Month: March 2011

There’s a lot happening lately in the world of tax justice (or injustice as the case may be) in Missouri. Here’s a quick roundup:

The Good: Anti-Poverty Tax Policy

This week a bill to introduce a 20 percent refundable Earned Income Tax Credit (EITC) was heard before the House Committee on Tax Reform.  Representative Jeanette Mott Oxford and her thirty-five cosponsors should be congratulated for presenting this bill. 

ITEP’s written testimony on behalf of the bill made it clear that “eighty percent of the benefits would go to the poorest forty percent of Missourians — exactly the income groups who pay the largest share of their income in Missouri taxes under current law.”

In their testimony, the Missouri Budget Project said, “A state EITC could benefit as many as 440,000 Missouri families and is also proven to be a valuable economic stimulus, generating economic activity that would reach every corner of Missouri.”

State tax structures illustrate state priorities. If Missouri’s legislators prioritize generating economic activity and making the tax system fair for working families, they should pass HB581.

The Bad: Ballot Measures to Starve Local Governments

Early next month voters in Kansas City and St. Louis will be asked to decide if their cities should continue to have an earnings tax. If the voters in Kansas City reject their 1 percent tax on earnings levied on those who live or work in Kansas City, the city will lose approximately $200 million a year by the time the earnings tax is fully repealed, a staggering 40 percent of the city’s general fund revenue.

Last year, Missouri voters approved a law that bars Kansas City and St. Louis from continuing to have these earnings taxes unless they are approved by the cities’ voters. (The measure also blocked other local governments from adopting an earnings tax.) The ballot measure was largely bankrolled by Rex Sinquefield, an ideological, wealthy financier known for supporting conservative causes.

Now, the groups battling for and against these major city revenue sources are entering the final push. The Kansas City Star recently explained that the anti-earnings tax folks aren’t being honest. “Earnings tax opponents continue to highlight this statement on their website: ‘Cutting the e-tax would only require an annual 1.5 percent cut out of the budget over the next 10 years.’ We’ve been over this before, but it bears repeating: This statement is misleading and, worse, the critics know it but refuse to acknowledge the truth.”

The Ugly: Income Tax Repeal

In even worse news, Missouri’s Mega Tax Bill, HJR 8, passed both the House Tax Reform and Rules Committees and is expected to be debated on the floor of the House any day. The legislation would create a constitutional amendment to eliminate the state’s individual and corporate income taxes as well as corporation and bank franchise taxes, and replace the revenue with an expanded sales tax.

There are currently nine ballot initiatives that, if enacted, would make a similar radical change to the state’s tax structure. In a previous analysis of similar legislation, ITEP found that the bottom 95 percent of the income distribution would see a tax hike if the Mega Tax Bill were to become law, while the richest five percent would see tax cuts. It’s hard to get any uglier than that.

Capital gains income, which disproportionately flows to the wealthiest taxpayers, is taxed at lower rates than “ordinary” income like wages under the federal income tax. This is unfair for all sorts of reasons, and the unfairness is amplified in the eight states that provide additional, substantial breaks for capital gains. Ohio could soon add itself to this ignominious list.

Ohio Governor John Kasich said this week, “We should not be taxing our capital gains as regular income.” Meanwhile, a new proposal in the legislature (House Bill 98) would offer a tax break for elderly Ohioans with unearned income. Policy Matters Ohio (PMO) and the Institute on Taxation and Economic Policy (ITEP) worked together to analyze the impact of changing how capital gains are taxed and the impact that passing HB 98 would have on Ohio’s tax structure.

Policy Matters Ohio concluded, “Cutting the Ohio income tax on capital gains would be costly and most of the gains would go to the most affluent Ohioans, while 92 percent of Ohio taxpayers would get nothing at all.” ITEP found that the cost of HB 98 would be staggering — about $325 million annually.

Though no tax break on unearned income was included in the budget plan presented earlier this week by Governor Kasich, his statement suggests that he supports legislation like HB 98. His budget does, however, make significant cuts to K-12 and higher education, which, coupled with a possible break for capital gains income, would result in a significant shift of priorities away from ordinary Ohioans in favor of the well-off.

A recent Republican proposal in the Minnesota Legislature would cut the state’s bottom two income tax rates over three years. Thanks to Minnesota’s ability to provide tax incidence analysis (an examination of how different income groups are impacted by policy changes) the public can be informed about the real consequences of this proposal.

After analyzing the plan, the state’s Revenue Department and the House Research Department reached the same conclusion: these tax reductions would be regressive and benefit upper income families disproportionately.

Governor Dayton’s response to the Republican’s plan will warm the heart of any tax justice advocate. “It bothers me,” he said, “the Republicans would present this as a tax cut targeted for lower and middle-income families when the facts are the opposite. The greatest benefit goes to upper-income Minnesota families. Once again they just have shown their values, their priorities are to benefit the richest Minnesotans at the expense of the rest of Minnesota.”

While we are giving kudos to Minnesota and that state’s ability to conduct timely analyses, we should note that the Department of Revenue recently released their 2011 Minnesota Tax Incidence Study. Other states interested in improving their analytical capacity should look to Minnesota.

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

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

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

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

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

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

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

Due to a technical error, we were unable to process requests for printed copies of the newly released ITEP Guide to Fair State and Local Taxes that were made prior to this Thursday (March 17).  If you would like a printed copy, please submit (or re-submit) your information using this request form.  We sincerely apologize for this inconvenience.

Robert McIntyre, director of Citizens for Tax Justice, testified on March 9 before the Senate Budget Committee on tax subsidies for businesses. He explained that these tax breaks for business (1) are hugely expensive, (2) are often economically harmful, and (3) conflict with fundamental tax fairness.

Eliminating or reducing these tax subsidies can result in revenue that would help us address our long-term budget crisis. McIntyre said that “President Obama is seriously off track in proposing to devote all the savings that can be gained from curbing business tax subsidies not to deficit reduction, but rather to lowering the statutory corporate tax rate.”

Here’s an excerpt of the testimony:

…Today is the first day of Lent, and I’d like to suggest that members of Congress consider giving something up, not just until Easter, but perhaps until the federal budget is balanced (and even thereafter). What I hope you’ll give up is your enthusiasm for providing subsidies to those who don’t need them, in  particular, for business subsidies administered by what seems to have become Congress’s favorite agency, the Internal Revenue Service.

A quarter of a century ago, President Ronald Reagan took on business tax subsidies in the Tax Reform Act of 1986. Among other things, Reagan’s tax act curbed offshore corporate profit shifting, leasing tax shelters and numerous industry-specific tax breaks, and despite a reduction in the statutory corporate tax rate, increased corporate tax payments by 34 percent. Reagan also equalized the personal income tax treatment of wages and realized capital gains, and he made the tax system more progressive overall.

But lobbyists for corporations and wealthy individuals didn’t give up after 1986. They worked hard to regain and expand the tax subsidies that Reagan had taken away. In the 1990s, the lobbyists persuaded the Clinton administration and the Congress to eviscerate the corporate Alternative Minimum Tax (designed to curb the huge tax advantages that go to highly-leveraged activities such as equipment leasing), adopt the so-called “check the box” and “active-financing” rules that vastly expanded offshore corporate tax-sheltering opportunities, and reestablish preferential tax rates on realized capital gains. During the George W. Bush administration, business and investment tax breaks were expanded considerably further. Both political parties are at fault in this sad repudiation of President Reagan’s tax legacy.

By the early 2000s, corporate subsidies had risen so much that the average effective U.S. federal corporate tax rate paid by America’s largest and most profitable corporations on their U.S. profits had fallen to only 18.4 percent — barely over half the 35 percent statutory rate. Those tax subsidies have grown even larger since then.

Our complaints about business tax subsidies fall into three categories. (1) They are hugely expensive. (2) They are often economically harmful. And (3) they conflict with fundamental tax fairness…

Read the full testimony

Last week we told you about Michigan Governor Rick Snyder’s plan to cut Michigan business taxes by nearly $2 billion annually, and to pay for it on the backs of seniors and low-income families.  In an update to that story, ITEP crunched the numbers on the tax fairness impact of Snyder’s proposed income tax hikes earlier this week, and unfortunately, the results weren’t very surprising.

The ITEP analysis was first published by the Michigan League for Human Services (MILHS), and was later picked up by the Associated Press, among others.  That analysis shows that the personal income tax increases contained in Snyder’s plan would require low-income families to pay 1.1 percent more of their income in tax, while requiring the state’s wealthiest taxpayers to pay less than one-tenth that amount, relative to their income.  The most notable components of Snyder’s plan include eliminating the state Earned Income Tax Credit (EITC) and fully taxing pensions and other retirement income.

Snyder’s plan is particularly objectionable because none of the additional revenue raised via the personal income tax would be used to save vital state services from the budget axe.  Rather, all of the money would be channeled into massive tax cuts for Michigan businesses.  It seems odd, to say the least, that Snyder would prioritize large business tax cuts so highly despite Michigan’s sizeable budget gap.  But even if Snyder refuses to give up on his quest to slash business taxes, the ITEP analysis at least makes clear that he needs to find a better way of paying for those cuts.

Yesterday the Maryland House Ways & Means Committee held a hearing on a bill that would reinstate and make permanent the state’s recently expired 6.25% tax bracket on taxable incomes over $1 million.  In advance of that hearing, ITEP released a new report offering five arguments in support of the millionaires’ tax.

Read the Report

A few weeks back, we surveyed efforts to impose new restrictions mandating that a supermajority of legislators vote in favor of a tax increase before it can become law.   The good news is that most of these efforts appear to have made little progress so far (though Wisconsin did pass a temporary version of this requirement in February).  The bad news, however, is that this idea has now surfaced in New Hampshire.

As we’ve argued before, supermajority requirements are anti-democratic, as they empower a small minority of legislators to block the will of the majority.  These requirements also reduce the ability of elected officials to deal with new challenges as they arise — such as a massive revenue shortfall caused by an economic recession, or an increase in government health care costs.  

Supermajority requirements also make it much more difficult to enact meaningful tax reform since they prevent a majority of legislators from closing a tax loophole unless they either enlarge another loophole, or find a way to reduce tax rates in order to offset the revenue gain.  Simply put, these requirements expand on the already enormous incentives lawmakers have to stuff state tax codes full of special interest goodies.

At the end of the day, voters have the ability to remove their representatives from office if they’re unhappy with their decision to raise taxes.  Lawmakers considering supermajority requirements in New Hampshire, Wisconsin, and other states should put some trust in democracy, and forgo enacting cumbersome limitations on the power of future elected officials.