  It may not be as eye-catching as the “tea party” shenanigans, but it represents an equally genuine expression of Americans’ feelings toward government.

State Budget Deficits Drive Greater Interest in Examining Tax Breaks


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State budget woes appear to be spurring an increasing amount of interest in re-examining state tax breaks.  The Governors of both Michigan and Idaho have taken steps to ramp up the scrutiny directed at their state’s tax breaks, while a new report out of Oklahoma and an editorial highlighting legislation in Georgia this week have urged similar actions.

In Michigan, the Detroit Free Press urged the adoption of Governor Granholm’s proposal to thoroughly analyze the merits of every tax break, and to saddle most breaks with sunset provisions that would force lawmakers to either debate and renew these breaks, or to let them expire.  This proposal would help to remedy the lack of scrutiny given to tax breaks because of their exclusion from the appropriations process.  Notably, the proposal’s use of sunsets as a mechanism for forcing review seems to resemble a law enacted in Oregon just last year.

In Georgia, the need for additional scrutiny of tax breaks is even more desperate.  Because the state lacks a tax expenditure report, Georgia lawmakers are not even aware of the full range and cost of special breaks that their tax system provides.  SB 206, which was endorsed by a Macon Telegraph editorial this week, would remedy this problem by finally requiring the creation of such a report.  The editorial rightly points out that the bill could be strengthened by requiring an analysis of each tax break’s effectiveness, but at this point, even simply producing a list of tax breaks and their costs would be a major step forward.  The Georgia Budget and Policy Institute has been pushing for the creation of such a report for many years.

Idaho governor Butch Otter has also shown some tentative interest in figuring out whether his state’s tax breaks are worth their cost.  While Governor Otter continues to hold out hope that the state’s revenues will rebound soon, he also recently directed the state’s Tax Commission to study sales tax exemptions in the event that closing some of those exemptions becomes necessary to fill the state’s budget gap next year.  If done carefully, the studies produced by the Tax Commission could provide a wealth of information on breaks that have so far received a relatively small amount of scrutiny.
    
The Oklahoma Policy Institute has also added to the progress being made on this issue with a new report outlining what should be done to scrutinize tax breaks in a systematic fashion.  Their report, titled “Let There Be Light: Making Oklahoma’s Tax Expenditures More Transparent and Accountable,” provides twelve specific recommendations for realizing this vision.  Among those recommendations are: improving the state’s existing tax expenditure report, sunsetting all tax incentives, requiring the extension of a sunsetting incentive to undergo a “performance review,” and developing a unified economic development budget.


A Victory for Oregon and Oregonians


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On Tuesday, voters in Oregon made their voices heard, using the ballot box to tell their elected officials that they agreed with the legislature's decision in June of last year to raise taxes on businesses and the wealthy to help close the state’s yawning budget gap.  By a substantial margin, they approved Measure 66 – which will raise income tax rates for married filers with incomes over $250,000 – and Measure 67 – which will overhaul the state’s corporate minimum tax and create a new top corporate income tax rate.  

ITEP's distributional analyses of the plan's progressive impact, cited in analyses by the Oregon Center for Public Policy, helped to inform this important debate.

The vote marks the first time in more than 70 years that Oregon voters approved an income tax increase via the ballot, suggesting they understand the need for a balanced approach to addressing the state’s fiscal woes and setting a sound example for the many states facing similar difficulties.

With a victory of this magnitude comes a certain amount of momentum – and policymakers in Oregon have made clear that they intend to use it achieve further progressive reform.  The day after the vote, Governor Ted Kulongoski announced that his top priority for the upcoming legislative session is to put an end to “budgeting from crisis to crisis” and to change existing law so that future budget surpluses will be reserved in a rainy day fund rather than returned to corporate and individual taxpayers via so-called “kicker” rebates.

To learn more about Oregon’s unique “kicker” and the disastrous consequences it has for sound fiscal management, as well as for further perspective on the passage of Measures 66 and 67, visit the Oregon Center for Public Policy.


Oregon: Tuesday Vote on Tax Issues in Measures 66 and 67


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This coming Tuesday, January 26, Oregonians will vote on two ballot initiatives, Measure 66 and Measure 67, that will decide the fate of major tax legislation initially approved in June of last year.  

A “yes” vote will affirm the decision by legislators and Governor Ted Kulongoski to take a balanced approach to addressing the state’s gaping budget deficit. This approach will increase the taxes paid by the very wealthiest Oregonians and by the state’s largest and most profitable businesses.

As the Oregon Center for Public Policy documents, if voters fail to pass Measures 66 and 67, even deeper cuts to vital services like education and health care will have to be made.  In the words of one news account, “shuttered prisons, eliminated programs for the sick and needy, increased tuition and fewer instructors on crowded university campuses” would be just some of the ramifications if Measures 66 and 67 go down to defeat.

While passage of Measures 66 and 67 would help forestall further spending reductions and make Oregon’s tax system less regressive, it is also important to keep in mind what passage would not do.  As Joe Cortright, a senior fellow at the Brookings Institution and president of Impresa, a Portland, Oregon-based economic consulting firm explains, passage of Measures 66 and 67 would not have the “job killing” impact that some opponents have disingenuously claimed. Rather, he concludes that “Given [Oregon’s] current economic straits, cutting public services would be far worse for the economy than these modest tax changes. Oregonians who are concerned about jobs should vote yes on Measures 66 and 67.”

For more on Measures 66 and 67, visit the Oregon Center for Public Policy as well as the Vote Yes for Oregon Coalition and Tax Fairness Oregon.


Out of Control Tax Credits Demonstrate Need for Greater Oversight


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Recent developments in Oregon and Massachusetts demonstrate how relying too heavily on tax breaks to accomplish policy goals can quickly cause things to get out of hand.  Policymakers in Maryland should heed these warnings when considering the Governor’s recent proposal to create new tax incentives for businesses, despite the state’s dire budgetary outlook.

In Oregon, the controversy involves the state’s Business Energy Tax Credit (BETC, or “Betsy”).  The BETC program is purportedly designed to encourage the growth of “green” energy companies in Oregon.  Under pressure from the Governor’s office, the Oregon Department of Energy is reported to have deliberately (and drastically) low-balled the cost-estimate attached to the BETC program.  This lower cost estimate allowed the program to be enacted with much less scrutiny than would otherwise have been the case.  Of course, if the program had instead been operated as a traditional spending program, its overall size would have been limited to whatever dollar amount the legislature decided it deserved during the appropriations process.

The Oregon credit has also taken heat in recent weeks for its lack of accountability – specifically, by providing benefits to businesses that have done little or anything to create jobs or improve the environment.  And moreover, because of the “transferability” of these credits, the program has also resulted in huge windfall benefits to businesses, including Walmart, that have made absolutely no attempt to promote the credit’s environmental goals.

In order to quell the outrange expressed by Oregonians at this blatant misuse of state resources, the Governor has since proposed, among other things, to cap the overall size of the BETC program and force the government to prioritize potential projects in order to bring the cost of the program beneath that cap.  It remains to be seen whether the Governor’s recommendations will be enough to salvage this so far disastrous program.

While Oregon’s recent experience with BETC provides anecdotal evidence of the danger of relying upon the tax code as a tool of economic development, evidence from Massachusetts provides an even more comprehensive picture of this problem.  The Massachusetts Budget and Policy Center’s (MBPC) recent analysis of economic development tax incentives shows that while traditional government “spending” has been forced downward by the economic recession, spending on business tax incentives has continued to rise sharply.  The 2.8% drop in FY10 appropriations, for example, contrasts sharply with a 4.2% increase in FY10 economic development tax breaks.  MBPC explains the cause of this asymmetry as follows:

“Tax expenditures are in many ways similar to direct appropriations. Both seek to achieve certain policy goals through the use of the state’s economic resources, and both have an effect on the state’s bottom line. A primary difference is that budget appropriations must be reauthorized by the Legislature each year, while tax expenditures remain in effect without the Legislature having to take action.  The effectiveness of these tax expenditures is rarely examined in any detail and very little data is available to analyze.”

In order to correct this bias in favor of special tax breaks, the MBPC proposes six reforms designed to shine a brighter light on these programs.  The first such reform, “provide information on the purpose and effectiveness of each tax expenditures,” mirrors a proposal made by CTJ just last month.

On the heels of this disappointing news from Oregon and Massachusetts comes a proposal from Maryland Governor Martin O’Malley to provide businesses with a $3,000 tax credit for each employee they hire.  While the Governor has thankfully proposed to cap the overall credit at $20 million, one can’t help but wonder whether another economic development tax break is really the best use of the state’s very scarce resources.


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.


State Spending Done Through the Tax Code Needs to Be Reviewed


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

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

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

Among CTJ’s findings are:

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

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

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

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

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

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

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

Read the full report.

Read the 2-page summary.


Anti-Tax Initiative on Oregon Ballot this November


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It’s official. Come this January, voters in Oregon will decide, via ballot initiative, whether to keep in place two major tax reforms – one raising the income taxes paid by wealthy Oregonians and the other increasing the taxes paid by large corporations – that were adopted in July to help close the state’s yawning budget gap. 

While the initiative’s backers (that is, the anti-tax activists favoring repeal) assert that the pair of reforms will damage Oregon’s economy, a recent report by the state’s Legislative Revenue Office finds that using spending cuts to make up for the $733 million in revenue that would be lost if the reforms were repealed would actually be worse for the state’s economic prospects. 

This conclusion is echoed in a letter signed by three dozen Oregon economists, who argue that the Legislature’s efforts to “balance budget cuts with tax increases targeted on corporations and high-income Oregonians while maximizing receipt of federal dollars to fill a $4 billion shortfall was, from an economic perspective, a prudent course of action.” 

Moreover, a study released earlier this week by the Oregon Center for Public Policy reveals that, while the recent reforms were extremely progressive in nature, they will still leave the very richest Oregonians paying less in state and local taxes, relative to their incomes, than poor and middle-income residents.

For more on the very different attitudes some affluent Oregonians have towards recent tax reforms, see this revealing piece from Oregon Public Broadcasting.


Oregon Enacts Legislation to Scrutinize Some Tax Subsidies, But Could Go Further


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Oregon Governor Ted Kulongoski recently signed legislation requiring the "sunset" (or forced expiration) of most tax credits offered by the state.  Tax credits related to the environment, agriculture, or business will expire at the end of 2011, if new legislation is not enacted.  Education, housing, and community service related credits will cease to exist after 2013, without legislative action.  The same goes for credits dealing with medical care, child care, and families after 2015.

Of course, the plan is not necessarily to allow all these tax breaks to expire, but instead to provide the legislature with an impetus for taking a closer look at these provisions.  Ideally, after a closer look, state lawmakers will then be able to more objectively decide whether renewing them is worth the cost.

This reexamination can be thought of as an attempt to mirror the reviews that occur when agricultural, housing, education, and other types of ordinary spending programs are reconsidered during the appropriations process.  Since tax credits oftentimes are enacted with fairly specific goals, a review of their merits could be quite pointed, and potentially very useful.

This is particularly important in Oregon, where any law increasing taxes (and that includes any law repealing a tax credit) usually requires a supermajority vote of three fifths of the state house and senate. So once a tax credit is enacted, it might be around forever if it doesn't have an expiration date.

But the reform signed by the Governor does not go far enough because there are many other types of tax subsidies (subsidies provided through the state's tax system) that do not take the form of credits, and these are not affected by the new law. For example, the state's home mortgage interest deduction is arguably due for an overhaul, but this new law does not provide state legislators with any impetus to review such targeted tax deductions.

It's nice to see lawmakers acknowledge that they need to pay more attention to the money they're doling out through the tax code, but this reform could be much stronger.


Big Business Already Giving Big to Take Down Oregon Tax Increase


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Earlier this year, policymakers in Oregon enacted both temporary and permanent changes in the state’s tax system to help close an enormous budget gap and, by extension, provide funding for vital services like education, health care, and public safety.  Among the changes are an increase in the personal income tax rate on income in excess of $250,000, new limitations on the personal income tax deduction for federal taxes paid, reforms to the state’s corporate minimum tax, and an increase in the top corporate income tax rate.

Yet, due to quirks in Oregon’s legislative process, opponents of these changes have an opportunity to put them before the voters for approval via referendum.  Not surprisingly, representatives of big business and a who’s who of anti-tax organizations are attempting to take full advantage of that opportunity.  Groups such as Associated General Contractors of America, Associated Oregon Industries, and Common Sense for Oregon have all already given tens of thousands of dollars to the referendum effort, which must collect over 55,000 signatures by September 25.  If they do, then the changes will be put before the voters in January. 

While corporate interests will almost certainly go to great lengths to stop these changes from taking effect, it will ultimately be the voters who decide -- and, for now, it appears that they understand the need for additional revenue generated in a progressive fashion.  Polling conducted by Grove Insight and released by the Oregon Center for Public Policy indicates that 62 percent of likely voters would back the changes enacted by the legislature, with just 26 percent opposed.

For more on the recent changes in tax policy and on the referendum fight, visit the Defend Oregon Coalition.


Pennsylvania & Oregon: Substantive Steps Toward Solvency


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While some states continue to believe that they can weather the current fiscal crisis with the budgetary equivalent of a rubber band, a paper clip, and some chewing gum -- yes, we're looking at you, Kentucky -- others, such as Pennsylvania and Oregon, recognize that the deficits spawned by the national recession should, in turn, spur them to shore up their tax codes.

In the Keystone State this past week, Governor Ed Rendell indicated that he would back an increase in the state's personal income tax rate from 3.07 to 3.57 percent. After all, as the Pittsburgh Post-Gazette observes "difficult times require tough action."

On the other side of the country, Oregon legislators gave final approval to changes in their corporate and personal income taxes that are expected to yield more than $700 million in additional revenue; those changes are expected to be signed into law by Governor Ted Kulongoski. Among the changes pending in Oregon are the creation of two new (albeit temporary) top income tax brackets with rates of 10.8 and 11 percent and increases in the state's corporate minimum tax.

For more on the need to raise additional revenue in Pennsylvania, see this statement from the Pennsylvania Budget & Policy Center and an array of other organizations.


Oregon: The Bridge to Tax Fairness


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As if the concurrent fiscal and economic crises weren't enough to handle on their own, many states also face the challenges posed by crumbling transportation infrastructure, the result of decades of neglect and underfunding. Recently, lawmakers in Oregon decided to find a way to address deteriorating bridges and overcrowded roadways, with the Legislature passing a $300 million transportation package that, by some estimates, will produce 40,000 new jobs over the next ten years.

Unfortunately, the financing mechanisms contained in the measure -- principally, a 6 cent increase in the gas tax scheduled for 2011 and increases in a variety of registration, title, and other fees -- will fall most heavily on low- and middle-income families, precisely those Oregonians bearing the brunt of the state's economic crisis.

A new report from the Oregon Center for Public Policy outlines one approach for easing the impact the transportation package will have on low-wage workers -- an increase in the state's version of the Earned Income Tax Credit. You can read the report in its entirety here.


Oregon and New Jersey: Time to Get Serious on Tax Increases


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With the start of fiscal year 2010 generally only a little more than a month away and with the overall fiscal picture continuing to look rather bleak, two more states have gotten serious about using progressive income tax increases to generate much needed revenue. In Oregon this past week, Democratic legislators -- who control both chambers of the statehouse -- unveiled a plan to raise $800 million over the FY09-11 biennium. One of the principal features of the plan is the creation of two new income tax brackets -- one for couples with incomes over $250,000 (or for single filers with incomes above $125,000) and another for filers with incomes greater than $500,000. The rates for these brackets would be 10.8 percent and 11 percent respectively. (At present, the top rate in Oregon is 9 percent). Similarly, in New Jersey, Governor Jon Corzine, in the wake of particularly poor April revenue collections, has revised his earlier budget plan. He now proposes to raise the tax rate for millionaires to 9.47 percent and to create an additional bracket for filers with incomes between $400,000 and $500,000. While the income tax aspects of the Governor's proposal have won support from progressives, his recommendation that the state suspend its current property tax rebates for everyone except the elderly and the disabled has been less favorably received.


Three States Focus on Eliminating Regressive Deduction to Raise Much Needed Revenue


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We've recently highlighted a variety of progressive revenue raising options gaining serious attention in New York and Wisconsin. This week we bring you yet another idea that's recently been the subject of debate, though this one applies to fewer states. Those seven states still offering income tax deductions for federal taxes paid (i.e. Alabama, Iowa, Missouri, Montana, North Dakota, Louisiana, and Oregon), should immediately repeal, or at the very least dramatically scale back, that deduction.

The federal income tax deduction takes what is perhaps the best attribute of the federal income tax -- its progressivity -- and uses it to stifle that very attribute at the state level. Since wealthy taxpayers generally pay more in federal taxes than their less well-off counterparts, allowing taxpayers to deduct those taxes from their income for state income tax purposes is a gift to precisely those folks who need it least. And since most state income tax systems possess a degree of progressivity, those better-off taxpayers who face higher marginal tax rates are benefited even more by being able to shield their income from tax via this deduction.

Iowa Governor Chet Culver most recently drew attention to this problem while urging lawmakers this week to end the deduction. The idea has also recently garnered attention in Missouri, where ITEP recently testified on a bill that would, among other changes, eliminate the deduction. Finally, another bill making its way through the Alabama legislature seeks to end the deduction for upper-income Alabamians.

With three of the seven states that still offer this deduction considering its elimination, this is definitely one progressive policy change to keep an eye on.

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

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

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

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

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

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

While reports such as those out of Iowa and Virginia (see "Budget Fixes Worth Embracing", in this week's Digest) highlight some of the best ways for states to dig themselves out of their current budgetary nightmares, in many cases it appears that the cigarette tax is continuing to hold on to its title as the single most popular tax to increase among the states. Policy advocates and even many legislators are often careful to frame their support of cigarette tax hikes in terms of fighting smoking or reducing health care costs, but in times as desperate as these, it's hard not to suspect that revenue needs may be the driving force. The fact is that revenue from the cigarette tax is almost never sustainable over time because the U.S. smoking population is constantly on the decline. It's therefore difficult to get excited about the cigarette tax as a budget-fix for any period of time beyond the very short-term -- and even then, states should never be excited about raising revenue through such a regressive tax. But in states that have held their cigarette taxes constant at low levels for a number of years, it's also hard to get too upset over such proposals. Five states in particular made news this week in their debates over the cigarette tax: Florida, Mississippi, Oregon, South Carolina, and Utah.

The three states with the most intense cigarette tax debates at the moment are Florida, Mississippi, and Oregon. Florida and Mississippi haven't increased their cigarette tax rates in 18 and 23 years, respectively, and therefore have some of the lowest cigarette tax rates in the nation. Hikes in the range of 50 cents to $1 per pack are being proposed in Florida, while Mississippi's debate appears to be over a range of 24 cents to $1 per pack. In Oregon, the governor recently proposed a 60 cent hike as part of his budget. The intent of that hike is use the new revenue as part of a package to expand health care in the state -- such an arrangement is likely to result in tensions down the road as cigarette revenues fall and health costs continue to rise.

South Carolina provides another example of a state with a cigarette tax debate worth following. In this past year's session, the legislature approved a cigarette tax hike, only to eventually be vetoed by the governor, ostensibly out of concern over linking such an unsustainable revenue source to a permanent expansion of Medicaid. As the appearance of a recent op-ed praising the benefits of hiking SC's lowest-in-the-nation rate suggests, this debate is not yet over.

Utah provides another example of a potential budding cigarette tax debate. With the American Cancer society enthusiastically seeking to capitalize on what appears to be a favorable climate for a cigarette tax hike, one has to expect the idea to pick up steam during discussions over how to close the state's looming budget gap.


Transportation Funds: The Other State Deficit


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As we've argued in past Digest articles, there are good reasons for relying on gas tax revenues to fund transportation -- at least when an effort is made to offset the tax's stark regressivity. To the extent that the gas tax falls most heavily on those people who drive the furthest distances, or who drive the heaviest vehicles, there are certainly some advantages to the gas tax. But when the people driving the furthest distances are doing so because they can't afford to live near their places of work, for example, that advantage becomes much less appealing. In this light, recent news regarding the funding of transportation has been both good and bad. While states are seemingly beginning to come around to the idea that gas taxes will need to be raised to provide an adequate transportation infrastructure, interest in offsetting the tax's regressivity has yet to pick up steam.

Support for increasing the gas tax has gained some notable momentum in New Hampshire and Massachusetts as of late, and in Oregon, the Governor even included a small gas tax hike in his recent budget proposal. Utah has taken the idea to another level, as top officials are reportedly considering both increasing and restructuring the state's gas tax. In Vermont, however, while raising the gas tax has gotten some attention, the more prominent proposal has been to simply obtain permission from the federal government to continue using federal highway dollars without having to match that money with state funds (of which it has none). But while there are persuasive reasons for considering aid to the states as one form of stimulus for our troubled economy, one has to wonder why some Vermonters are apparently more averse than these other four states to the idea of paying for their own transportation network.

Unfortunately, while there has been an increasing acceptance of the fact that existing gas tax revenues are inadequate in many states, little notice has been given to the idea of offsetting the stark regressivity of gas tax hikes with low-income refundable credits. This idea was recently made a reality in Minnesota, and has been proposed by the Commonwealth Institute in Virginia as well. Notably, eight states already offer similar credits to offset the regressivity of the sales tax (usually designed specifically to offset the tax on groceries). Nineteen states and D.C. offer refundable EITC's, which while not designed specifically to offset regressive taxes, could perhaps be used in a similar matter. In states in need of additional transportation dollars, coupling any transportation related tax increases with the enactment of a low-income refundable credit, or the enhancement of an existing credit, should be a top priority.


Progressives Defeat Regressive Tax Cuts in Three States


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Massachusetts, North Dakota, and Oregon residents rejected regressive and costly income tax cuts (or even outright repeals, in the case of Massachusetts) in each of their respective states this Tuesday. The results in every state were fairly lopsided, with between 60% and 70% of voters coming out in opposition. As we noted in earlier Digest articles, these victories for fair tax policy are partly the result of hard work by progressives and also partly the result of very broad (and sometimes unexpected) coalitions. This cooperation symbolized a growing recognition of the importance of taxes in paying for valued government services and generally improving Americans' quality of life.

The votes in these three states are especially important given the economic slowdown that is laying waste to state budgets across the country. Massachusetts is already projecting a mid-year budget deficit, while Oregon is projecting a deficit in the next fiscal year. North Dakota, though doing well relative to other states, is unlikely to escape the slowdown without similar budgetary wounds. Given such a difficult environment for state budget-makers, it's not at all hard to see that tax cuts are the exact opposite of what is needed -- especially if those cuts are targeted overwhelmingly to the rich.

Multiple stories and descriptions of each of these failed measures can be found in the Tax Justice Digest's Massachusetts, Oregon, and North Dakota archives.


Supply-Side Disasters in the Making at the State Level


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One does not have to be elected to Congress or hired to anchor a national news show to become addicted to supply-side economics. State government and local media are equally at risk. This November, voters in several states will decide on ballot questions that are being promoted with supply-side justifications.

A proposal to be voted on in Oregon seeks to allow taxpayers to deduct (in full) their income tax payments to the federal government for state income tax purposes. Currently, only the first $5,600 one pays to the federal government is allowed to be deducted on Oregon state income tax forms. This arrangement already has regressive results, and by uncapping the deduction limit completely, those wealthy individuals who owe the most in federal income taxes will be allowed to slash their Oregon tax payments substantially.

Though the workings of the Oregon proposal may seem a bit confusing, its results most certainly are not. The vast majority (78 percent) of Oregonian families will get nothing, the wealthiest 1 percent will enjoy a nearly $16,000 annual tax cut, and the government of Oregon will have to make due with between $500 million and $1 billion less in revenues each year. (Six other states, Alabama, Iowa, Louisiana, Missouri, Montana, and North Dakota, currently allow for some deduction of federal income taxes, and they should all end this regressive practice.)

So how are backers of the Oregon proposal justifying this giveaway to the rich? You guessed it. One news account informs us that "[Russ] Walker, Oregon director of the national fiscal conservative group FreedomWorks [and co-sponsor of Measure 59], says the tax reduction would produce a supply-side result of economic expansion with more income and more tax revenue to offset the cut." The argument is that the tax cut will at least increase revenue enough to pay for itself -- the most extreme form of supply-side thinking.

North Dakota voters will also be taking a look at their income tax this fall. Backers of an income tax rate cut are enthusiastically pushing a plan that offers an average tax cut of just $83 to the bottom 60 percent of taxpayers statewide. What's the big deal? The wealthiest 1 percent of North Dakotans would save an average of over $11,000 per year. And those numbers don't even include the corporate income tax cuts, which are sure to also disproportionately benefit the wealthy. And to make matters worse, the proposal would cost the state over $200 million annually.

And how do backers of this measure justify giving away revenue to the rich? Well, if a tax cut simply pays for itself through supply-side magic, backers hope that the practical, common sense folk of North Dakota won't ask such uncomfortable questions. As one news account explains, "Measure 2 proposes to cut income taxes 50 percent and corporate taxes 15 percent, said Duane Sand of the group Americans for Prosperity [the measure's principal backer]. Sand said the state's tax policies have forced young and old to leave the state. The OMB estimates Measure 2 would cut state revenue about $415 million for the next biennium. That money would be replaced by higher tax collections from increased economic activity, Sand said."

A proposal on the ballot in Massachusetts provides perhaps the most obvious example of the recklessness so often involved in anti-tax ballot initiatives. Massachusetts voters will once again have to decide this November on a proposal to constitutionally end the income tax -- a move that would reduce government revenues by a whopping 40 percent, and would undoubtedly have dire consequences in the form of reduced government services. But while all Massachusetts residents would have to share in the pain of a 40 percent reduction in their government's budget, the wealthy would be the primary beneficiaries of the tax cut, since the income tax is the only major progressive tax levied by the state. Even more alarming is the fact that over 45 percent of Massachusetts voters supported a similar measure in 2002.

Now, even supply-siders would have trouble arguing that reducing a tax to zero can result in increased revenues. (Except that apparently the Republicans in the U.S. House of Representative do believe that about the capital gains tax, as we said in a previous article in this Digest).

But backers of the Massachusetts measure do argue, using supply-side logic, that less taxes will result in so much economic growth that no one will feel the loss of public services that would inevitably result.

Carla Howell, chairperson of the group backing the measure (and Libertarian candidate for governor in 2002) says that "In addition to giving each worker an annual average of $3,700, it will take $12.5 billion out of the hands of Beacon Hill politicians -- and put it back into the hands of the men and women who earned it. Every year. In productive, private hands this $12.5 billion a year will create hundreds of thousands of jobs in Massachusetts."

Actually, this proposal to slash state government revenue by 40 percent is so extreme that even business groups cite a report showing just how devastated infrastructure, education and other services would be if this proposal is approved.

So it seems that many states are on the verge of ruining themselves with the narcotic of supply-side tax economics. If these states fail to resist, then what? Rehabilitation is possible, but it's a long and hard road. Colorado is trying to break free of the mess it created a decade ago when taxes and revenues were strictly suppressed by the so-called "Taxpayer Bill of Rights" (TABOR) that was approved by voters. TABOR poses a serious problem given that the cost of government services sometimes increases at a rate greater than general inflation. Also, another amendment to the state's constitution requires regular increases in education spending. Reconciling these two competing demands proved impossible, and in 2005 Colorado voters temporarily suspended a significant portion of the TABOR requirement.

This year, it appears many Coloradans have finally had enough with having to deal with inadequate government services under the unrealistic TABOR requirements. Voters will have the opportunity to decide on Amendment 59, which would end the automatic refunds to taxpayers used to suppress state revenues, in favor of diverting that money toward education. This effort gives hope to those who realize that public services like schools and roads are the building blocks of a state economy, and that to have these services we have to pay for them. It also should serve as a warning to people in other states where supply-siders are promising voters that they can have their cake and eat it too.

It's sometimes easy to forget that the Presidential race isn't the only battle over policy proposals going on right now. But Massachusetts and Oregon provide two examples of states where voters are about to make some very important decisions affecting the future of their tax systems.

There may be a silver-lining in the regressive and irresponsible nature of the proposals facing these two states. In both states, the anti-tax groups pushing these ridiculous proposals appear to have gone too far, causing groups traditionally supportive of tax cuts to fight these initiatives.

An Expensive and Unfair Tax Cut, Part 1: Massachusetts

The Massachusetts proposal is perhaps the worst tax-related question on any ballot in the nation. It would repeal the state's income tax. Aside from being the only major progressive tax levied by the state, the income tax is also a source of 40% of Massachusetts' revenue. The results of depriving the state of 40% of its funding are nearly unfathomable. So unfathomable, in fact, that the Massachusetts Taxpayers Foundation (MTF), a group that just last year opposed reforms to make Massachusetts' tax system more fair, recently released a report in opposition titled The Massive Consequences of Question 1.

The MTF report does not focus solely on the budgetary consequences of income tax repeal. Those consequences have already received tremendous publicity in recent months, especially given the state's already strained budgetary situation as documented in this brief from the Massachusetts Budget and Policy Center. Instead, what stands out about the MTF report is its examination of the distributional consequences of the tax cut. In contrast to the claims of those supporting the repeal, the vast majority of Massachusetts residents will not be receiving a $3,700 tax cut if the measure is approved. Instead, as the report indicates, that cut will be much smaller for those low-income residents most in need, and much, much larger for the most well-off taxpayers in the state.

An Expensive and Unfair Tax Cut, Part 2: Oregon

Oregon's proposal also seeks to reduce state revenues in a way that disproportionately benefits the wealthy, though on a much smaller scale than that proposed in Massachusetts. The proposal: allowing Oregonians to write off their federal income tax payments when determining their state income taxes. Since residents can already write off up to $5,600, this measure will only benefit the wealthiest 22% of households in the state who pay more than $5,600 in federal income taxes. As this report from the Oregon Center for Public Policy notes, 78% of Oregonians will see no benefit from this proposal. In fact, as another release explains, some 120,000 Oregonians -- most of them retirees -- would see their taxes rise if Measure 59 were made law, as the measure would prohibit Oregonians from deducting taxes paid on Social Security benefits or certain pensions, as they are allowed to do under current law.

Recent actions by a collection of Oregonian business groups demonstrate the degree of irresponsibility contained in the plan. The Associated Oregon Industries, Oregon Business Association, Oregon Business Council, and Portland Business Alliance recently came together to issue a joint statement against the proposal. These businesses worried the measure would "deeply hurt basic services, including those critical to our economy". And these groups are absolutely right: why throw money at those taxpayers already doing quite well, if it's going to result in a reduction in the education, healthcare, and safety protections that Oregon families and workers depend on?


Measure 59 Threatens Fiscal Disaster for Oregon


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This fall, voters in Oregon will decide on one of the nation's more fiscally disastrous ballot initiatives. Known as Measure 59, the initiative would eliminate the cap on a personal income tax deduction that state taxpayers can currently take for the federal income taxes they pay. As the Oregon Center for Public Policy points out in a report released this week, the vast majority of state residents would see no benefit at all from the initiative -- but would certainly feel the consequences if it were enacted. The report notes that only about one in four Oregon taxpayers would witness a tax cut if the initiative became law, with the vast majority of the cut accruing to families and individuals with incomes in excess of $83,000 annually. Of course, the cost of the initiative, (which could range from $1.1 to $2.4 billion over the state's biennium depending on the fate of the Bush tax cuts) would be seen across the state. After all, a $1.1 billion revenue loss is the equivalent of a 70 percent pay cut for each and every public K-12 teacher in the state, to give just one example.


Regressive Tax Proposals on the Ballot This November


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It's that time again. Right-wing activists, unable to convince lawmakers to gut their tax systems, are asking voters to do it themselves through the ballot. This update explains that ballot initiatives to enact regressive tax policies died in Michigan and Montana, but survived to secure spots on the ballot in Arizona, Florida, Massachusetts and Oregon.

The Good News: Two Regressive Proposals Did Not Make It onto the Ballot

Michigan "Fair "Tax": The Michigan Fair Tax proposal, a highly regressive measure that was anything but fair, failed to make it onto the November ballot. The proposal would have eliminated both the Michigan Business Tax and the personal income tax, raised the state sales tax to 9.75% and expanded it to include services, food, prescription drugs and out-of-pocket health care expenses.

Montana Property Tax Limitations: CI-99, a measure that would have capped property tax increases at no more than 1.5% annually, fell short of landing a spot on the Montana ballot. In addition to the limits on tax hikes, the proposal would have ensured that homes can only be reappraised when sold (as opposed to every seven years). Sound familiar? It looks like, at least this year, Montana averted the disastrous path followed by California's Proposition 13.

The Bad News: Other Regressive Tax Proposals ARE on the Ballot in November

Arizona Sales Tax Hike: On June 27, the Digest described the Arizona sales tax initiative which will be on the ballot in November. The proposal would hike the sales tax by one cent. The increased revenues would be directed toward a faltering transportation system. Arizona already has sales taxes bordering on 10% and a nearly flat income tax. As a result, its tax policy is already highly regressive and this initiative would make it more so.

Florida Tax Swap: In November voters will decide on Amendment 5, a 25% property tax cut and a 1 cent sales tax hike. The property tax cut would hit Florida's schools, already in shambles, the hardest. The Amendment would come at a cost of $9 billion in lost revenue and the subsequent sales tax increase would only produce about $4 billion, plunging the Sunshine State even further into debt and shifting the tax burden to lower-income Floridians.

Abolishing Massachusetts' Income Tax: In Massachusetts, voters will have the opportunity to decide on an initiative that would eliminate the state's income tax. Such irresponsible policy would cost the state $12 billion in lost revenue -- a whopping 40% of its budget. The price would be paid with teacher layoffs, school closings, cuts to higher education, worker training programs and health care services, and delays of road and bridge repairs.

Cutting Oregon's Income Tax for the Rich: Oregon voters will have the opportunity to vote on a measure that would drastically cut income taxes for its wealthiest taxpayers. The proposal would create an unlimited deduction on the state income tax form for federal income taxes paid.The state's general fund would lose about $4 billion over four years from the proposal. The general fund is used primarily for education, public safety, the justice system, human services (including health care, care for seniors and child protective services) and state parks. Meanwhile, the average tax cut for the top one percent of Oregon earners would be about $15,000. Those who fall among the middle 20% of earners would receive about $1 on average.


Election Results are In!


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Last Tuesday voters made their voices heard on a variety of tax related issues. In Washington State it appears that anti-tax radical Tim Eyman won another initiative battle. The passage of Initiative 960 makes it more difficult for the state to raise needed revenue, but does little to increase government transparency or encourage economic development. Opponents of the measure rightly say that I-960 will increase dreaded red tape and bureaucracy. Read an FAQ about the initiative from the Washington Tax Fairness Coalition here.

But in a victory for tax justice, an earlier Eyman initiative has been ruled unconstitutional. This 2001 initiative, I-747, capped state and local property tax collections at 1 percent each year, unless a higher increase was approved by voters. Be on the lookout for more on how Washington responds to the passage of I-960 as courts may get involved again.

Elsewhere in the Pacific Northwest, a ballot initiative to raise cigarette taxes and to use the funds to provide universal health care for children was defeated in Oregon, due in large part to the $12 million spent by RJ Reynolds and other tobacco companies to oppose it. Governor Ted Kulongoski, one of the initiative's key backers, has vowed to continue the fight for expanding health care.

To read about the outcomes of ballot measures across the country check out this report from the Ballot Initiative Strategy Center.


Earned Income Tax Credits Advance Around the Nation


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Over the past few weeks, three more states have taken steps towards helping low-wage workers and their families by means of the earned income tax credit (EITC). In Delaware, the Senate Revenue and Taxation Committee recently approved a measure that would make the state's existing EITC refundable, meaning that individuals and families who owe less in personal income taxes than the value of their EITCs would receive refund checks to help offset other taxes and to make it easier to make ends meet. In Oregon, Republican and Democratic members of the House Revenue Committee have put forward a proposal that would raise that state's EITC from 5 percent of the federal EITC to 12 percent. As the Eugene Register-Guard observes this proposal would help to achieve a vital goal - eliminating income taxes on working families living in poverty in Oregon. Lastly, the Louisiana Senate has passed legislation that would create a state EITC equal to 5 percent of the federal EITC. This report from the Louisiana Budget Project details the positive impact that such a credit would have.


Oregon Takes One Small Step Towards Fiscal Sanity


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Late last week, policymakers in Oregon established the state's first permanent rainy day fund, a significant step forward in improving fiscal stability in the Beaver State. Rainy day funds can be a valuable tool in helping states to weather economic downturns or other fiscal difficulties, as they set aside excess revenues during the good times to help bolster flagging revenues during the bad.The lack of such a fund was one of the factors contributing to the sizable cuts in spending that Oregon was forced to adopt in 2003.

At present, rather than setting aside surpluses to hedge against future deficits, Oregon is required under law to return any tax revenue that exceeds official projections by more than 2 percent to both personal and corporate income taxpayers, in the form of a rebate or "kicker."Projections from the Oregon Office of Economic Analysis issued earlier this month suggested that the "kicker" for the 2005-2007 biennium would amount to roughly $1.1 billion for families and individuals and to approximately $315 million for businesses.

Legislation signed by Governor Ted Kulongoski temporarily suspends the "kicker" for businesses with Oregon sales of more than $5 million and directs the $290 million that they would have received into the nascent rainy day fund.Businesses with Oregon sales below that threshold will still receive a "kicker" totaling $25 million, while the personal income tax "kicker" will go on untouched. The legislation also mandates that 1 percent of general fund revenue be deposited into the fund in all future years.

Still, as the Eugene Register-Guard observes, the legislation signed by Governor Kulongoski suffers from a number of shortcomings.With only a one-time infusion from the corporate "kicker", the rainy day fund will likely be too small to withstand a significant recession and may not be adequately replenished once it is used.What's more, the legislation leaves Oregon's "kicker" system intact over the long-run, a situation that will continue to impair the state's ability to invest in vital public services.

For more on the need for - and the proper design of - state rainy day funds, see ITEP's Talking Taxes policy brief on this topic.


Should Driving Cost Less or More?


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Several states are grappling with how and whether gasoline should be taxed. In Indiana, House Democrats campaigned on a proposal to eliminate the state's sales tax on gasoline entirely, but this plan was cast aside because it was entirely too expensive to carry out. Instead, the House has passed a rather complicated bill this week that would remove the sales tax from gasoline only when the price rose to $2.25 a gallon or higher. This bill, which is certainly not efficiently targeted to those who might need help the most, is expected to cost the state $45 million a year and perhaps more in later years.

Some environmentalists argue that the total cost of fuel consumption needs to be increased, not lessened, by government policy. But even states that attempt to move in that direction are not necessarily going about it in a rational or efficient manner. Oregon is in the midst of a pilot mileage tax program where cars are equipped with mileage readers and a tax is calculated based on miles driven. Governor Tim Pawlenty in Minnesota has included money to study a similar initiative in his budget. This proposal creates privacy concerns and does not seem particularly helpful from an environmental perspective. It would treat both gas-guzzling SUVs and fuel-efficient hybrids the same, so long as they drove the same number of miles.

While the Democratic takeover of the House of Representatives (and apparently also the Senate) on Tuesday has has given new hope to advocates of progressive tax policies at the federal level, the results of ballot initiatives across the country indicate that state tax policy is also headed in a progressive direction.

In the three states where they were on the ballot, voters rejected TABOR proposals, which involve artificial tax and spending caps that would cut services drastically over several years. Washington State defeated repeal of its estate tax. Several states also rejected initiatives to increase school funding which, while based on the best intentions, were not responsible fiscal policy. Two of four ballot proposals to hike cigarette taxes were approved and the night also brought a mixed bag of results for property tax caps.

Taxpayer Bill of Rights (TABOR):
Maine - Question 1 - FAILED
Nebraska - Initiative 423 - FAILED
Oregon - Measure 48 - FAILED
Voters in three states soundly rejected tax- and spending-cap proposals modeled after Colorado's so-called "Taxpayers Bill of Rights" (TABOR). Apparently people in these three states had too many concerns over the damage caused by TABOR in Colorado. Property Tax

Caps:
Arizona - Proposition 101 - PASSED - tightening existing caps on growth in local property tax levies.
Georgia - Referendum D - PASSED - exempting seniors at all income levels from the statewide property tax (a small part of overall Georgia property taxes. (The Georgia Budget and Policy Institute evaluates this idea here.)
South Carolina - Amendment Question 4 - PASSED - capping growth of properties' assessed value for tax purposes. The State newspaper explains why the cap would be counterproductive.
South Dakota - Amendment D - FAILED - capping the allowable growth in taxable value for homes, taking a page from California's Proposition 13 playbook. (The Aberdeen American News explains why this is bad policy here - and asks tough questions about whether lawmakers have shirked their duties by shunting this complicated decision off to voters.)
Tennessee - Amendment 2 - PASSED - allowing (but not requiring) local governments to enact senior-citizens property tax freezes.
Arizona's property tax limit will restrict property tax growth for all taxpayers in a given district. South Dakota's proposal was fortunately defeated. It would have offered help only to families whose property is rapidly becoming more valuable, and those families are rarely the neediest. Georgia's is not targeted at those who need help but would give tax cuts to seniors at all income levels. The Tennesse initiative, which passed, is a reasonable tool for localities to use, at their option, to target help towards those seniors who need it.

Cigarette Tax Increase:
Arizona - Proposition 203 - PASSED - increase in cigarette tax from $1.18 to $1.98 to fund early education and childrens' health screenings.
California - Proposition 86 - FAILED - increasing the cigarette tax by $2.60 a pack to pay for health care (from $.87 to $3.47)
Missouri - Amendment 3 - FAILED - increasing cigarette tax from 17 cents to 97 cents
South Dakota - Initiated Measure 2 - PASSED - increasing cigarette tax from 53 cents to $1.53. While many progressive activists and organizations support raising cigarette taxes to fund worthy services and projects, the cigarette tax is essentially regressive and is an unreliable revenue source since it is shrinking.

State Estate Tax Repeal:
Washington - Initiative 920 - FAILED
Complementing the heated debate over the federal estate tax has been this lesser noticed debate over Washington Stats's own estate tax which funds smaller classroom size, assistance for low-income students and other education purposes. Washingtonians decided it was a tax worth keeping.

Revenue for Education:
Alabama - Amendment 2 - PASSED - requiring that every school district in the state provide at least 10 mills of property tax for local schools.
California - Proposition 88 - FAILED - would impose a regressive "parcel tax" of $50 on each parcel of property in the state to help fund education
Idaho - Proposition 1 - FAILED - requiring the legislature to spend an additional $220 million a year on education - and requiring the legislature to come up with an (unidentified) revenue stream to pay for it.
Michigan - Proposal 5 - FAILED - mandating annual increases in state education spending, tied to inflation - but without specifying a funding source. The Michigan League for Human Services explains why this is a bad idea.
Voters made wise choices on education spending. The initiative in California would have raised revenue in a regressive way, while the initiatives in Idaho and Michigan sought to increase education spending without providing any revenue source. Alabama's Amendment 2 takes an approach that is both responsible and progressive.

Income Taxes:
Oregon - Measure 41 - FAILED - creating an alternative method of calculating state income taxes. Measure 41 was an ill-conceived proposal to allow wealthier Oregonians the option of claiming the same personal exemptions allowed under federal tax rules and would have bypassed a majority of Oregon seniors and would offer little to most low-income Oregonians of all ages.

Other Ballot Measures:
California - Proposition 87 - FAILED - would impose a tax on oil production and use all the revenue to reduce the state's reliance on fossil fuels and encourage the use of renewable energy
California - Proposition 89 - FAILED - using a corporate income tax hike to provide public funding for elections
South Dakota - Initiated Measure 7 - FAILED - repealing the state's video lottery - proceeds of which are used to cut local property taxes
South Dakota - Initiated Measure 8 - FAILED - repealing 4 percent tax on cell phone users.


Business Turning Against TABOR


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Kiplinger reports that business are expected "to mount pitched battles to defeat" TABOR-esque spending tax cap initiatives in Maine, Michigan, Montana, Nebraska, Nevada, and Oregon. In fact, there's a concerted effort forming in Oklahoma that is actually being lead by business groups. The Chairman of Tulsa's Chamber of Commerce was even quoted as saying that TABOR would be a "train wreck" for Oklahoma.


Payoffs for Layoffs


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Once again, the public is learning that tax funded corporate economic incentives don't really work. In Oregon, right after Georgia-Pacific received a property tax break that will amount to $15 million over 15 years, the company turned around and announced that it was laying off 130 workers. Chuck Sheketoff over at the Oregon Center for Public Policy puts it the best, "[i]t's payoffs for layoffs". On the other side of the country, AAA Mid-Atlantic demanded that Delaware grant the company tax incentives if the state wanted them to move there. The twist? AAA Mid-Atlantic already made the decision to move to Delaware before they demanded the tax incentives - Delaware simply paid AAA Mid-Atlantic to do something it was already going to do. For a more in-depth analysis of AAA Mid-Atlantic's scheme, check out this report by New Jersey Policy Perspectives.

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