Month: June 2011

With the state’s gas tax pegged to the price of gasoline, North Carolina is scheduled to raise its gas tax rate tomorrow (July 1). This increase was entirely predictable, but is understandably controversial. Unfortunately, the debate surrounding what to do in the wake of this increase has been far too narrow, focusing on just two options: capping the maximum tax rate, or doing nothing at all.Read the ITEP Press Release.

Photo via herzogbr Creative Commons Attribution License 2.0

Unfortunately, Rhode Island lawmakers rejected Governor Lincoln Chafee’s balanced and reform-minded approach to closing the state’s budget shortfall for next fiscal year.

Senate members gave final approval to the House’s revised spending plan this week, both chambers choosing significant spending cuts over the governor’s sensible tax package.  Governor Chafee proposed closing half of the budget gap with a $160 million comprehensive sales tax reform package that included adding dozens of services to the state’s sales tax base, lowering the state sales tax rate from seven to six percent, and taxing more than 40 currently exempted goods at a one percent rate.  Chafee also supported mandatory combined reporting which would have helped level the corporate tax playing field for in-state businesses.

Caving to special interests who lined up in April to denounce the Governor’s plan, the final budget only adds five items to the sales tax base including non-prescription drugs and sightseeing tour packages.  Combined with a few other minor tax and fee changes, the final budget raises only $30 million in new revenue and reduces spending by more than $150 million.  According to the Providence Journal, more than half of the budget cuts impact programs for the poor, elderly, disabled and homeless.

Photo via J. Stephen Conn Creative Commons Attribution License 2.0

Revenue Increase the Obvious Answer to Budget Deficits

Some members of Congress are threatening to allow the U.S. to default on its debt obligations — and send financial markets into a tailspin — unless the President agrees to large, sudden cuts in the budget deficit without any increase in tax revenue. But the most recent data reveal that the U.S. is already one of the least taxed countries in the developed world. Only two OECD countries have lower taxes as a share of gross domestic product (GDP) than the United States.

Read the report.

Minnesota state government is on the brink of shutting down.  Despite months of intense negotiations between the state’s Democratic governor, Mark Dayton, and the Republican controlled legislature, neither party seems prepared to budge from their preferred positions on balancing the budget. 

Their positions were staked out in last year’s campaign season and both sides are looking to deliver on their promises.  Governor Dayton wants to address the state’s budget shortfall with a combination of sensible spending reductions and increased taxes on Minnesota’s wealthiest households.  Republican lawmakers aim to block all tax increases and prefer to slash state spending to damaging levels.

An Institute on Taxation and Economic Policy opinion editorial on the budget predicament explains that the legislature’s approach disproportionately burdens Minnesota’s low- and moderate-income working families.  The piece goes on to say that Governor Dayton’s proposed tax increases on the richest two percent of Minnesotans is entirely reasonable.  “Asking the wealthiest to pay more simply means that the state will have more revenue to invest in the public structures and services provided now and over the long term.”

Update: The Government of Minnesota is now shutdown.

New Hampshire joins the majority of states that have patched next fiscal year’s budget gaps with a cuts-only approach.  Democratic Governor John Lynch will allow the budget to go into effect Friday, July 1 without his signature, fearing a veto would only lead to a more austere budget than the one presented to him last week (the Republicans have a veto-proof majority in the House and Senate).

The budget contains a long list of spending reductions including cutting higher education funds in half (which will lead to higher tuition), state worker layoffs, and cuts to agency funds. 

The most nonsensical cut included in the New Hampshire budget is a 10 cent reduction in the state’s cigarette tax (dropping from $1.78 to $1.68) and lower taxes on other tobacco products.  Proponents of this tax change argued that a decrease in taxes on tobacco would lead to greater revenue as smokers from neighboring states would be incentivized to cross the border to purchase cigarettes. 

However, as the New Hampshire Fiscal Policy Institute (NHFPI) points out, this change is likely to reduce tax revenue by at least $14 million and as much as $30 million over the next two years.  Their analysis points to data from the state’s Department of Revenue Administration that shows even an increase in the sale of tobacco products would lead to the lower end estimated revenue loss.  NHFPI also questions whether or not a drop in taxes would lead to greater tobacco sales given that the long-term trend in cigarette sales is down.

Based in part on the flawed logic of the tax cut’s proponents and in part to the rushed process to include this provision in the final budget bill, lawmakers failed to account for any revenue loss from the tax cut.  This means that New Hampshire’s new budget is likely already out of balance before the year starts and more spending cuts are likely to come mid-year.

It’s no secret that once enacted, tax breaks receive far too little scrutiny from state lawmakers.  Consider the debacle in Missouri, for example, where the state accidentally spent $1 billion more on tax credits beyond what lawmakers originally intended, in large part because the state’s budget rules left lawmakers with very few options for properly overseeing those tax breaks.

In an attempt to encourage lawmakers to spend more time discussing the true costs and benefits of tax breaks, Oregon enacted a law in 2009 requiring the vast majority of its tax credits to sunset within two, four, or six years.  Last week, with the first batch of credits scheduled to expire at the end of this year, the Oregon legislature sent Governor Kitzhaber a bill that will scale back the size of the expiring tax breaks by some 75 percent over the next two years – from $40million to $10million.  Similarly, the credits’ six-year, $500million price tag (had the legislature simply extended all the credits) will fall to roughly $136million.

Among the credits reduced by the legislation are the film tax credit, the biomass credit, and the research and development credit.  The much maligned business energy tax credit (BETC) will also be replaced with new and smaller credits designed to encourage conservation and renewable energy.

Unfortunately, there is one troubling addendum to this story.  Just days after passing these tax credit reductions, the legislature also gave approval to a costly new credit based on the federal New Markets Tax Credit (NMTC).  The NMTC is ostensibly designed to encourage business investment in low-income communities, but as our friends at the Oregon Center for Public Policy (OCPP) point out, the credit often flows straight to the pockets of wealthy investors building upscale hotels and condominiums in areas that are hardly impoverished. 

Moreover, the OCPP notes that this credit “will subsidize projects that will occur anyway,” and “despite all the talk about creating jobs, the bill does not attach job standards to receipt of the subsidy.”  Additionally, “nothing in the bill matches the rhetoric that investments will be made in small businesses. The bill has no provision limiting the investments to small businesses.”  On the bright side, there’s still time for Governor Kitzhaber to veto the NMTC, and regardless of whether or not the NMTC becomes law, Oregon’s tax credit spending will be much lower in the years ahead than would otherwise have been the case.

This success is thanks in no small part to the role Oregon’s 2009 sunset law played in pushing these costly tax breaks into the spotlight.

For more information on steps states can take to enhance the level of scrutiny applied to tax breaks, read CTJ’s report, How to Enact (and Maintain) Tax Reform.

Last Friday night (6/24/11), New York Governor Andrew Cuomo signed into law the state’s first ever property tax cap, one of the biggest legislative priorities of his administration. As Citizens for Tax Justice noted even before its final passage, however, the new property cap is one of the most extreme in the nation and widely viewed as ill-advised.

The cap limits annual growth in property tax revenues to 2 percent or the inflation rate, whichever is lower, with comparatively strict limits on exceptions to the cap: chiefly, state pension system increases above 2 percent of payroll. Voters in a given locality could also override the cap by a 60 percent vote.

Considering that property taxes are rising at about 5 percent annually, the cap will force dramatic cuts in local education, medical, and public safety services.

Many advocates argue that the enactment of a similar property tax cap in Massachusetts proves that it will not hurt the quality of education or local services, but the Center on Budget and Policy Priorities has thoroughly debunked this claim, showing how the cap has been disastrous in Massachusetts.

Compounding this, according to the Fiscal Policy Institute (FPI), New York’s cap is actually much worse than the one in Massachusetts considering that it’s 60 percent stricter in terms of reducing revenues, and, is not coupled with significant additional state funding to local governments.

Even if Cuomo’s goal is just to help low and middle income families with relief from rising property taxes, the FPI explains that a much more effective and less costly approach would be to enhance the state’s property tax circuit breaker.

Calling the tax cap “a cap on student achievement, especially for the poorest school districts” Karen Scharff, the Executive Director of Citizen Action New York points out that in reality the property tax cap is just “one more fake Albany quick fix.”

With just a few days left before the end of the fiscal year, Democratic lawmakers who control the legislature released an alternative to Governor Christie’s budget that the good people over at New Jersey Policy Perspective call a “this is what we stand for budget.”

Most notably, the budget reintroduces a tax on millionaires which the governor vetoed last year.  The proposed “millionaires’ tax” would raise around $500 million and help avoid damaging cuts to public education in a way that affects only the very wealthiest taxpayers. The proposed tax — a 10.75 percent marginal rate — would only apply to taxpayers with taxable income above $1 million, or about .2 percent of all households.  

Moreover, this plan would take back only a fraction of the huge federal income tax reductions accruing to these best-off taxpayers as a result of the recent extension of the Bush tax cuts.  According to an Institute on Taxation and Economic Policy analysis, these very same taxpayers are already enjoying an average $72,505 in federal tax savings in 2011.  It is entirely reasonable to ask the less than 1 percent of the state’s wealthiest households to pay more in state income taxes now, particularly as New Jersey continues to struggle with the consequences of the national recession.

Governor Christie wasted no time criticizing the alternative plan and is expected to veto any tax increase just as he did last year.

While the battle over the millionaires’ tax is in the spotlight, another tax change in the Democrats’ proposal is worthy of attention.  The alternative plan would also restore the single most effective anti-poverty tax strategy available to state lawmakers — the Earned Income Tax Credit — to its previous levels. The EITC provides targeted tax cuts to low-income working families, helping low-wage families to stay above the poverty line.

The decision of Governor Christie and the legislature to reduce the EITC from 25 to 20 percent of the federal credit last year directly pushed more families into the increasingly frayed safety net—a shortsighted and counterproductive decision that Democratic lawmakers are smart to propose reversing.

By law, New Jersey must have a budget in place for next fiscal year by the end of the day on Thursday, June 30th.  The alternative budget plan passed out of House and Senate committees on Monday and is expected to be approved in both chambers on Wednesday.  While it is all but certain that Governor Christie will use his line-item veto power to strike out portions of the Democrats’ plan, at this point it is unclear if the Democrats have enough Republican support to overturn the governor’s veto. Also not known is whether the governor’s allies in the legislature can afford to back him on an override vote: with 72 percent of the New Jersey voters supporting a millionaire’s tax, it won’t be easy for legislators to explain or justify their opposition.

The Internal Revenue Service (IRS) recently released new data showing that the number of individuals paying zero US income taxes on an adjusted gross income (AGI) of $200,000 or more almost doubled between 2007 and 2008.

In 2008, the number of returns declaring an AGI of over $200,000 represented about 3.1 percent of the total returns filed to the IRS. Out of these returns, as many as 18,783 had no U.S. income tax liability whatsoever in 2008; that’s nearly double the 10,465 who owed nothing in 2007.

Although this may represent only 0.43 percent of taxpayers reporting an AGI of over $200,000, it is the biggest percentage of non-payers in this category since the IRS began reporting the data in 1977.

The IRS report also revealed that the much publicized top marginal rate of 35 percent exists primarily on paper: according to the data, only 0.007 percent of ALL taxpayers pay an effective tax rate of 35 percent or higher. Put differently, nine times as many high income taxpayers pay zero in taxes than pay an effective, actual 35 percent tax rate.

Much of the explanation for the low effective rates for higher income individuals can be explained by the over $1 trillion in special tax deductions and treatment often referred to as tax expenditures. Examples of expenditures that rich taxpayers exploit would be: special treatment of capital gains, tax-exempt interest and the mortgage interest deduction.

Reducing or eliminating tax expenditures for businesses and investors would not only help reduce the deficit, it would also make the system more fair by reducing the number of higher income taxpayers who are able to avoid paying a substantial part or all of the taxes they owe.

The IRS data proves once again what Citizens for Tax Justice has said all along, our tax system is not as progressive as you think.