Month: January 2011

During his State of the Union Address last week, President Obama called on Congress to “get rid of the loopholes” in the corporate tax and “use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit.”

If the President means that all of the revenue raised by closing tax loopholes should be used to pay for a reduction in the corporate tax rate, then this is the wrong approach.

A report released earlier that day by Citizens for Tax Justice explains several reasons why corporate tax reform should be revenue-positive, not revenue-neutral. Despite what corporate CEO’s and many politicians claim, U.S. corporate taxes are already lower than the corporate taxes imposed by the countries that we compete with. Surveys show that most Americans want large corporations to pay more, not less, in taxes. The arguments lobbyists make to try to justify reducing U.S. corporate taxes — arguments related to “competitiveness” and alleged “double-taxation” of corporate income — don’t add up. The last major corporate tax reform, which was enacted under President Ronald Reagan at a time when corporate loopholes were out of control, as they are again today, resulted in a 34 percent net corporate tax increase.

House Budget Chairman Paul Ryan gave the Republican response to President Obama’s State of the Union address, speaking at length about what he sees as the need for greater cuts in government spending.

Anyone interested in learning what sorts of changes Congressman Ryan has in mind can look to the detailed “Roadmap for America’s Future” that he proposed last year.

Ryan’s “Roadmap” would reduce Social Security benefits and partially privatize the program, replace Medicare and Medicaid with gradually declining subsidies for private health insurance, and dramatically slash other types of non-military spending.

CTJ’s report on the tax proposals in Ryan’s “Roadmap” found that they would raise taxes on average for the bottom 90 percent of taxpayers, slash taxes on average for the richest 10 percent of taxpayers, and lose $2 trillion over a decade.

Governors are in the midst of crafting their budget proposals for next year, and many state leaders continue to grapple with historic budget shortfalls due to lagging revenue recovery and a high demand for public services.  In 2009 and 2010, most states balanced their budgets with a mix of temporary and permanent tax increases, significant federal assistance, and spending cuts.  This year, state revenues continue to lag, many of the temporary tax increases are set to expire, and federal stimulus assistance will dry up, yet the need for quality education, safe communities, affordable health care, public transit and well-maintained roads has not diminished.

As the Tax Justice Digest has previously noted, so far this year we have seen mostly a slew of bad proposals from state leaders. Many states are offering tax breaks to corporations and wealthy households and refusing to consider new taxes, while choosing to cut state spending to historically low and damaging levels. A few governors, however, have recently bucked the cuts-only trend and have made it clear that taxes must be a part of the solution.
 
In Connecticut, newly elected Governor Dannel Malloy plans to address the state’s $3.7 billion budget shortfall with an almost equal share of spending cuts ($2 billion) and tax increases ($1.7 billion).   While the details of his tax plan will not be unveiled until February, he is likely to support eliminating a majority of the state’s sales tax exemptions as one part of his revenue raising plan.

Hawaii’s new governor, Neil Abercrombie, has also embraced the need to raise new revenues as part of a budget-fixing compromise.  Governor Abercrombie proposed raising $279 million, including taxes on soda, alcohol, and time-shares. Most significantly, Abercrombie would tax pension income (which is generally exempt from taxation currently) for taxpayers with incomes over $50,000, raising around $114 million a year.  He also supports eliminating the state deduction for state taxes, a smart reform measure that would raise $70 million a year.  

North Carolina lawmakers addressed their budget crisis in the previous two years in part with $1.3 billion in temporary taxes which are set to expire this year.  For months, Governor Bev Perdue opposed extending the taxes for another year despite a shortfall of nearly $4 billion.  She recently changed her tune, and is now considering including an extension of these temporary tax increases (a 1 cent sales tax increase and income tax surcharge on high-income households and corporations) in her budget proposal in order to stave off massive cuts to K-12 education.

In recent weeks, tax commissions in Georgia and Vermont issued reports recommending a major overhaul of their states’ tax systems.  The recommendations share many things in common, including sensible proposals to broaden the bases of major taxes and to make the changes revenue-neutral. In fact, when ITEP staff testified before each of these commissions over the last year, our testimony highlighted the importance of base-broadening as a first step towards sustainable tax reform. However, it’s clear that only one commission was concerned about the general welfare of its low-income taxpayers while the other seemed to have little interest in ensuring that a major tax overhaul doesn’t disproportionately impact working families.  

Georgia’s Special Council on Tax Reform Releases Recommendations

Earlier this month Georgia’s Special Council on Tax Reform released its recommendations for how Georgia’s tax structure should be changed. CTJ has been following the Council’s work closely over the past few months.  

As anticipated, the recommendations are quite sweeping and deal with every major tax the state levies.  Among the recommendations are broadening the income tax base by repealing the state’s generous pension exclusion and broadening the sales tax base by including more services and groceries. The Council also recommends replacing the state’s progressive income tax with a flat 4 percent rate, increasing the corporate income tax rate and increasing the cigarette tax. (Read the Council’s full recommendations.)

Unfortunately, no thought was given to how these sweeping changes impact low and middle-class working families. Broadening tax bases is sound tax policy, but base-broadening must be coupled with targeted measures to ensure that the brunt of this tax modernization isn’t borne by the most vulnerable.

Vermont’s Tax Commission Releases Final Report

On the heels of Georgia, Vermont’s Blue Ribbon Tax Structure Commission released its final report last week after more than a year of review, research, outreach and discussion about the state’s tax system.  The report offers a clear path forward for Vermont to “strengthen its tax system for the 21st century” which means “questioning critically every assumption in the tax system.” 

If enacted as a comprehensive package, which Commission members have requested lawmakers to consider, the recommendations would indeed make the state’s tax system more sustainable, adequate, and fair over the long run. 

The Public Assets Institute issued a statement on the report, saying it “was badly needed and long overdue…a  good first step in strengthening our revenue system so it can support the essential public services that all Vermonters deserve.”

The recommended income tax changes include basing Vermont’s taxes on federal adjusted gross income (AGI) and eliminating itemized and standard deductions.

The personal exemption would be replaced with a $350 non-refundable per-filer credit, plus an additional $150 for each spouse or dependent, which is capped at $800 and only available to taxpayers with AGI below $125,000.

The revenue gained from broadening the income tax base would be used to lower income tax rates.

The Commission recommended expanding the sales tax to most consumer-purchased services in order to bring their sales tax in line with current consumer patterns which favor services rather than goods.  They also suggested that all consumer-based sales tax exemptions should be eliminated with the exception of food and prescription drugs.  The revenue gained from broadening the sales tax base would be used to lower the sales tax rate from 6 percent to 4.5 percent.

Additionally, the Commission wants more scrutiny of the state’s tax expenditures and called for the state to develop the capacity to conduct tax incidence studies to better inform policymakers on tax policy changes.

One criticism of the Commission is that their recommendations were revenue-neutral, meaning the changes would not increase or decrease current state revenues.  Given that Vermont must fill a $150 million budget gap next fiscal year, some advocates and lawmakers have suggested that the plan should raise some new revenue, at least temporarily, to fill the gap. 

The good news, however, is that if taken as a comprehensive package, the recommended changes would maintain the state’s reliance on a progressive income tax and would use revenue gained from broadening the sales tax base to lower the sales tax rate rather than moving to a greater reliance on consumption-based taxes.

Commission members asked state leaders to give serious consideration to their findings and recommendations. There is a good chance their request will be answered, because Vermont policymakers are making tax reform a priority during this legislative session.

Some politicians in state capitals across the U.S. seem convinced that tax cuts for businesses and the wealthy are the best way to accelerate economic recovery. In two states, governors are proposing instead to cut taxes on groceries, which is a more effective, though not exactly flawless, way to help ordinary families. The tradeoff to any tax cut, of course, is unaffordable cuts to essential services including education, public safety, and health care.

In Wisconsin, state lawmakers agreed on a business tax cut that would add about $50 million to the budget deficit.  The Republican controlled legislature and newly elected Governor Scott Walker believe that the tax cuts will leave everybody with more money and leave the state with an improved economy.  Incredibly, Walker’s proposal rests on the assumption that the tax cuts will lure businesses away from Illinois, which recently saw an increase in its income tax, rather than fostering young, developing businesses. 

In Iowa, where a similar $300 million business tax cut is being discussed, critics of Governor Terry Branstad point out that essential social services are being axed in favor of pro-business policies.

In Arizona, Governor Jan Brewer is proposing to cut taxes on high-wage industries while further reducing funding for Medicaid, universities, community colleges, and K-12 education.  

Similar tax cuts are being proposed in New York, Washington, Michigan, Minnesota, and South Carolina. All of these plans prioritize tax breaks for business over providing essential services to those most affected by the economic downturn.  

The Governors of West Virginia and Arkansas have arrived at an entirely different tax-cutting proposal: reducing the sales tax on groceries.  Like lawmakers who support business tax cuts, Governors Tomblin and Beebe believe their brand of tax cuts will circulate quickly throughout the economy, providing necessary relief to the taxpaying public while stimulating the economy. 

Governor Mike Beebe of Arkansas wants to cut the sales tax on groceries by a half-cent and has said it is the only tax cut he will consider this year.  In West Virginia, Governor Earl Ray Tomblin wants to reduce the grocery sales tax from 3 to 2 cents and would ultimately like to see it eliminated entirely.

While the proposals to cut the sales tax on groceries are a welcome development compared to proposed tax cuts for businesses and the wealthy, there are still two problems with them. 

First and foremost, states are in dire need of revenue this year as they face the most significant budget challenge yet since the start of the recession.  Every dollar lost to a tax cut will have to be made up by an even deeper cut in spending. 

Second, reducing the sales tax on groceries is not the most targeted approach available to state leaders looking to support working families.  The poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries. 

Enacting or increasing a refundable state Earned Income Tax Credit (EITC) or other low-income refundable credit would be a more affordable and better targeted alternative to ensure that tax cuts reach low- and middle-income working families.  Tax cuts that directly benefit low-wage workers are especially beneficial to the general economy because low-wage workers immediately spend their refunds out of necessity.  By pumping the money back into the economy, the tax cut goes further in stimulating the economy than tax cuts for the wealthy or businesses.

Instead of pursuing tax cuts for businesses and wealthy individuals, state lawmakers should be working to alleviate hardship on the most vulnerable.  Indeed, the governors in West Virginia and Arkansas may end up being much more efficient at helping their state economies rebound than the “business friendly” governors in Wisconsin and Iowa.

Ill-conceived tax ideas are coming out of statehouses and governors’ mansions at a faster rate than we’ve seen in quite a while.  Here’s a quick summary on recent proposals receiving serious consideration in Arizona, Florida, Idaho, Maine, Michigan, Minnesota, New Jersey, Ohio, and Wisconsin.

Arizona: Business tax breaks and property tax breaks are being pushed by the Arizona Chamber of Commerce, and legislative leaders are taking them seriously.  The specifics have yet to be worked out, but expect at a minimum to see tax subsidies ostensibly aimed at boosting business hiring and investment.  As the Center on Budget and Policy Priorities (CBPP) has explained, however, states cannot stimulate their economies by cutting taxes.

Florida: Newly elected Governor Rick Scott continues to insist that “the way to get the state back to work is to cut property taxes and phase-out the corporate income tax, and we’re going to get that done.”  The state’s enormous budget gap has caused Senate President Mike Haridopolos to approach the issue more cautiously, though he still claims that “if we see some opportunities for tax relief that we feel absolutely confident will create more jobs and actually grow the economy, we’re open to them.”  Haridopolos is also pushing a “Taxpayer Bill of Rights” (TABOR) proposal similar to the one that decimated Colorado’s education funding stream.

Idaho: Legislators in Idaho — including the House majority leader — are preparing to revive an idea they first proposed toward the end of last year’s session: slashing the state’s corporate income tax rate from 7.6 percent to 4.9 percent.  Idaho legislators are also discussing cutting the state’s top personal income tax rate from 7.8 percent to 4.9 percent.  Each of these changes would drastically reduce the amount of revenue available to pay for vital state services, though by proposing that these changes be phased-in gradually over the course of the next decade, legislators are hoping to avoid having to spend too much time thinking about what state services will eventually have to be cut.

Maine: State Tax Notes (subscription required) reports that the chairman of Maine’s Senate tax committee plans to make cutting the state’s personal income tax rate his top priority.  Unlike the tax reform package that Maine voters recently rejected, this cut would be paid for not by broadening the state’s tax base, but by cutting spending and hoping for strong revenue growth.  Maine’s legislators are also apparently contemplating a constitutional amendment that would require supermajority support in the legislature in order to raise taxes.  A supermajority requirement of this type would result not only in lower state services, but also in more tax loopholes.  This is because such a requirement would prevent a simple majority of legislators from eliminating a tax loophole unless they also enlarged another loophole or lowered tax rates in a way that resulted in no net revenue gain.

Michigan: House and Senate leadership on both sides of the aisle in Michigan have inexplicably come to an agreement that the state’s EITC should be cut.  It’s unclear why tax increases on low-income families have suddenly become so popular in Michigan.  If Governor Rick Snyder gets his way, some of the revenue generated by taxing low-income families will likely to be used to pay for his proposed $1.5 billion cut in state business taxes.

Minnesota: The Republican leaders of Minnesota’s state legislature made clear this week that business tax cuts will be one of their top priorities.  One Senate leader has proposed cutting the state’s corporate income tax rate in half by 2017 and freezing statewide taxes on business property.  Fortunately, Minnesota Governor Mark Dayton is likely to vigorously oppose these cuts.

New Jersey: Democratic legislators are seriously considering a move to single sales factor apportionment for their corporate income tax.  The bill has already cleared the relevant committee, and will move to the full Senate soon.  See ITEP’s policy brief criticizing the single sales factor for state corporate income taxes.

Ohio: Ohio’s House and Governor have declared repealing the state’s estate tax to be a top priority.  Local governments receive a majority of the revenue generated by Ohio’s estate tax, and therefore oppose its repeal.  Ohio’s House leaders would also like to create a business tax credit for hiring new employees.

Wisconsin: Governor Scott Walker has proposed a variety of business tax breaks and, as in Maine, the creation of a supermajority requirement to raise taxes.  More bad ideas are almost certain to come from Wisconsin in the weeks ahead, as Governor Walker made clear during last year’s campaign that he supports the outright repeal of Wisconsin’s corporate income tax.

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

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

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

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

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