Month: February 2011

Progressive tax reform ideas are getting attention in Colorado, where voters may get the opportunity to enact it by ballot, and Kentucky, where lawmakers have the opportunity to support a far-reaching reform bill. Meanwhile, Iowa may move in the opposite direction by choosing the most draconian tax proposal being debated in the state.

Supporters of progressive taxation in Colorado, led by the Colorado Center on Law and Policy, filed a mix of ballot proposals last week that would greatly enhance the adequacy and fairness of Colorado’s tax system.  (Multiple proposals were filed for technical reasons, and supporters intend to bring only one plan before the voters.) 

Each proposal would transition away from Colorado’s flat rate income tax in favor of a graduated rate system.  The tax rate on taxable incomes below $50,000 would fall from 4.63% to 4.2%, while progressively higher rates would apply to higher levels of income.  Incomes above $1 million would be taxed at 9.5%. 

The majority of Colorado residents would see tax cuts, or no change in their income tax liability, under this plan.  Some of the proposals would also raise the state’s corporate income tax rate, while others would institute a new corporate minimum tax.  The state’s EITC would also be made permanent under some of the proposals.  By reforming Colorado’s tax system in this manner, approximately $1.5 billion in sorely needed revenue could be raised each year in order to improve the state’s struggling school system and other public services.

In Kentucky, Representative Jim Wayne held a press conference last week to discuss his bill, HB 318, which would modernize and increase the progressivity of Kentucky’s tax structure. The bill would expand the sales tax base to include a variety of services, introduce an Earned Income Tax Credit, and change the personal income tax rates and brackets.

ITEP estimates were used to show that, overall, the state would have a more progressive tax structure if the Wayne bill became law. Representative Wayne should be applauded for continuing to beat the progressive drum and arguing year after year that a tax system “should be equitable, it should be buoyant, it should be flexible, and it should grow with the economy.”

In less cheerful news, the Iowa House will have the opportunity to vote on a bill that passed through committee that, if approved, would reduce the state’s income tax rates across the board by 20 percent. This bill is one of the most expensive tax cut proposals currently on the table and threatens Iowa’s ability to provide public services over the long term.

In fact, the leader of the Democratic minority in the House recently said, “I’m not sure where the House ship is sailing. On one hand, we have all kinds of tax-cut bills moving through the process. … It’s about $2 billion over the next few years that would be eliminated from the state of Iowa’s budget. How is that even remotely fiscally responsible?”

Of course, it’s the opposite of fiscally responsible, as noted in a recent Iowa Policy Project brief finding that “[t]o develop long-term sustainability in the budget, it is important to examine what has given rise to current budget imbalances. Iowa’s long-term structural budget deficit has occurred in significant measure because lawmakers have adopted various tax breaks and reductions, not because they have expanded programs and services.”

Ohio Governor Kasich, an advocate of repealing the state’s personal income tax, now apparently thinks that if the full income tax can’t be repealed, then he should make the tax as generous as possible to wealthy Ohioans. There are reports that the Governor wants to introduce a tax break for capital gains income. He said recently, “We can’t tax ourselves to prosperity. We need to get the mojo back.”

Kasich should read ITEP’s report on capital gains taxation, which explains that tax breaks for capital gains are an ineffective strategy for economic development.

The battle pitting Michigan’s low-income families against big business is heating up.  Governor Rick Snyder is unabashedly supporting an elimination of the state’s Earned Income Tax Credit (EITC) to help pay for his $1.5 billion annual cut in state business taxes.  Snyder wants to replace the Michigan Business Tax with a 6 percent corporate income tax which will exempt most small businesses from paying any business taxes.   

Michigan, however, is not flush with cash to pay for such a cut. It has a $1.8 billion budget gap to close this year.  So, Snyder and other state lawmakers have turned to their state’s most vulnerable residents and are asking them to “share in the pain” to help plug the even larger budget gap that would result if the business tax cut plan is enacted. 

This week, State Senator Roger Kahn officially introduced a bill to eliminate the EITC because, he says, state residents “don’t need it.”

Michigan’s EITC costs around $350 million a year, which is around 20 percent of the cost of the business tax cut, and provides affordable, effective, and targeted assistance to more than 700,000 low- and moderate-income Michiganders.   These are the working families hit hardest by the economic downturn and who are also feeling the impact of several years of budget cuts to education and health services. 

The Michigan League of Human Services’ CEO released a statement on the proposal saying, “While we recognize the desire for everybody in the state to share in the sacrifice, poor people are being asked to be the sacrificial lambs. The Michigan Earned Income Tax Credit, which helps low- and moderate-income working households, should not be the first credit considered among Michigan’s $34 billion list of tax expenditures, including tax breaks for big corporations.”

There’s been a lot of talk lately about how much U.S. corporations actually pay in federal income taxes, and a lot of it has been wrong. This is not surprising, since corporations go to a lot of trouble to obscure what they pay in the financial reports that they must file with the Securities and Exchange Commission (SEC) each year.

For example, the New York Times recently reported that General Electric paid 14.3 percent of its profits in taxes over the 2005-2009 period. While this is surprisingly low (compared to the statutory corporate income tax rate of 35 percent) it is incorrect, and the real effective rate is much lower.

GE’s effective tax rate for its U.S. profits was actually just 3.4 percent over that period. Our figure is based on what GE says that it paid in U.S. corporate income taxes (called “current” taxes) divided by what GE says its pretax U.S. profits were (all from GE’s annual 10K reports to shareholders, filed with the SEC).

There are several reasons for confusion over the effective tax rates paid by corporations. First, the U.S. only taxes corporate profits generated in the U.S. (or repatriated to the U.S.) so that it is mostly up to foreign countries to tax the profits these corporations generate offshore, and yet some people are referring to worldwide taxes U.S. corporations pay on their worldwide profits when they discuss the U.S. corporate tax system. The worldwide effective tax rate includes taxes that a corporation pays to all governments in the world. But to understand how the U.S. corporate income tax is working, one must focus on U.S. taxes paid on U.S. profits. No one expects Congress to do much about taxes that U.S. corporations pay to the governments of France, Germany, or Japan!

Second, to get a sense of what a corporation pays each year, we should include the current U.S. taxes paid, but not the deferred U.S. taxes. “Deferred” is a euphemism for “not paid.” Corporations can defer (delay) paying taxes if, for example, they enjoy tax breaks for accelerated depreciation, which allow them to take deductions for capital investments sooner than they would if the rules were simply based on the actual life of the investment. A company could eventually pay taxes that it has “deferred.” But that doesn’t happen very often.

A post on the New York Times Economix blog, which received a lot of recent attention, uses data that includes the worldwide taxes, both current and deferred, paid by U.S. corporations on their worldwide profits, and tries to use this to make a point about the U.S. corporate tax system.

(The NYU scholar who created this data set recently introduced another measure which rightly focuses only on profitable corporations, but the problems identified above still remain.)

The point the New York Times article was trying to make is that effective corporate tax rates vary widely among companies and industries, which is true (and is a bad thing). But the worldwide tax information cited doesn’t shed much light on the U.S. corporate tax system’s role in these disparities.
 
More important, as our lawmakers contemplate reforming the corporate income tax, the place to start is to have an accurate understanding of the effective tax rates that companies pay to the U.S. government. Mistakenly mixing in foreign data just muddies the waters.

In some states, huge budget gaps are making it somewhat difficult to enact the types of large, immediate tax cuts that many lawmakers promised during their political campaigns last year.  Partially as a result, anti-tax lawmakers are increasingly looking toward the longer-term with proposals to cap state spending, cap property tax growth, and mandate a supermajority legislative vote in order to raise taxes.  Four states in particular generated headlines for proposals of this sort over the past week: New York, Wisconsin, Virginia, and North Dakota.

As we mentioned two weeks ago, New York’s Republican-led Senate has already passed constitutional amendments that would impose a TABOR-style spending cap, and a supermajority requirement for raising taxes.  This week, the Senate added to that list by enthusiastically passing Governor Andrew Cuomo’s property tax cap, which would limit property tax growth to 2 percent per year.  As the New York Times pointed out, property tax caps in general are extremely blunt instruments, and this one is particularly worrisome given the lack of exemptions for things like health care, pensions, debt service, or increased enrollment.  Fortunately, all three of these proposals will be less welcome in the state Assembly, though the Assembly’s speaker has expressed an interest in coming to a “common ground with the governor and the Senate on an appropriate property tax cap.”

In Wisconsin, the state’s newly elected Republican governor and Republican legislators have enacted relatively minor business tax cuts that some lawmakers have described as merely symbolic.  Not content with these small victories, Republican lawmakers are now turning to the slightly longer-term, as the state Assembly last week passed a bill that would require a supermajority vote in order to raise taxes during the next two years.  Of much more concern, however, is a proposed constitutional amendment that would permanently impose the same restriction on Wisconsin residents’ elected representatives. That amendment has yet to come up for a vote.

In Virginia, two troubling constitutional amendments made it out of committee last week. One would mandate a supermajority vote to raise taxes and another would impose a TABOR spending cap equal to inflation plus population growth.  Both are being pushed by Del. Mark Cole, and both were the subject of a highly critical editorial in the Roanoke Times this week.

Finally, in North Dakota, a proposal to cap property tax revenue growth at 3 percent per year received a committee hearing this week and will eventually move to the full House for a vote.  Similar proposals have been rejected in each of the last two sessions, though the fate of this one remains unclear.

Hopefully, lawmakers in each of these states will eventually decide against reducing their ability to deal with the difficult and often unforeseen challenges that state and local governments must inevitably confront.

It looks very likely that the question of whether or not to extend a temporary income tax surcharge on New York’s wealthiest households will be a contentious issue as the budget process moves forward in the state.

New York Governor Andrew Cuomo released his budget plan this week.  Sticking to his “no tax increase” campaign promise, Cuomo did not include any significant revenue-raisers and instead chose to close a $10 billion budget gap primarily with massive cuts to education and Medicaid spending.

As a New York Times editorial stated, “without additional revenue… the state’s most vulnerable citizens — the poor, the sick, the elderly and schoolchildren — will inevitably bear the largest burden.”  The editorial endorsed extending the temporary personal income tax surcharge on the state’s wealthiest households, a move also supported by Democratic Assembly members and many advocacy groups who want to lessen the magnitude of proposed spending cuts.  

The temporary high-income tax surcharge was enacted in 2009 to help address New York’s budget crisis at the time and is set to expire at the end of 2011.  But, clearly, the budget crisis is not behind the state and the $2 billion the temporary tax would raise for the coming fiscal year and $4 billion in the following year could go a long way to protecting core state services.  The surcharge applies only to married couples with taxable incomes over $300,000 a year ($200,000 for single taxpayers).  These very same taxpayers will receive a significant federal benefit from the extension of the Bush tax cuts. 

For the sake of ensuring all New Yorkers have access to affordable health care, quality education, and safe communities, let’s hope the state’s lawmakers can agree that their wealthiest residents can afford to pay a little more this year.

In a recent op-ed in the Atlanta Journal Constitution, Sarah Beth Gehl of the Georgia Budget and Policy Institute makes the case that the Special Council on Tax Reform and Fairness hit a triple when they came out with their policy recommendations for modernizing the state’s tax structure. The Council emphasized sales tax base expansion to include more services and broadening the state’s income tax base. 

Triples are good, but home runs are better and Gehl makes the case that the Council missed out on a homerun because they overlooked a key tax policy principle when devising its recommendations — tax fairness.  Citing ITEP data, she writes, “The best-off 1 percent of Georgians, those making more than $389,000 in 2010, would receive an almost $7,800 average yearly tax decrease. In the case of a Georgian making around $40,000, taxes would rise by about $400 a year.” 

Gehl identifies several sensible alternatives that the legislature could tack onto the Council’s recommendations that would take into account tax fairness, including more generous low-income tax relief and exempting groceries from the sales tax base.

There seems to be a contingent that is steering away from the debate and instead focusing on what Grover Norquist would approve of. In fact, to appease Norquist and his group, Americans for Tax Reform, the Council actually reconvened earlier this week to vote on a resolution which claimed that the intent of the Council’s recommendations was that they were to be “revenue-neutral.” Because, of course, Norquist’s group would never give the thumbs up to a proposal that actually raised revenue to meet the needs of Georgians.

The Special Joint Committee on Georgia Revenue Structure met this week to debate the Council’s recommendations. We’ll be watching their actions closely and it sounds like Grover will be too.

Low-income tax credits and rebates are one of the most effective ways that lawmakers can reduce poverty through the tax code. The proliferation of state Earned Income Tax Credits attests to policymakers’ growing awareness of this. But these rebates can be meaningless if lawmakers don’t make at least minimal outreach efforts to ensure that eligible taxpayers claim the credits.

Case in point: South Dakota, where last week the House Taxation Committee met to consider HB 1131, a bill that would have eliminated the state’s sales tax on food and replaced the lost revenue by increasing the sales tax rate on other items.

Data generated by ITEP and presented in testimony by the South Dakota Budget and Policy Project showed that this revenue-neutral tax change would actually result in a tax cut for 99 percent of South Dakotans. Yet, the bill was defeated in committee.

Certainly, the debate about whether or not to tax food is worth having. It’s important to note that in states that tax food, most offer some type of low-income tax relief to help offset the regressive nature of sales taxes levied on necessities. South Dakota offers a rebate, but it’s ineffective at best. The current rebate was only claimed by 726 families in all of fiscal year 2010. Qualifying for the program is difficult and there’s little effort by the state to even make sure families know about the refund.

Maddeningly, some of the lawmakers who rejected HB 1121 cited the existence of the rebate as a reason why a grocery tax cut is unnecessary. South Dakota’s tax structure is plenty flawed already (it’s a state that doesn’t levy an income tax) and taxing food without offering an effective refund simply doesn’t help.

Some Americans respond positively to the anti-tax message of the Tea Party, but is anyone willing to accept the cuts in public services that must logically follow? The Tea Party has been specific about cutting taxes but vague about what programs must be slashed in order to balance the government’s books. So what will happen if the Tea Party takes power? The recent experience of Nassau County, New York, shows us that the result will be a disaster.

When Tea Party-backed Edward Mangano won his election for the Nassau County Executive as a member of the Tax Revolt Party, it was on a platform of vague promises to cut spending and to repeal a $40 million dollar energy tax.

The voters of Nassau County got what they asked for. Mangano immediately repealed the energy tax, but failed to actually pass any of the substantial spending cuts that he had promised. In doing so, he may have stayed true to his Tea Party roots, but he also drove the second richest county in the nation into fiscal disaster.

With a $175 million dollar gap in the $2.6 billion budget plan, the Nassau County Interim Finance Authority (NIFA), a New York State oversight board, was forced to take control of the county’s finances. NIFA is tasked with stepping in to correct the county’s finances whenever there is a gap of larger than 1 percent, which the current gap dwarfs by almost 7 times.

The situation is so dire that Moody’s is putting the county’s municipal securities on watch for a downgrade, a move that portfolio managers said is rare considering how safe these investments are usually considered.

Despite this, Mangano has refused to yield and in recent days filed suit to stop the takeover, citing his worries that NIFA may force him to raise taxes.

The consensus against Mangano even transcends normal ideological lines, with the New York Times and New York Post editorial pages finding themselves in rare agreement over the irresponsibility of his actions.

In a comprehensive special report, Reuter’s called Nassau County’s experience a “cautionary tale,” saying that the fiscal collapse in Nassau and the subsequent takeover represents a “black eye for the Tea Party.”

As one observer put it, “A lot of people who got elected on this type of anti-tax platform are running into the brick wall of fiscal reality.”