Month: March 2012

How sad. Here’s one story among many about state officials hoping today’s Mega Millions lottery winner is in their state, because, Wow!, that would be some revenue windfall!  Rhode Island’s budget, for example, is currently $117 million in the red, and the $23 million tax bill on a lotto winner would help pay for some affordable housing.

This is what it’s come to: 43 states now sponsor legalized gambling in the form of a lottery in order to boost revenues and then drool over the prospect of collecting more taxes from the winner.  Each state taxes winnings differently, of course, but any of the 42 states participating in today’s Mega Million game stand to gain some revenues.

This is no way to balance a budget. For one thing, if consumers spend disposable income on lotto tickets, they are forgoing other purchases – purchases that would be subject to a sales tax.  So in the end, lotto may prove to be a revenue wash.

For another thing, it becomes a case of diminishing returns as neighboring states introduce new and better lotto games. Then, states either lose business to another state or hit a ceiling for how many lotto tickets a population can buy. That is, as a revenue source, it’s a short or medium term quick fix but not a long term solution. Kind of like winning the lottery.

And did we mention that gambling is addictive, winning is unlikely and it’s not at all in the public’s interest for a government to actively encourage and promote it?

Real public servants level with their constituents about state budget needs. In states like Maryland, California and Washington, courageous lawmakers are doing the right thing and raising revenues the honest way – with taxes.

Whatever comes of rumors that Governor Haley might face tax fraud charges, a modified income tax cut has passed out of South Carolina’s House Ways and Means Committee. Perhpas due to ITEP’s analysis, which found that the poorest South Carolinians would see their taxes increased under the legislation, it was modified to at least spare the poorest South Carolinians from new taxes.

Check out yesterday’s post from the Wisconsin Budget Project showing that diminishing revenues are a “purple problem” because taxes keep getting cut no matter who’s in power.

The personal income tax has been under threat of repeal for most of this year in Oklahoma, but the Oklahoman reported yesterday that the Chair of the House Taxation and Revenue Committee says it’s unlikely full repeal will come to fruition.  A cut in the top tax rate, however, still appears likely so they’re still buying the economic snake oil.

Here is a commonsense editorial from the Kansas City Star advocating for the taxing internet purchases and the streamlined sales tax agreement.  

This week, Progressive Maryland came out with their compromise plan designed to bridge the gap between the personal income tax increases passed by the state House and Senate.  The plan was analyzed with the help of the Institute on Taxation and Economic Policy (ITEP), and would raise needed revenues while actually reducing the unfairness of the state’s regressive tax system.

Given all the talk lately about the richest one percent and the other 99 percent, it’s surprising that more attention has not been focused on one federal tax that truly does target the richest one percent: the federal estate tax.

A coalition of organizations, including Citizens for Tax Justice, has sent a letter to Congress urging lawmakers to enact Congressman Jim McDermott’s Sensible Estate Tax Act, or, alternatively, to simply allow the estate tax cuts in effect now to expire at the end of this year.

The tax cuts enacted under President Bush included a provision that gradually reduced the estate tax over several years until repealing it entirely in 2010. As part of the “compromise” legislation that President Obama signed to extend the Bush tax cuts for two years, only a very scaled back version of the estate tax was allowed to come back for 2011 and 2012. If Congress does nothing, the estate tax cuts will expire at the end of this year and the pre-Bush estate tax rules will come back into effect.

And that would be just fine with us. Despite common misconceptions that the estate tax affects a lot of Americans, only the value of estates exceeding $1 million ($2 million for married couples) would be subject to the tax, and usually larger amounts can be passed on without tax because of breaks that reduce the tax (like deductions for charitable bequests and special breaks for family businesses and farms).

The other sensible option would be for Congress to enact Congressman McDermott’s bill, which would allow the overall structure of the pre-Bush estate tax rules to come back into effect, but would simplify the rules and make them a little more generous to families who might be affected by the tax. (For example, the McDermott bill would index for inflation the exemptions that keep the estate tax from affecting most of us.)

As the letter to Congress explains, under either approach, the estate tax would affect the richest one percent of Americans, those who have benefited more than anyone else from the public investments that create and sustain a prosperous society.

For more details, see the related press release.

Photo of Congressman Jim McDermott via SEIU Health Creative Commons Attribution License 2.0

Kansas Governor Sam Brownback laid down a legislative marker at the beginning of year, promising to cut and eventually eliminate the state’s personal income tax. Since then, state lawmakers have debated a number of approaches to changing the state’s tax laws that have been, to varying degrees, in line with the Governor’s own deeply flawed plan. The House and Senate each recently passed their own tax plans, and a conference committee began meeting this week in effort to reconcile them into legislation the Governor would sign. 

The Institute on Taxation and Economic Policy (ITEP) has analyzed both plans and finds that both would give gradually larger tax cuts, as a percentage of income, to Kansans higher up the income ladder while actually raising taxes on filers further down.

Each also creates a massive gap in the state’s revenues. The full analysis is here.

On Monday, the Congressional Progressive Caucus (CPC) released its budget proposal, which would allow the expiration of a much larger portion of the Bush tax cuts than would expire under President Obama’s plan.

The CPC budget plan, which Citizens for Tax Justice and other organizations helped prepare, would also

—  end the tax preference for capital gains and stock dividends,

— enact the higher income tax rates for millionaires that were proposed by Congresswoman Jan Schakowsky,

— enact the President’s proposal to limit the value of tax deductions and exclusions to 28 cents for each dollar deducted or excluded,

—  end the rule allowing corporations to “defer” U.S. taxes on their offshore profits,

—  close tax loopholes for oil and gas companies,

—  enact a financial crisis responsibility fee (a bank tax).

These are just some of the reforms included in the CPC budget plan that make sense as tax policy and as ways to address the budget deficit.

Ending the tax preference for capital gains and stock dividends and simply taxing all income at the same rates is key to tax reform. (See a related post.) Ending “deferral” in the corporate income tax is a major reform necessary to end the tax incentives for U.S. corporations to shift jobs and profits overseas.

While President Obama’s budget plan would allow only the top two income tax rates to revert to their pre-Bush levels, the CPC budget would eventually allow some other rates to return to their pre-Bush levels.

There are currently six income tax brackets, and President Obama’s plan would allow the top two rates (the 35 and 33 percent rates) to return to their pre-Bush levels. The CPC budget would go further because it would (eventually) also allow the 28 and 25 percent rates to return to their pre-Bush levels, in 2017 and 2019, respectively.

This is more responsible than President Obama’s approach, which would extend 78 percent of the Bush tax cuts. Despite being more fair and responsible than extending all the Bush tax cuts, Obama’s approach would still manage to give significant tax cuts to the richest one percent and richest five percent.

A budget resolution held out as a “centrist” alternative to the Ryan budget plan is claimed to be based on the recommendations of the President’s fiscal commission (often called the Simpson-Bowles commission, after its co-chairs) but actually maintains the regressive capital gains break that would have been eliminated under the commission’s plan.

A recent report from CTJ finds that ending the tax preference for capital gains would raise more than half a trillion dollars over a decade and that 80 percent of the resulting tax increase would be borne by the richest one percent of taxpayers.

The plan proposed by the Simpson-Bowles commission in 2010 to reduce the budget deficit offered several alternatives to reform the tax code, all of which would eliminate the tax preference for capital gains. There is, in fact, a note under the table on page 29 of the commission’s plan saying each alternative, regardless of rates, “taxes capital gains and dividends as ordinary income.”

In stark contrast, the so-called centrist budget resolution that was introduced Monday specifically calls for “lowering individual and corporate income tax rates across-the-board with the top rate reduced to between 23 and 29 percent unless the top rate must be higher than 29 percent to offset preferential treatment for capital gains.” (Italics added.)

The co-sponsors of this resolution include Reps. Jim Cooper (D-TN) Steve LaTourette (R-OH), Kurt Schrader (D-OR), Charlie Bass (R-NH), Mike Quigley (D-IL) and Tom Reed (R-NY).

Tax Reform Requires Taxing All Income at the Same Rates — as Reagan’s Did

It is virtually impossible for Congress to pass a fundamental tax reform that sweeps away tax loopholes and tax subsidies, and does so in a progressive way, without eliminating the tax subsidy that is most targeted to the rich — the capital gains tax preference.

The last major tax reform, signed into law by President Reagan in 1986, did exactly this, resulting in a personal income tax that applied the same rates to all types of income. This greatly simplified taxes and eliminated the incentive to engage in tax shelters to convert other types of income into capital gains in order to take advantage of lower income tax rates.

Simpson-Bowles Plan Was Poor Policy Even Before House “Centrists” Inserted Capital Gains Tax Preference

Even though it would have ended the capital gains tax preference, the Simpson-Bowles commission’s plan was deeply flawed and unfair for many other reasons. Chief among them, it relied on spending cuts to meet two-thirds of its deficit-reduction goal and relied on new revenue to meet just one third of that goal.

When the Simpson-Bowles plan was made public, CTJ criticized the fact that it would close tax loopholes and tax subsidies but would use most of the resulting revenue savings to reduce tax rates rather than reducing the budget deficit (which was the point of the commission, after all).

Another major problem with the plan is its call for a “territorial” tax system, which the “centrist” House budget resolution echoes. A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from the corporate income tax.

Photo of Barack Obama meeting with Alan Simpsons and Erskine Bowles via White House Creative Commons Attribution License 2.0

On Wednesday, the House Ways and Means Committee approved a bill that House Majority Leader Eric Cantor (R-VA) introduced last week: the “Small Business Tax Cut Act.”  As it stands right now, a lot of truly small businesses would not actually qualify for the deduction it offers, for 20 percent of “small business” income.

Think of a mom-and-pop mail-order business or the local shoe repair shop where you see the owners working hard every day, but no other employees. Because the bill caps the deduction at 50 percent of the wages paid to non-owners, many family businesses won’t qualify because their only employees are family members who are owners.

While the legislation caps the amount of the deduction (at half of non-employee payroll), there is no limitation on the type or amount of income that business can have. So highly profitable operations like Oprah Winfrey’s production company or the Trump Tower Sales & Leasing office would both qualify for the deduction simply because they have fewer than 500 employees on payroll.

Who else would qualify? Professional sports teams (including teams owned by Mitt Romney’s friends) with their multi-million-dollar salaries to non-owner players. So would private equity firms, hedge funds, and other “small businesses” with income in the millions, or even billions, of dollars, along with most of the top law and lobbying firms inside the Beltway and elsewhere.

The bill is currently projected to cost $45.9 billion in its first year – but its benefits are not at all clear. So far it seems that in Rep. Cantor’s dictionary, “small business” is defined as “my rich friends.”

The Tulsa World takes a look at the growing list of reasons to oppose an income tax cut in Oklahoma, including arguments being made by education groups, businesses, retirees, real estate developers and lawmakers themselves.  As the World puts it, basic public services already “haven’t been protected for years and as a result are decimated by recent cutbacks. Protecting them should mean restoring some funding, but that’s not how tax-cutters see things.”

The Maryland House and Senate have each passed budgets containing progressive personal income tax increases that roughly hew to the Governor’s original blueprint.  As the Maryland Budget and Tax Policy Institute points out, the Senate plan raises more revenue from across the board increases, while the House plan raises less and targets the state’s highest-income residents.  The differences between these two plans will be worked out in the days ahead.

This great editorial in the Lincoln Journal-Register (Nebraska) calls the newly formed Open Sky Policy Institute “an informed new voice” in Nebraska’s public policy debates. The editorial also shares some of the Institute’s numbers (compliments of ITEP) making the case that “the number of dollars the tax cut would put into the pockets of higher-income Nebraskans dwarfed the amount that would go to low- and middle-income Nebraskans” under a plan the governor has proposed.

The Tax Policy Center (TPC) recently published figures showing that for the vast majority of taxpayers, Obama’s proposal to extend most of the Bush tax cuts would provide benefits that far exceed the tax increases he proposes. Just 6.5 percent of taxpayers would pay more in taxes in 2013, even by a very broad definition of “tax increase.” However, several news stories cited a separate set of figures published by TPC showing that if you put aside Obama’s proposed extension of most of the Bush tax cuts, 27.3 percent of taxpayers would pay more in 2013 under Obama’s tax proposals. This figure has caused some confusion and is, frankly, misleading.

First, the Bush tax cuts do expire at the end of 2012 under current law, so any extension of those tax cuts are, in fact, new tax cuts that reduce what Americans will pay. (Remember, Congress decided during the Bush years and again in 2010 to temporarily cut taxes, but never decided to permanently cut taxes.)

Second, the tax increases that Obama does propose would be trivial for most taxpayers. The relevant tax increases involve proposals to close tax loopholes for corporations and other businesses. Some middle-income and low-income taxpayers own stocks in corporations or interest in businesses that might be affected, but the effects would be trivial for those who are not rich. So, to take an example, when President Obama proposes to close tax loopholes for oil companies, TPC attributes the resulting tax increase to stockholders, a group than includes some middle-income or even a few low-income people. (It is nonetheless true that most corporate stocks and business assets are owned by high-income people, who would therefore bear most of the tax increase.) 

For example, if you look at TPC’s figures that ignore Obama’s proposed extension of the Bush tax cuts, you see that 26.4 percent of those taxpayers in the middle fifth of the income distribution would get a “tax increase” in 2013 — but the average tax increase for this 26.4 percent is just $70. Note that the average tax change for all taxpayers in the middle fifth of the income distribution would be a tax cut of $40 — and again, this would happen only if one ignores the extension of most of the Bush tax cuts.

For the vast majority of taxpayers, the benefits of Obama’s proposed extension of most of the Bush tax cuts are much larger than any indirect tax increases they would face from closing business tax loopholes. If you look at TPC’s figures that do include Obama’s proposed extension of most of the Bush tax cuts, you see that only 4.2 percent of those taxpayers in the middle fifth of the income distribution would face a tax increase, and the average tax increase for this 4.2 percent is only $76. (These would be people who don’t benefit from the extension of the Bush tax cuts, but do own a small amount of corporate stock.) The average tax change for all taxpayers in the middle fifth of the income distribution would be a tax cut of $1,133.

Two Sources of Confusion: Baselines and Small, Indirect Tax Increases

So the first part of the confusion stems from the fact that TPC publishes figures in two different ways. To use wonky terms, TPC provides one set of figures that compares the effects of Obama’s tax proposals to the “current law baseline,” which means, well, what the current law actually says is going to happen. And current law says the Bush tax cuts expire at the end of 2012. TPC provides a separate set of figures that compare Obama’s tax proposals to a “current policy baseline,” a hypothetical scenario that assumes that all of the Bush tax cuts are made permanent, even though that has never actually happened. (It’s unclear why we should use the term “current policy” to describe proposals that some lawmakers want to enact, but which Congress has not enacted.)

The second part of the confusion stems from the fact that TPC assumes that closing tax loopholes for multinational corporations, oil companies and other businesses will result in indirect tax increases on the owners of these businesses, which, to a very small extent, includes a few moderate-income taxpayers. These indirect tax effects may be real, but most people don’t think that this as a reason to leave in place tax loopholes for major profitable corporations and other businesses.