Month: April 2011

The Boss a Local Hero with Anti-Poverty and Children’s Advocates

With a short letter to the editor of his hometown paper, the Asbury Park Press, Bruce Springsteen sided with anti-poverty and children’s advocates, teachers, and other New Jersey residents who oppose Gov. Christie’s cuts-only approach to the state’s budget gap.

The letter was a response to an article about rising poverty amidst budget cuts to the very programs that assist low- and moderate-income families in the state.  Springsteen praised the article for being “one of the few that highlights the contradictions between a policy of large tax cuts, on the one hand, and cuts in services to those in the most dire conditions, on the other.”

The letter has forced Governor Christie to spend the past week defending his cuts to critical and core services and his adamant objection to reinstating a tax on New Jersey millionaires. 

New Jersey Senate and Assembly Democrats support a plan to raise $600 million in revenue by instating a surcharge on households with taxable income of more than $1 million (the households impacted make up less than half of one percent of the state’s taxpayers). 

A similar policy was in place temporarily in 2009.  Democrats passed a bill to reinstate the surcharge last summer, but the governor vetoed the bill and has vowed to do the same this year. 

During the governor’s ABC News interview this week, Diane Sawyer said that Springsteen “has written a letter in which he says that it’s simply a contradiction between your large tax cuts including for really rich people and doing things that change education for the kids that affect teachers, cut the services to those in the most dire conditions.” 

Christie responded that Springsteen is a liberal who “believes that we should be raising taxes all the time on everyone to do all the things that he’d like to see government do.”

Reason to Believe in the Role of the State

Of course, Springsteen is right that in a time of economic distress, when demand for state-funded services has increased alongside growing poverty, states more than ever need to focus on education, assistance to families and communities in need, and keeping the public healthy and safe, which will in turn support economic recovery.  To do this, New Jersey must have adequate revenue.

Christie Stands Up for the Mansion on the Hill

Christie went on to suggest that it was the previous New Jersey governor, Jon Corzine, who cut taxes on millionaires, which is a completely false statement.  When Corzine was governor, he enacted a temporary increase on millionaire’s that expired after tax year 2009.  As previously noted, a bill passed the Senate and Assembly last year to reinstate the tax, but Christie vetoed it and continues to voice opposition to any tax on millionaires. 

When Sawyer pressed him more on the issue, Christie argued that the tax would “only raise $600 million.”  While $600 million may be only loose change to Christie, that money would go a long way to the hard-working New Jersey families struggling to make ends meet in the face of more and more cuts to the very services they depend on. 

The honest truth is that Christie would rather shrink government at the expense of the vast majority of New Jerseyans than ruffle the feathers of millionaires.

Elected officials in California and Florida face unprecedented fiscal challenges at both the state and local levels. Yet rather than working to reduce their budget shortfalls, policymakers in each state are doing their best to dig their budget holes deeper by offering new company-specific tax breaks to keep footloose corporations from moving their operations elsewhere.

A front-page article in today’s New York Times offers some insights into this seemingly irrational behavior. Focusing on the battle between Kansas and Missouri lawmakers over the future headquarters of movie-theater chain AMC Entertainment, the article describes a system of extorting tax breaks that is viewed by everyone involved — from lawmakers to the beneficiaries of the tax breaks — as a pointless zero-sum game.

AMC’s chief executive officer, poised to receive lavish tax handouts from the two states, wonders aloud “whether this is an appropriate role for government to be playing,” and a lawyer whose job involves seeking out tax breaks for corporate clients describes it as “horrible public policy.”

This situation won’t be news to anyone who’s followed the work of Greg LeRoy and the folks at Good Jobs First over the years. LeRoy’s “Great American Jobs Scam” provides an excellent summary of the cottage industry of site location consultants that has emerged to facilitate the “economic war between the states” that the Times article describes. But the battle over AMC is only one example of egregious tax giveaways from the past week.

In Florida, Darden Restaurants (parent company of the Red Lobster and Olive Garden restaurant franchises) is pushing for new tax breaks. The Orlando Sentinel reports that this Fortune 500 company, which generated $7.1 billion in global sales during its most recent fiscal year, is pushing for legislation that would allow the millions in corporate income tax credits it already receives in Florida to be applied to its sales tax liability. This would save the company as much as $5 million.

Fortunately, the tax legislation has stalled as its key sponsor, Republican State Representative Chris Dorworth, read the ‘revelation’ in the Orlando Sentinel that his own tax break legislation would only apply to Darden Restaurants. He then decided he could not support his own legislation as written.  

Meanwhile, San-Franciso-based Twitter has played tax break hardball with city officials for months, threatening to move to Brisbane if it does not receive substantial tax breaks. Despite facing a tough $350 million deficit and dramatic cuts to health services, the San Francisco Board of Supervisors capitulated to Twitter’s demands this week, passing a $22 million payroll tax break for the company on Tuesday. Roxanne Sanchez, the president of Service Employees International Union Local 1021, opposed the measure, saying, “It’s a taxpayer handout to a $10 billion company at a time we’re cutting basic city services.”

As today’s Times article reminds us, corporate tax breaks all too often create benefits for one jurisdiction at the direct expense of another, with no net benefit for the US economy overall. And tax breaks targeted to a specific company set an especially dangerous precedent. As an editorial in the San Francisco Guardian put it, “once you go down the path of caving in to corporate blackmail, it never ends.”

A USA Today op-ed written by CTJ’s Steve Wamhoff argues that we should approach corporate tax reform the way President Reagan did in 1986. He closed enough tax loopholes to raise new revenue from corporations, even while lowering the corporate tax rate.

Read the op-ed

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

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

Anti-tax policymakers seeking an excuse to eviscerate the progressive personal income tax sometimes assert that its alleged volatility makes budgeting harder for state lawmakers, and that this volatility leads directly to the sort of difficult spending and tax decisions lawmakers around the nation are confronting today. A recent article in The Wall Street Journal by the often-sensible Robert Frank adds (possibly inadvertently) fuel to the fire for those seeking to make this “volatility” argument, giving the clear impression that California’s budgetary woes can be laid at the door of that state’s excessive reliance on boom-or-bust capital gains taxes. (No-income-tax states Nevada and Florida can breathe a sigh of relief — presumably, the ongoing bitter budget battles in those states would be even worse if either state levied an income tax of any kind.)

Yet, as a new ITEP report shows, the “income tax volatility” fears reinforced by Frank’s article are misleading in a number of ways. In many states, sales taxes have plummeted as rapidly as income taxes during the recent recession, and academic research suggests that on average, state income taxes are probably not meaningfully more volatile than sales taxes over the long haul. Moreover, the same research shows that progressive income taxes are a far more sustainable and reliable funding source, over the long term, for needed public investments than the other major revenue sources available to states. Finally, the “volatility” argument is usually made in states (like California) in which rainy day funds are either unprotected or inadequately funded to begin with.
 
Read the ITEP report

Earlier this year, Illinois took a major step toward balancing its budget for the upcoming fiscal year by increasing its flat-rate income tax from 3 percent to 5 percent. Even at that time, however, lawmakers were under no illusion that this important step had solved the state’s fiscal woes.  A new report from the Center for Tax and Budget Accountability provides a sobering view of just how big a budgeting challenge Illinois lawmakers still face.  Among the findings of the CTBA report is that even after the recent tax hike, Governor Pat Quinn’s budget proposal for fiscal year 2012 would leave the state with a revenue shortfall of over $1 billion.

This report was released at CTBA’s annual fiscal symposium last week.  The symposium, aptly entitled “$7 Billion in New Revenue: Now What Do We Do?”, included illuminating discussions of a number of spending and tax reform strategies that could help the state deal with its remaining short-term budget deficits, while simultaneously strengthening the state’s long-term fiscal position.  Keynote speaker and Illinois Senate President John Cullerton reiterated his previous public statement that he viewed the state’s costly and regressive income tax exemption for retirement income as a tax break worth examining as part of this process. And a new ITEP report released to coincide with ITEP staff’s participation in this symposium, “Should Illinois Tax Retirement Income?”, confirms Cullerton’s view. The report shows that this one tax break costs Illinois almost $1 billion a year — roughly the size of the state’s remaining fiscal shortfall.

Illinois lawmakers took an important step earlier this year to pay for needed public services in the short run — but it’s important to recognize that this year’s legislative actions to date have done virtually nothing to achieve the structural tax reforms needed to ensure the long-term sustainability of the state’s tax system. ITEP’s report — and Senator Cullerton’s willingness to identify the costliest income tax break in Illinois as fair game — clearly identifies one important strategy for achieving these long-term reforms.

Read the ITEP Report

Read the CTBA Report

A slew of conservative commentators took aim this week at Sarah Palin for her acceptance of a $1.2 million film tax credit that she herself signed into law in Alaska for the production of the TLC reality show “Sarah Palin’s Alaska.”

The Tax Foundation, for example, pointed out in a short blog post that accepting this substantial government subsidy (worth about a third of the production costs) may not square with Palin’s own small-government ideology.

Timothy Carney went further in the conservative Washington Examiner, saying that “Palin’s views on the proper role of government becomes more flexible as it comes closer to her own interests.”

Jim Geraghty, a commentator for the conservative National Review added that there is little doubt that there is a contradiction between supporting government funding for reality shows while at the same time advocating against funding of PBS, NPR, and the National Endowment for the Arts.

For her part, Palin argued in a response posted in full on the conservative Daily Caller that there was no conflict of interest because she had no idea when signing the legislation that she would benefit from it years later. She added that the subsidy does not contradict her small government philosophy because she has apparently always argued that “government can play an appropriate role in incentivizing business,” instead of “bureaucrats burdening businesses and picking winners and losers.”

As the Tax Foundation, the Center on Budget and Policy Priorities, and others have pointed out, however, film tax credits are both a horrible way of “incentivizing business,” and a perfect example of government picking the film industry as a winner, while making most other taxpayers losers by default.

Furthermore, Palin’s decision to enact the film tax credit in the first place shows how out of whack her priorities were as the Governor of Alaska. Perhaps the $1.2 million dollars from the film tax credit she just received could have been better spent restoring the $1.1 million in cuts to emergency programs serving troubled youths that she also made in 2008, for example.

After passing the Arizona House and the Arizona Senate’s tax-writing committee, a sharply regressive flat tax bill died a sudden death this week when its sponsor admitted that he needed to address a number of flaws in the legislation.  Data from ITEP and from the state’s Department of Revenue played a vital role in demonstrating one of those flaws: its extreme unfairness.

Rep. Steve Court’s bill (HB2636) would have broadened Arizona’s income tax base significantly, and used the revenue generated by this change to replace the state’s graduated rate structure with a super-low, 2.13 percent flat tax rate.  Some of the base-broadening measures contained in the bill – like the elimination of itemized deductions – deserve real consideration.  But Rep. Court’s bill also eliminated the standard deduction, the personal exemption, and the low-income family tax credit.  As a result, had the bill passed, Arizona’s income tax would have been left with basically no mechanism in place for ensuring that poor families would not be taxed deeper into poverty.  Moreover, the bill’s attempt to abandon the state’s graduated rate structure in favor of a flat tax would have resulted in exactly the type of regressive impact you’d expect.

Armed with data provided by ITEP, the Arizona Children’s Action Alliance (CAA) played a key role in injecting the fairness issue into the debate.  Late last week, The Arizona Republic ran a story explaining that the bill would raise taxes for the vast majority of Arizona families, while cutting taxes only for those at the top of the income distribution.  The sponsor of the legislation refused to share the Department of Revenue’s full detailed analysis of the bill, so the Republic cited ITEP’s numbers showing that while most families would see tax hikes around $200 per year, those fortunate families with incomes between $152,000 and $354,000 would see their tax bills cut by $900 or more.  Families earning over $354,000 would have seen even larger tax cuts.

Following the release of that article, The Arizona Republic’s editorial board published a piece last Sunday calling the bill “blatantly unfair,” and urging the Senate to reject it.  Other groups, including most notably the real estate lobby, also objected to the bill on the grounds that it would wipe out their favorite tax preferences.  A few days later, the bill’s sponsor declared it dead for this year’s session, though he’s vowed to try again next year.

Lawmakers in almost every state (44 according to the Center on Budget and Policy Priorities) must close significant budget gaps again this year.  Despite these continuing fiscal woes, a variety of costly tax cuts — from reductions in corporate tax rates to new capital gains breaks — have been proposed alongside massive spending cuts in many of these states.

But West Virginia and Arkansas are among the six states not reporting budget gaps this year — a fact which has provided them with somewhat more flexibility to consider reducing taxes. In this context, both Arkansas and West Virginia lawmakers recently enacted reductions in their states’ sales taxes on groceries.  As of July 1, 2011, Arkansas’ sales tax rate on groceries will be lowered from 2 percent to 1.5 percent.  West Virginia’s rate will drop from 3 percent to 2 percent starting January 1, 2012.  These cuts were championed by Governors Beebe and Tomblin as a means to provide immediate assistance to taxpayers (in particular low-income households), and as a way to stimulate their states’ economies. 

But reducing the sales tax on groceries is not the most targeted approach available to state lawmakers looking to support working families.  The poorest 40 percent of taxpayers only receive about 25 percent of the benefit from exempting groceries in most cases. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries.  Increasing Arkansas’s refundable state Earned Income Tax Credit (EITC) or enacting a state EITC in West Virginia would have been a better targeted alternative for ensuring that the tax cuts would reach low- and middle-income working families.  However, when viewed alongside the sharply regressive and completely unaffordable tax cuts being considered in so many other states, Arkansas and West Virginia lawmakers should receive some credit for at least enacting progressive tax cuts that benefit low- and moderate-income households the most as a share of their incomes.