Month: March 2011

On Sunday the Milwaukee Journal Sentinel published an interesting article about the capital gains tax breaks that Governor Scott Walker is proposing in his biennial budget. The article’s title “Walker’s proposed capital gains tax break gets lukewarm backing” says it all. Capital gains tax breaks are costly and are extremely regressive because most capital gains income is received by the richest taxpayers.

Wisconsin already allows a tremendously generous 30 percent exclusion for capital gains income, which ITEP estimates cost more than $150 million in 2010. The Governor is proposing two changes to how capital gains are currently taxed: “a 100 percent exclusion for capital gains realized on Wisconsin-based capital assets held for five or more years and a 100 percent capital gains tax deferral for gains reinvested in Wisconsin-based businesses.”

If implemented, these changes would cost the state about $36 million over the next two fiscal years. At a time when the state is facing a $3.6 billion dollar shortfall, surely there are better ways that $36 million could be used.

For more on the ongoing budget debate, check out the Wisconsin Budget Project’s blog and the Institute for Wisconsin’s Future (IWF).

We’ve written before that state governments provide a wide array of tax breaks for their elderly residents. Almost every state levying an income tax now allows some form of exemption or credit for its over-65 citizens that is unavailable to non-elderly taxpayers. But many states have enacted poorly-targeted, unnecessarily expensive elderly tax breaks that make state tax systems less sustainable and less fair. These breaks are being reconsidered in Illinois, Michigan, and Hawaii.

One of the most egregious examples of the special treatment retirees receive is the Illinois income tax exemption for all retirement income. But this exemption is getting more and more attention. Senate President John Cullerton recently said, “It would just be a matter of fairness” to tax this income.

The Chicago Tribune joins us in applauding Cullerton for raising this issue. “Illinois needs a talk about revising tax policies and rethinking exemptions,” the Tribune editorializes. “Not to grab more from taxpayers, but to broaden the tax base as a matter of fairness. Why should the working family making $50,000 a year pay a tax that the retiree getting $100,000 a year avoids? Credit Cullerton for thinking creatively — and out loud. ”

Eliminating senior tax preferences is also receiving attention in Michigan, where Governor Rick Snyder has proposed scrapping the state’s generous exemptions for pensions, annuities, and various other types of retirement income.  Unfortunately, Snyder has paired this change with an elimination of the state’s EITC — a proposal that has contributed greatly to the overall regressivity of Snyder’s personal income tax changes.  Retaining the EITC and means-testing Michigan’s pension breaks, rather than eliminating them entirely, could greatly reduce the regressivity of Snyder’s plan. 
 
Finally, in Hawaii, a proposal to tax pensions earned by taxpayers with incomes over $100,000 (or $200,000 for married filers) recently passed the House.  Unlike in Michigan, this plan both includes protections for low-income retirees, and uses the revenue it would generate in order to close the state’s budget gap.

Add North Carolina to the list of states considering increasing taxes on the low-income working families hit hardest by the economic downturn.  Republican lawmakers in North Carolina recently filed a bill to convert the state’s refundable 5 percent Earned Income Tax Credit (EITC) to a nonrefundable credit, essentially eliminating the benefit of the program for the lowest income households. 

An op-ed this week by Lucy Gorham, director of the EITC Carolinas Initiative, put it this way: “The Republican leaders won their seats, in part, by pledging not to raise taxes and to represent those North Carolinians who work hard to provide for their families in the face of one of the worst economic downturns most of us have ever lived through. Strange, then, that in one of their first moves in the current legislative session, the leadership proposes to increase taxes on low- and moderate-income working families by eliminating the refundable portion of the state’s Earned Income Tax Credit (EITC).”

North Carolina’s House Finance Committee heard the bill on Wednesday.  Only two lawmakers spoke out in favor of the proposed change to the credit.  Representative Edgar Starnes, the bill’s sponsor, delivered an endorsement of the credit even while he moved to destroy its value.  He said he recognizes the EITC is an extremely good program, but given North Carolina’s large budget shortfall, he claims the state can no longer afford the cost and lawmakers must look to every program for savings, including the EITC. 

Naturally, the opponents of the proposal turned the committee debate into a question of why the majority party was starting with the EITC — an attack on the state’s most vulnerable residents — and suggested they should look elsewhere for the $50 million saved by the regressive change.  

House and Senate Democrats also held a press conference this week to show support for the EITC.  They argued that the refundability is a means to reimburse low-income families for other taxes they pay and pointed out that low-income workers pay a much larger share of their incomes in state and local taxes than wealthier households.  North Carolina’s governor, Bev Perdue, also weighed into the debate via Twitter: “Concerned that EITC bill hurts working families: waitresses, construction wrkrs, store clerks — the backbone of our communities. #NCGA”

The North Carolina Budget and Tax Center has argued that “working class, tax-paying families could no longer benefit from the credit’s ability to help them cover the substantial share of their income they pay in sales and property taxes” if refundability was eliminated.  An ITEP analysis found that eliminating the refundability of North Carolina’s EITC would result in a tax increase for 1 in 10 households.  The Budget and Tax Center also released an interactive map this week that demonstrates the wide-ranging and deep benefits of the North Carolina’s Earned Income Tax Credit.

North Carolina lawmakers will continue to grapple with significant budget dilemmas in 2011 and beyond.  But balancing their budget on the backs of those families hit hardest by the recession should be a non-starter.

This week, Rhode Island Governor Lincoln Chafee joined the very short list of governors supporting a balanced approach to addressing significant revenue shortfalls.  Like governors in Connecticut, Minnesota, Illinois, Hawaii, and North Carolina, Chafee included new revenue in his budget proposal, which will help mitigate the impact of otherwise devastating spending cuts. 

Significant changes to Rhode Island’s sales tax would raise enough revenue to close roughly half of the state’s $331 million budget gap.  Chafee proposes a two-tier sales tax rate structure, a 6 percent rate on most goods and some services and a 1 percent rate on certain additional items currently not taxed. 

The 6 percent sales tax would be a broader version of the existing tax. Chafee would expand the base of the sales tax to include an array of services currently not taxed as well as some goods that are legislatively exempt from the sales tax, including newspapers, live entertainment, car washes, and dry cleaning services.  The main sales tax rate would be lowered from 7 percent to 6 percent and the combined change would raise around $78 million for next fiscal year.

Chafee’s plan would also apply a new 1 percent sales tax to more than 40 goods currently exempt from the sales tax including clothing, boats, flags and farm equipment. 

Under the plan, food, prescription drugs, durable medical products and gasoline would continue to be exempt from state sales taxes. 

Chafee’s budget proposal also included an overhaul of business taxation, including enacting combined reporting, phasing down the corporate income tax rate from 9 to 7.5 percent, and restructuring the corporate minimum tax so that corporations pay differing amounts based on their total sales in Rhode Island.  These combined changes would result in a net revenue loss of $14.5 million once fully implemented in FY16, but Chafee champions the package as one that will make the state more business-friendly and competitive with neighboring states.

Kate Brewster, Executive Director of the Poverty Institute, commented on the governor’s budget proposal to GoLocalProv: “We are pleased that our Governor has taken a balanced approach to balancing the budget that includes revenue raising proposals rather than relying on a cuts-only strategy… His proposals to close corporate loopholes through combined reporting and bring our sales tax into the 21st century are responsible tax policies.”

While we agree Governor Chafee should be applauded for embracing a balanced approach to the budget that includes important tax modernization changes, relying solely on the sales tax to raise revenue inevitably means that the state’s poorest residents will shoulder the largest share of the tax increase.  An ITEP analysis found that the bottom 20 percent of taxpayers will pay on average an additional 0.8 percent of their incomes in sales taxes while the top 1 percent on average will only pay an additional 0.2 percent. 

In order to lessen the impact of the sales tax changes on low- and moderate-income households, Rhode Island lawmakers should consider increasing their state Earned Income Tax Credit (EITC).  Rhode Island currently allows for a 15 percent refundable EITC or an optional 25 percent non-refundable EITC.  According to ITEP analysis, eliminating the optional non-refundable EITC and increasing the refundable credit to 25 percent (in other words, all eligible taxpayers would receive a refundable EITC that is 25 percent of their federal credit), would offset the impact of the sales tax changes on the poorest 40 percent of households.  This change would cost an estimated $26 million, which could be paid for by scaling back the governor’s corporate income tax rate reduction.

It is also curious that Governor Chafee chose a two-tiered sales tax rate structure rather than simply applying his entire list of currently exempt items to the higher sales tax rate.  If Rhode Island had one sales tax base, the main sales tax rate could be reduced even lower than 6 percent while still raising a significant amount of revenue.

State governments face a budget crisis of historic proportions, and in recent months policymakers have responded with unpopular and frequently myopic spending cuts to close budget gaps. But there are alternatives. A new report, The ITEP Guide to Fair State and Local Taxes, explains that policymakers in virtually every state have sensible tax policy tools at their disposal to help reform their underperforming tax systems.

With the scheduled end of temporary federal aid to state governments later this year, state lawmakers will face even more pressure to find real, long-term solutions. The report is designed to help policymakers to approach both the short-term and long-term fiscal challenges they face.

The ITEP Guide takes a hard look at why state taxes have underperformed in the recent economic downturn, and recommends strategies for reforming these taxes to make them better able to fund public investments in the future.

The report includes separate chapters discussing each of the major revenue sources on which state and local governments rely, including personal income taxes, sales taxes, property taxes and corporate taxes. A common theme in ITEP’s analysis of each of these is that unwarranted loopholes make these taxes less fair, and less sustainable, than they should be.  

The report also recommends a variety of procedural tax reforms that would make it much easier for state policymakers to identify and evaluate these harmful tax giveaways in the future. These reforms include regularly publishing detailed “tax expenditure reports,” which list the cost and rationale for every tax break currently weighing down state tax codes, and “tax incidence analyses” to help measure the tax fairness impact of proposed tax changes.

To view the report or request a copy be mailed to you, please visit: http://www.itepnet.org/state_reports/guide2011.php.

Michigan Governor Rick Snyder has taken a lot of heat for his budget plan over the last week or so, and for very good reason.  Snyder is currently seeking to raise individual income taxes — primarily on elderly and poor Michiganders — by some $1.7 billion per year.  Rather than using this money to help close the state’s budget deficit, Snyder is asking some of Michigan’s most vulnerable families to hand all this money over to businesses, in the form of a roughly $1.8 billion business tax cut.

Snyder would like to replace the state’s much maligned Michigan Business Tax (MBT) — a sort of hybrid between a corporate income tax and a sales tax — with a true corporate income tax.  The basic idea isn’t necessarily a bad one, but the corporate income tax Snyder has in mind is much too modest.  Overall, the swap would raise $1.8 billion less per year than current law.

In order to make up this difference during such tight budgetary times, Snyder has proposed a variety of personal income tax increases on Michigan families.  The most notable increases include eliminating the state’s generous pension tax breaks (a change opposed by 53% of state residents) and scrapping the state’s Earned Income Tax Credit (EITC) (a change opposed by 58% of the state).  Snyder is also seeking to eliminate extra exemptions available to elderly taxpayers and families with children.

Overall, the Michigan League for Human Services (MILHS) found that individual income tax bills would rise by 31% under Snyder’s plan, while the state’s businesses would receive a staggering 86% tax cut.  So much for shared sacrifice.

Under any reasonable property tax system, a property’s tax bill should be tied fairly closely to the actual value of that property.  Sure, some modest exemptions and credits can (and should) be used to reduce the property tax’s regressivity, but the basis for the tax should remain the property’s actual market value.  Oddly, a proposal currently being considered in South Carolina would depart drastically from this fundamental principle.

Back in 2006, South Carolina raised its state sales tax rate in order to pay for a property tax cap that limits growth in a home’s taxable assessed value to no greater than 15% every 5 years — or a little under 3% per year, on average.  Under this arrangement, changes in one’s property tax bill have very little to do with changes in the value of one’s property, and are instead driven by the artificially imposed 15% limitation.  Over time, the impact of the 15% limit can add up, and South Carolinians often end up paying property taxes at an assessed value far below what their home is actually worth.  In other words, for these families the term “property tax” has very little meaning, as their tax bill is only loosely tied to their property as it currently exists.

As strange and shortsighted as this policy may be, the law as currently structured does have one bright spot: whenever a property changes hands, the 15% limitation is reset.  This means that — at least for a short time — the property tax is once again applied to the home’s actual value.  These “resets” play an important role in ensuring that South Carolina’s property tax retains some of its character as a tax on actual property values.

Unfortunately, some state legislators would like to eliminate this feature of the law, claiming that the “reset” results in unaffordable tax bills for people looking to change residences.  In a way, it’s a legitimate complaint.  The South Carolina tax cap (like those in California, Florida, and many other states) results in vastly different property tax bills for different taxpayers, based solely on how long they’ve chosen to remain at their current address.

But the “cure” lawmakers are considering in this case is worse than the disease.  Ending the reset feature would essentially divorce South Carolina’s residential property tax system from present day reality.  Rather than having anything to do with actual property values, a tax cap system without a reset feature would forever base each property’s tax bill on its 2006 value, and then grow it artificially based on the 15% formula.  Sure, when the real estate market is weak the 15% formula might not kick in, but given enough time, many residences will accumulate massive tax cap savings and will be subject to tax bills with almost no basis in present reality.

Ultimately, if the goal of state lawmakers is to ensure that property taxes don’t grow faster than South Carolinians’ ability to pay them, the best relief option is an income-tested circuit breaker credit.  Property tax caps, circuit breakers, and many other related topics are discussed in the property tax chapter of the newly released ITEP Guide to Fair State and Local Taxes.

New York Governor Andrew Cuomo is at odds with his fellow Democrats, who control the state’s Assembly, over tax policy.

The focal point of this conflict is a proposed extension of the temporary income tax surcharge on individuals with taxable incomes over $200,000 (or $300,000 from joint filers), known as the ‘millionaires’ tax because most of it is paid by millionaires. If extended, the measure would raise $1 billion dollars over the next year.     

There is no doubt that New York’s fiscal situation is dire. But the governor’s budget relies almost entirely on dramatic spending cuts, including cuts to K-12 education aid to the state’s poorest children.

Some of the opposition to the ‘millionaires tax’ has been driven by initial reporting that such taxation drives wealthy individuals out of the state, though this claim has since been thoroughly discredited.

In January, Gov. Cuomo explained his personal opposition to extending the millionaires’ tax, saying absurdly that “the working families of New York cannot afford tax increases.”  

Frank Mauro, Executive Director of the Fiscal Policy Institute, responded, “It is unfathomable that those who have profited so tremendously from New York’s economic growth over the past two decades are not in a position to aid poor and working New Yorkers in this time of need.”
    
Gov. Cuomo is united with New York’s Senate Republicans in opposing extending the tax, but is facing increasingly vocal protests and polls showing that nearly two thirds of New Yorkers are in favor of extending it.

Last month, Wisconsin Governor Scott Walker introduced his budget plan to help balance Wisconsin’s books for the remainder of the current fiscal year. The most controversial piece of the budget repair bill calls for a reduction in benefits for public employees and the end of their collective bargaining rights.

However, the Wisconsin Budget Project reminds us that public employees in Wisconsin actually aren’t overcompensated for their work.  The New York Times opines, “Like many governors, he wants to cut the benefits of state workers. But he also decided a budget crisis was a good time to advance an ideological goal dear to his fellow Republicans: eliminating most collective bargaining rights for public employees.”

It’s worth noting that shortly after taking office, Governor Walker pushed through his own tax cuts, which will cost the state $117 million in the next biennium. This begs the question: If the Governor was really serious about balancing the state’s books, why is he passing more tax cuts that will need to be paid for in the future?  Governor Walker would likely say that passing these tax cuts are proof that he is fulfilling his campaign promise that “Wisconsin is open for business.” But we know that companies look for more than lower tax rates or special tax credits when deciding where to locate.

The debate about the budget repair bill rages on. Democratic Senators remain outside the state to prevent a quorum, and protestors are gathering in Madison every day.  With the unveiling of Governor Walker’s biennial budget Tuesday night, the debate is only going to heat up. The Governor’s budget includes no fee or tax increases and reduces aid to local governments by over a billion dollars. In fact, overall spending is reduced by $4.2 billion under the Governor’s plan.

The Governor’s proposed budget creates distinct winners and losers. In terms of tax policy, low-income folks are likely to be hit the hardest by this budget, but certain Wisconsin investors will come out ahead. 

For example, the Governor proposes to also eliminate indexing of the state’s homestead credit, which offers property tax relief specifically targeted to low-income Wisconsinites. Despite the Earned Income Tax Credit’s impressive track record of lifting people from poverty, the proposed budget will reduce the percentage of the federal credit that Wisconsin currently allows.

On the other hand, Wisconsin allows one of the most generous capital gains tax breaks, and the Governor is proposing to add a 100 percent capital gains exclusion for investors who invest in Wisconsin businesses and keep those investments for at least five years. 

The Governor is not making draconian cuts and moving against collective bargaining because it’s necessary to balance the budget. He’s making choices that reflect the priorities of businesses and anti-government activists. He could make other choices.

For example, instead of creating a new giveaway for investors, he could move in the opposite direction by reducing or eliminating the state’s existing break for capital gains. Wisconsin is just one of eight states that offer special treatment for capital gains income. ITEP estimates that eliminating this regressive and costly exclusion could bring in more than $151 million.  Given the concentration of capital gains income among the very wealthiest taxpayers, the benefits of capital gains tax preferences are, of course, focused on the well-to-do. In fact, virtually all — 95 percent — of the tax reductions arising from Wisconsin’s 30 percent capital gains exclusion are realized by the richest 20 percent of taxpayers in the state. The remaining 80 percent of taxpayers collectively receive just 5 percent of the overall capital gains tax break.

This fierce budget debate presents a historic opportunity for all Wisconsinites to take a closer look at their state’s budget, tax structure, and tax credits and ensure that these important fiscal structures reflect the state’s values.