Month: June 2012

So the modest fee that the Affordable Health Care Act will impose on people who choose not to have health insurance is a “tax,” according to a majority of Supreme Court justices. Hooray! That characterization made the Act pass constitutional muster even in the opinion of this very conservative Supreme Court.

There’s more good news. It’s a tax that hardly anyone will pay.

That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.

For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.

Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.

For example, a family of four earning $50,000 that buys health insurance will get a government subsidy equal to 60-70 percent of the cost of the premiums.

Because of these large subsidies to buy insurance, it’s estimated that the new “tax” on those who fail to get health insurance will apply to less than 3 percent of all households. So don’t worry. You’re almost certainly not one of them.

Nonsensical Claim of Largest Tax Increase in History

Some opponents of the health care reform law have taken to calling it the largest tax increase in history. The fee for not having health insurance would be, of course, relatively small, raising around $7 billion a year (just 0.03 percent of GDP) and increasing federal revenue by 0.15 percent (one sixth of one percent).

Even if you count all the tax increases in the health law, that still amounts to less than the tax increases President Reagan enacted from 1982 through 1983. When you subtract the tax cuts (the refundable credits to help families obtain health insurance and the tax credits for small businesses) the net effect of the law is to increase taxes by $653 billion over the next decade, which is about 0.3 percent of GDP. By way of comparison, from 1982 through 1983, President Reagan raised taxes by 1.8 percent of GDP. (And of course, there were much larger tax increases in our history, like the tax increase during World War II that equaled 14.8 percent of GDP.)

It’s also important to note that about three-fourths of the tax increases in the health reform law apply to corporations (drug companies, medical device manufacturers, insurance companies) and married couples making over $250,000 and single people making over $200,000.

Health Reform Law Includes a Major Win for Tax Fairness

The tax increase on high-income individuals is particularly important because it reduces the bias in the tax code in favor of investment income and against income from work.

This provision, which was proposed in 2009 by Citizens for Tax Justice, reforms the Hospital Insurance (HI) tax that funds part of Medicare so that it’s more progressive and no longer exempts the income of people who live off their investments. The HI tax will effectively have a top rate of 3.8 percent that applies to both earnings and most investment income, and which only applies to taxpayers with incomes in excess of $250,000/$200,000.

This provision reduces, but does not eliminate, the ability of people who live off their investments to have a lower effective tax rate than people who live on earnings. It’s another reason why the health law is victory for middle-income working Americans.

Photo of Supreme Court via OZ in OH Creative Commons Attribution License 2.0

While Kansas recently repealed its only form of grocery tax relief (a credit for low-income families), West Virginia is moving in the opposite direction.  That state’s sales tax rate on groceries will drop by one percentage point starting on July 1 this year, and be repealed entirely midway through next year.

West Virginia revenue officials aren’t too enamored with any suggestion to increase the state’s already generous property tax breaks for senior citizens.  Using a $300,000 home as an example, the state’s deputy secretary of revenue explained how under today’s rules, a homeowner under 65 would pay $2,334 on that house while a homeowner over age 65 using the credit could pay as little as $764. Moreover, with the state’s eligible senior population expected to grow by 37 percent over the next decade, the cost of any tax breaks for older West Virginians is going to grow dramatically.

After much debate, South Carolina lawmakers appear to have come to an agreement on a regressive tax change that allows “pass-through” business income (which tends to go mainly to wealthy individuals rather than businesses) to be taxed at three percent instead of the five percent currently levied.

After the legislature overrode Governor John Lynch’s veto, New Hampshire became the latest state to adopt neo-vouchers: tax credits for corporations who contribute money to private school scholarship funds which end up diverting taxpayer dollars into corporate coffers.  In his veto message, the Governor wrote: “I believe that any tax credit program enacted by the Legislature must not weaken our public school system in New Hampshire, downshift additional costs on local communities or taxpayers, or allow private companies to determine where public school money will be spent.”

Tax experts asked by the Associated Press couldn’t find anything nice to say about Pennsylvania Governor Tom Corbett’s proposed $1.7 billion tax break for Shell Chemicals – the largest-ever financial incentive offered by the state – for the company to build an oil refinery. David Brunori from George Washington University said, “There’s absolutely nothing good about what the governor is proposing” and a libertarian policy expert pointed out that government shouldn’t be covering the cost of risk for businesses through tax subsidies.

Politifact highlights an increasingly common complication for those who sign Grover Norquist’s “no tax” pledge.  On July 31, Georgia voters will decide on a referendum to increase the sales tax to fund transportation, a measure that’s backed by Republican Governor Nathan Deal.  But having signed Norquist’s no-new-taxes pledge, the Governor is struggling to justify supporting a “new tax” that he believes will benefit his state’s economy.

More evidence that Wisconsin’s tax structure is unfair: two of the state’s billionaires paid no state income taxes in 2010.

Here’s a compelling read by former Congressman Berkley Bedell of Iowa, championing the “ability to pay” principle of taxation that he says accounts for the Great Prosperity period in post-war America.

An investigative series in the Toledo Blade reveals the Ohio Finance Agency isn’t properly overseeing the state’s low-income housing tax credit program.  Many of the beneficiaries of the credits are “large corporations such as banks, insurance companies, and tech firms [that] receive tax breaks even as the low-income rental homes for which they received the credits fall apart.”

Iowa Governor Terry Branstad recently joined with a dozen other Republican governors in calling for Congress to pass a measure that would allow states to require the largest online retailers to collect sales taxes. In pushing for the measure, however, Republican governors are finding that their biggest roadblock is opposition from their own party in Congress, who perceive the measure as being a “tax increase.”

In addition to getting in trouble with their own party, Republican governors are getting pushback from the anti-tax enforcer Grover Norquist, who argues that legislation allowing states to require online retailers to collect sales taxes is a tax increase because consumers will ultimately pay more in taxes. Republican Pennsylvania Governor Tom Corbett’s office defied Norquist, however, correctly arguing (subscription required) that collecting online sales taxes is “just enforcing existing laws” and not adding a new tax.  

The fact is that only retailers can collect sales taxes, but the Supreme Court ruled in the 1992 catalog sales case of Quill v. North Dakota that states can only require remote retailers – which includes online sellers – to collect the tax if they have a so-called physical presence in the state. This has left many states scrambling to cut piecemeal deals with major online retailers (notably Amazon.com) who may not have a physical presence in their state in order to collect at least some of those sales taxes.

The messiness of these deals has made Republican and Democratic governors realize that for practical purposes what is really needed is a federal solution, such as the Main Street Fairness act, to clear a path for states to enforce sales tax collection.

The growth in online shopping is staggering and it is costing states tens of millions a year in lost sales tax revenues.  Asking online retailers to do what brick and mortar stores do and collect sales tax (PDF) is just common sense. This new push by Republican governors to make it happen might just be the thing that makes the Quill ruling history, and brings sales tax law into the 21st Century.

Months after cutting the state income tax for wealthy taxpayers, Idaho’s budget situation isn’t looking good.  The Associated Press reports that “earlier this year it looked like the state had sufficient revenue to provide a $36 million tax cut, as well as give state employees a 2 percent raise” but that surplus has already evaporated. In fact, there was never real consensus about the state’s revenue projections in the first place.

Kansas Governor Sam Brownback admits his radical tax cut package is a “real live experiment.”

The South Carolina House approved a measure to keep the state running if it doesn’t have a budget by July 1 when the new fiscal year begins.  The Senate and House are currently bickering over how to implement a (regressive) tax cut for so-called “small” business owners.

It’s back! New Jersey Assembly Democrats are once again planning to introduce a millionaire’s tax into the budget debate.  Proponents of the tax on the wealthiest New Jerseyans want to use the $800 million in revenue it would raise to boost funding to the state’s current property tax credit program for low and middle-income homeowners and renters.  Governor Chris Christie has already vetoed a millionaire’s tax twice. 

The clever folks at Together NC, a coalition of more than 120 organizations in North Carolina, held a Backwards Budget 5K race this week to “to shine a spotlight on the legislature’s backwards approach to the state budget.” 

California Governor Jerry Brown’s revenue raising initiative (which temporarily raises income taxes on the state’s wealthiest residents and increases the sales tax ¼ cent) has officially qualified for the state’s November ballot. Two additional tax measures will join Brown’s plan on the ballot: a rival income tax measure pushed by a billionaire lawyer to fund education and early childhood programs; and an initiative to increase business income tax revenues by implementing a mandatory single-sales factor (PDF backgrounder) formula.

The Pittsburgh Post-Gazette editorializes in favor of capping Pennsylvania’s “vendor discount,” a program (PDF) that allows retailers to legally pocket a portion of the sales taxes they collect in order to offset the costs associated with collecting the tax.  The Gazette explains that a handful of big companies are taking in over $1 million per year thanks to this “antiquated” giveaway.  Computerized bookkeeping takes the effort out of tax collecting and a cap would only impact the national chain stores who disproportionately benefit from the program.

A new report from the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) explains that an uptick in revenues from modest economic growth is not enough to undo the damage from years of cuts to state governments during the recent economic downturn when revenues were underperforming.  According to NASBO, while state revenues are returning to pre-recession levels, spending is not, largely because lawmakers are being conservative – replenishing rainy day funds, for example – rather than restoring revenues to agencies that have been under-serving citizens for years.

Warnings of structural deficits at the state level predate the Great Recession. (See this PDF from the Center on Budget and Policy Priorities for an excellent overview.) They result from states failing to change their tax systems in a changing world – new kinds of economic activity, shifting demographics and a virtual epidemic of corporate and personal income tax cutting has left states congenitally unable to maintain the revenues they need when they need them.

And right now, with the cost of education and health care (the two biggest chunks of total state spending) growing faster than the economy and taking an ever growing bite out of budgets, states are facing a genuine crisis. In fact, the NGA/NASBO report notes that state spending on Medicaid continues to outpace all other spending and is projected to increase annually by 8.1 percent over the next 10 years.

As NGA Executive Director Dan Crippen explained to the Washington Post, this growth in expenditures without an injection of sufficient revenues means government leaders will have to choose which public services (schools, roads, police, etc.) get adequately funded, and which don’t. Again. And not only state programs: locally provided services that rely on state aid that have already seen devastating cuts in the past few years because of squeezed state budgets will continue to atrophy, too.

If state governments are to continue providing even just the same level of services to their citizens, they must modernize their revenue systems—and soon. As the Institute on Taxation and Economic Policy (ITEP) detailed in a 2011 report, state governments can and should make systemic changes such as expanding the state sales tax base to include services, eliminating tax loopholes (like those for capital gains) and ending corporate tax breaks that allow corporations to dodge taxes with accounting tricks.

States that continue to duck the issue and craft tax policy with short-term tweaks, political games and downright backward fixes will soon find that they are unable to fully fund basic services—even if an economic recovery improves revenues — and will be forced to cut more deeply into basic services, like keeping water clean and the courthouse staffed.

So the real news in this fiscal survey is actually an old story: without serious, substantial and responsible tax reform, revenues cannot keep pace with the needs of modern government.

Image from NGA report charts.

New Analysis Finds GOP Approach to Bush Tax Cuts would Give Richest One Percent of Americans $50,660 Per Year More and Give Poorest 20 Percent $150 Less on Average than Obama’s Approach

Citizens for Tax Justice Compares the Two Approaches to Extending Some or All of the Bush Tax Cuts, Nationally and State-by-State

Washington, DC – Middle-income and low-income Americans would pay somewhat more in taxes under the Congressional Republicans’ approach to extending the Bush tax cuts than they would under President Obama’s approach, while high-income Americans would pay far less under the Republican approach, according to a new analysis from the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice (CTJ).

Under the President’s approach, in 2013, the poorest 20 percent of Americans would receive an average tax cut of $270 while the richest one percent would get an average tax cut of $20,130.  Under the Congressional Republicans’ approach, the poorest 20 percent of Americans would receive an average tax cut of $120 while the richest one percent would receive an average cut of $70,790.

The Bush tax cuts extension outlined by the President would cost one trillion dollars less over 10 years than would making all the Bush tax cuts permanent, as the GOP proposes.

“Both President Obama and Congressional Republicans have proposed to extend far too many of these unaffordable tax cuts,” said Robert S. McIntyre, director of Citizens for Tax Justice.  “But if we have to choose between the Congressional Republicans’ and President Obama’s approach, the President’s proposal is fairer and more responsible.”

The national and state reports are all available at: www.ctj.org/bushtaxcuts2012.php.

The term “Bush tax cuts” refers to income tax cuts and estate tax cuts enacted in 2001 and 2003 and extended several times since then.  In 2009, President Obama expanded some parts of these tax cuts that benefit low income and working families.  In December of 2010, the President and Congress agreed to extend all of these tax cuts through the end of 2012.

Republicans in Congress have indicated that they would extend all of the tax cuts first enacted in 2001 and 2003, but not the 2009 expansions for lower income families. President Obama wants to extend the 2001 and 2003 tax cuts only for the first $250,000 a married couple makes annually, or the first $200,000 a single person makes. Obama also wants to extend the 2009 expansions.

The findings from CTJ and ITEP also show:

• Of the tax cuts going to Americans, under Obama’s approach, three percent would go to the poorest 20 percent of Americans, 9.9 percent would go to the middle 20 percent and 11.4 percent would go to the richest one percent.

• Of the tax cuts going to Americans, under the Congressional Republicans’ approach, one percent would go to the poorest 20 percent of Americans, 7.4 percent would go to the middle 20 percent of Americans and 31.8 percent would go to the richest one percent of Americans.

CTJ and ITEP are also releasing state-specific versions of this report showing the specific distribution of the benefits, and amounts of tax cuts, from each approach in each of the fifty states and the District of Columbia.  All the reports are at www.ctj.org/bushtaxcuts2012.php.

The report also addresses the economic effects of tax cuts versus direct government spending and cites Moody Analytics research concluding that government spending is more stimulative by a factor of five or more than tax cuts.

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 Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation ( www.ctj.org).

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP’s mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (www.itepnet.org).