Month: September 2011

This week’s release of Census data showing that a growing number of families are officially poor prompted CTJ to examine claims that too many Americans are paying “no” taxes and calls to raise taxes on low-income families.

Aside from recipients of Social Security benefits (which are largely untaxed), all but the poorest Americans do pay federal income taxes or federal payroll taxes or both. We estimate that in 2010, only 15 percent of non-Social Security taxpayers paid zero dollars or less in combined federal income and payroll taxes.  These families and individuals pay other types of taxes, as this report explains.

Fifty-seven percent of those who paid zero or less in combined federal income and payroll taxes had incomes below $15,000, and 76 percent had incomes below $20,000. This tells us that the vast majority of these taxpayers were quite poor because the average poverty threshold for 2010 was $14,218 for a household of two individuals and $22,314 for a household of four individuals.

Our 3-page report is here.

Minnesota lawmakers balanced the state’s budget earlier this year (after an historic government shutdown) by cutting vital programs, delaying payments to schools and issuing bonds against future tobacco settlement monies.  Of course, they have been boasting that they balanced the budget without raising taxes, but in reality all they did was pass the buck to localities.  Literally.  Their cowardice and unwillingness to consider Governor Dayton’s proposal to ask the wealthiest Minnesotans to pay a little more in income taxes is astounding and is resulting in a new kind of “trickle down” economics that we’re seeing in more and more states. 

This week the Star Tribune reported that in November a record number of  Minnesota school districts – 133 to be precise – will be asking taxpayers to support referendums to help “ward off cuts that have condensed class schedules, provoked higher pay-to-play fees and forced schools to resort to in-school advertising to make ends meet.”  Some school districts are accepting ads on student lockers and in mailings to parents. Other still have invited businesses to parent-teacher conferences to hawk their wares, and many have increased parking fees for students.  All at a time when 40 percent of school aged children in Minnesota are eligible for reduced cost meals because their parents are already facing their own hard times.  

In the St. Cloud area, some local officials are reeling from the impact of the state budget, which reduced the property tax base for some localities and cut local aid.  As St. Cloud Mayor (and former state senator) Dave Kleis put it, “There’s certainly a tendency to shift that burden onto those local communities.”

With the multiple fiscal pressures cities face, state legislators who balance their budgets by cutting local funds are putting short-term political gains over the long term economic health of their citizens.

A recent Kansas City Star editorial, “KC’s taxes especially burdensome for the poor” argues for reforming that city’s tax structure. The article cites Tax Rates and Tax Burdens in the District of Columbia – A Nationwide Comparison put out by the D.C. government. This annual study takes a close look at the major taxes levied by large cities and, by creating hypothetical profiles of different kinds of households, it ranks their impact on individual family types with variations for income, filing status, available deductions, etc.

Kansas City, Missouri doesn’t fare very well in the report. In fact, the city’s tax structure asks low-income residents to pay more than their fair share. Kansas City does have a recently reinvigorated Citizens Commission on Municipal Revenue tasked with improving the city’s “financial problems and [to] ensure continuing city growth.” The findings of the D.C. report should play a large role in informing the Commission and improving the city’s tax structure.

The Kansas City Star should be commended for opining that, “the commission needs to focus on the already high tax burden on Kansas Citians — particularly on low-income residents.”

While Citizens for Tax Justice works largely on federal tax issues, and its partner, the Institute on Taxation and Economic Policy,  focuses on state tax systems, D.C.’s annual report on tax rates and burdens reminds us that there is important work to be done improving the tax structures of cities’ too. 

For detailed profiles of state tax systems – which  are notoriously regressive and take more money, as a percentage of income, from the least well off families compared to the wealthiest – you can look at ITEP’s Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.

Photo via Jimmy Wayne Creative Commons Attribution License 2.0

Estimates provided by the White House show that the payroll tax cuts proposed last night by President Obama would cost $240 billion next year, just shy of the $245 billion cost of the Bush income tax cuts during the same year as estimated by Citizens for Tax Justice.

Republican lawmakers were the original proponents of a payroll tax holiday. But lately many of them have spoken out against it or are reluctant to endorse it because the President supports it. Apparently cost is not the reason for their objection, given their support of the Bush tax cuts.

The payroll tax cuts, which would go into effect in 2012 and which are the largest parts of the jobs plan announced by the President last night, have several components. The payroll tax cuts for workers would cost $175 billion, while the payroll tax cuts for employers would cost $65 billion, for a total of $240 billion.

Economists generally find that the most effective measures to mitigate a recession include programs that directly create jobs (such as Obama’s proposals to hire or retain school teachers and fix schools). Also at the top of the list are direct spending programs by the government on things like unemployment benefits (also included in Obama’s plan), since they go to the very people who are most likely to immediately spend any money or benefits they receive.

But some lawmakers oppose any and all new government spending, creating an obvious political constraint that the President has tried to navigate by proposing payroll tax cuts and other tax breaks that make up over half of the $447 billion cost of his jobs plan.

Payroll Tax Cuts for Workers: $175 Billion

As part of the tax compromise enacted at the end of last year, a one-year payroll tax cut is in effect for 2011, reducing the 6.2 percent Social Security payroll tax paid directly by workers to 4.2 percent. President Obama proposes to extend this break into 2012 and expand it by further reducing the tax paid by workers to 3.1 percent.

As we have explained before, cutting payroll taxes for workers is neither the best nor the worst possible tax measure. A tax credit that is more targeted to low- and middle-income people, like the Making Work Pay Credit, would be more effective because it would target money more towards people who are likely to spend it immediately and thereby give an immediate boost to the economy.

On the other hand, a payroll tax cut for workers is dramatically more targeted to low- and middle-income people than the other types of tax cuts that are usually debated (like the Bush tax cuts).

Payroll Tax Cuts for Employers: $65 Billion

The President’s plan would also reduce the Social Security payroll tax paid by employers to 3.1 percent for the first $5 million in wages paid in 2012. This break would go to all employers. The plan would also eliminate the entire 6.2 percent payroll tax paid by employers for any increase in a firm’s payroll up to $50 million.

Giving all companies a break for the first $5 million in wages is not likely to be effective because it gives employers a tax break regardless of whether or not they increase hiring. Economists have pointed out that many companies are stockpiling cash that they already could use to hire more workers, and a recent survey of business owners reveals that labor costs are nowhere near their main concern. In other words, only increased demand for goods and services can really prompt businesses to hire more workers. 

Some economists do believe that the payroll tax cut for businesses that expand their payroll will be more effective. But there are several reasons to be skeptical about the number of jobs that will be created as a result of this measure. First, most of this tax break will go to companies that would have expanded their payrolls anyway. Second, the payroll expansion in many cases will not mean new hires but could simply take the form of pay raises for existing employees. (This problem would be limited to a degree because the Social Security payroll tax does not apply to wages in excess of $106,800).

What businesses really need are customers. A payroll tax cut or a more targeted tax credit could help somewhat to produce more customers by putting cash in the hands of people who will spend it. But the other parts of the President’s plan, like transportation projects, extending unemployment insurance, modernizing schools, and rehiring teachers will almost certainly provide far more bang for the buck.

On Wednesday night, the GOP presidential candidates gathered at the Reagan Library for a particularly spirited debate in which candidates repeatedly turned back to tax policy. As with past debates, the GOP candidates attempted to rewrite tax history and reinforce their complete intransience on raising revenue, though there were a few glimmers of moderation.

Here are the highlights:

Former Utah Governor Jon Huntsman, in the most striking moment of the debate, called out the other candidates for signing Grover Norquist’s No-Tax Pledge, saying that he would “love to get everybody to sign a pledge to take no pledges,” noting that taking such pledges “jeopardizes your ability to lead.”

Unfortunately, he followed up this statement by pointing to his record of tax cuts in Utah, which Citizens for Tax Justice (CTJ) has called this a case study in bad tax policy. Adding to this, Huntsman’s recently released tax plan is regressive and is best characterized as tax loophole consolidation for the rich. He starts with a simplified tax system recommended by the Bowles Simpson commission, then adds huge loopholes for the rich by eliminating taxes on capital gains and stock dividends.

Texas Governor Rick Perry sought to make a name for himself at his first debate appearance by supporting the radical balanced budget amendment (BBA) promoted by Congressional Republicans, calling it a way to “start getting the snake’s head cut off.” Rather than killing some metaphoric government snake however, it is much more likely that a BBA would tie the hands of lawmakers to react to changing economic conditions and force immediate catastrophic cuts to critical government programs like Social Security, food inspection, and housing. Although Perry is one of the BBA’s most outspoken advocates, all of the GOP presidential candidates have voiced their support for it in principle.

Minnesota Rep. Michele Bachmann rewrote the legacy of Ronald Reagan in claiming that, like the entirely of the Republican field, Reagan would not embrace a deal involving $10 in spending cuts for every $1 increase in tax revenues. Her reasoning is that Reagan’s own 1982 3-to-1 deficit reduction deal failed because the spending cuts did not fully materialize (which is disputed). Bachmann’s logic break downs, however, when you consider that Reagan did not support increasing taxes just this one time, but actually increased taxes 10 more times after the 1982 deal. If anything, the lesson is that Reagan was more willing to compromise, as shown by his willingness to embrace much less lopsided deals than the candidates today reject outright.

Former Massachusetts Governor Mitt Romney did reject the claim that 47% of Americans pay no federal income taxes (a popular conservative talking point) when prompted by the moderator. Instead, Romney rightfully noted that every American feels that they are contributing “through the income tax or through other tax vehicles” and that he does not want “to raise taxes on the American people,” presumably even on those on low end who pay very little. 

Americans are, in fact, justified in feeling they contribute to government, and CTJ has provided estimates showing that all Americans pay taxes. Although Romney signaled his intention to not raise taxes on the poor, his recently released economic plan provides insignificant token relief for lower income Americans and heavily favors tax breaks for the wealthy and corporations.

Former CEO of Godfather’s Pizza Herman Cain was asked a fantastic question by the moderator on whether General Electric’s infamously low tax bill is fair. He answered that “the government needs to get out of the business of trying to figure out who gets a tax break here, who get’s a tax break there.” Though he started off well, Cain then pivoted into promoting his rather ridiculous “9-9-9” plan to replace the entire federal tax system with a 9% national sales tax, 9% income tax, and 9% corporate income tax rate. Needless to say, any plan advocating a national sales tax, a flat tax, and a 75% cut in the corporate income rate would be extremely regressive and almost certainly not raise enough revenue to fund basic government functions.

Former Georgia Rep. Newt Gingrich must not have read Bob McIntyre’s piece debunking the former House Speaker’s claims that he balanced the federal budget. Gingrich claimed during the debate that, as Speaker of the House, he “balanced the budget four straight years.” The problem, of course, is that economic growth and the 1993 repeal of the Reagan tax cuts (which every Republican including Gingrich opposed at the time) were what really led to the balanced budgets.

Former Pennsylvania Sen. Rick Santorum added his name to the long list of supporters of a repatriation amnesty, noting that such a provision is included in his plan to create jobs. In advocating for a repatriation amnesty, Santorum is following the leadership of the Republican Party and Cain, who has been the proposal’s most vocal proponent during the GOP debates.

Texas Rep. Ron Paul took his anti-government and anti-tax beliefs to their logical extreme in defending a letter he wrote during the Reagan administration informing the President that he was leaving the Republican Party. Whereas the rest of the Republican field admires Reagan without reservation, Paul called Reagan’s fiscal record during the 1980’s “a bad scene,” explaining that Reagan taxed and spent too much, leading to massive deficits. Though it’s absurd to claim Reagan taxed too much, Paul is right to point out that Reagan presided over such massive deficits that by the end of his tenure the national debt had tripled.

The Institute on Taxation and Economic Policy (ITEP) offers a series of Policy Briefs designed to provide a quick introduction to basic tax policy ideas that are important to understanding current debates at the state and federal level. This week, ITEP released new and updated Briefs that explore three costly and poorly-targeted state personal income tax giveaways: itemized deductions, capital gains exemptions, and special tax breaks for older adults. The Briefs offer several recommendations for reforming these breaks to achieve fairer and more sustainable state tax systems.

• State Treatment of Itemized Deductions
• State Income Taxes and Older Adults
• The Folly of State Capital Gains Tax Cuts

The St. Louis Post Dispatch gets it all wrong when they title a recent article: “Jobs incentives in peril as special legislative session begins in Missouri.” True, Missouri’s special session started this week and, along with moving the date of the presidential primary and repealing a new law regarding teachers and students on Facebook, taxes are on the table.

But the tax incentives supposed to spur employment and economic development aren’t in any real peril. The state of Missouri seems to be chugging along without these controversial incentives, one of which would cost the state $360 million in an attempt to make the St. Louis airport a hub for freight between China and the Midwest.

No, the state’s property tax credit, designed to specifically help low income renters who are seniors and/or disabled, is the program in real peril. Some in the legislature and now Governor Nixon are proposing to eliminate this credit entirely.  The revenue gain from eliminating the property tax credit for these renters is $57 million, by far the largest cut proposed in the legislation.  

Last year, Nixon’s Missouri Tax Credit Review Commission proposed eliminating the credit, saying the credit “doesn’t really do anything.”  But tell that to a woman who’d been trying to prepare her meals on a camp stove.  Brenda Procter, a University of Missouri extension specialist in personal finance, tells of informing this client she could expect a $600 credit and “she almost crushed me with a hug. She said, Oh, my God, I can buy a stove.”

Yes, this is the program where lawmakers decided to go looking for big revenue savings while simultaneously pursuing dubious tax incentives to make St. Louis some kind of “aerotropolis.”

There is some evidence the sponsor of the repeal bill might be rethinking complete elimination of the credit, however.  Senator Chuck Purgason recently said: “Republicans are always portrayed as taking from the poor and giving to the rich, and we didn’t want to do that.”

Let’s hope Missouri Republicans and the legislature as a whole defy that stereotype and do right by the state’s most vulnerable citizens.

Photo via Missouri News Horizon Creative Commons Attribution License 2.0

Over Labor Day weekend Louisiana shoppers purchasing items like firearms, ammunition, hunting supplies, holsters, certain knives and archery items didn’t pay any sales tax.  Shoppers participating in the “Second Amendment Weekend Sales Tax Holiday” should be aware that holidays like this one don’t make their state’s tax structure any fairer and they cost Louisiana money.

Governor Jindal is a big proponent of the holiday, saying, “This is a great opportunity for all hunters and campers to save money on the equipment they need to enjoy Sportsman’s Paradise. The weekend-long event will also bring more customers to our local hunting and sporting stores which will further benefit our businesses and Louisiana’s economy.”

Second Amendment politics aside, sales tax holidays are ridiculous tax policy. Holidays like this one and those offered during back-to-school time are not at all targeted, and targeting is the key to smart policy.  They do nothing to meaningfully help low and middle-income families struggling to make ends meet because they can’t just shop when the state says so.  Only wealthier consumers can postpone or move up their shopping to take advantage of these holidays. What’s more, the more well-off will likely make their purchase regardless of a tax holiday; saving four percent on the price probably does not change their consumer behavior.

Sales tax holidays falsely lull legislators into thinking they are helping families in a real way, and make too many families think the state is doing them a favor.  Sportsman’s Paradise or not, Louisiana policymakers should implement smart tax policies that offer more than just window dressing.  The Pelican State can start by ending the deduction it gives for every federal income tax dollar its citizens pay: the richer you are the more you benefit and it’s costing the state about $643 million this fiscal year.  With those revenues, lawmakers could target some tax credits in the direction of low- and middle- income Louisianans who pay a larger portion of their incomes (10% on average) than their rich counterparts in state taxes under the current structure.

Our contempt for Grover Norquist’s no-new-taxes pledge is no secret, and it seems that at least one member of Congress is willing to come out and admit he shares the feeling. Nebraska Rep. Jeff Fortenberry signed the no-new-taxes pledge in 2004, but now says he regrets the move.

He says, “A while back, I had notified the organization that I had taken that pledge when I ran for office and upheld that my first term in office but realized that this type of pledge can constrain creative policy thinking, so I asked not to be associated with it any longer.”

Ouch.  Poor Grover!

Responding to Fortenberry’s snub, a spokesperson from Norquist’s group bristled, “One does not promise to be pro-life for two years, or pro-Second Amendment for one year. One is pro-life, pro-Second Amendment or pro-taxpayer as long as one is in office. Or not.”

This pathological inflexibility defines the pledge mentality and hurts our democracy. It’s chilling that even when legislators abandon the pledge after recognizing it for the ideological straightjacket it is, they are never fully released from it.  Isn’t that how cults work?

Completely taking tax increases off the table is no way to govern.  Pledges thwart the important debates and conversations that make our political system work, the current Washington gridlock offering a case in point. Rep. Fortenberry is setting an example for his GOP colleagues, going so far as to say Warren Buffett might even be right about taxing millionaires.  We’ll see if his stance helps open up our debates.

Pledging to spending cuts as the only budget balancing tool is like agreeing to eat a bowl of spaghetti with only a knife; it doesn’t work and it makes you look foolish.

Photos via Steve Rhodes & Republican Conference via Creative Commons Attribution License 2.0