Month: June 2012

• The Detroit News’ editorial board recently criticized a plan to cut Michigan’s personal income tax rates which, despite its hefty $800 million price tag, managed to pass the state’s House.  The editors called it risky election year pandering.

• Oregon is launching a pilot program to figure out how road and bridge repairs will be funded when cars no longer run on gasoline and drivers no longer pay the gas tax.  One possible solution is a tax directly on miles traveled rather than gallons consumed, but the last time the state tested that out, it “didn’t sit well with the public” because the GPS-like technology made people worry the government would be spying on them.

• Rhode Island Governor Lincoln Chafee signed a state budget that includes a small foray into sales tax base expansion.  Starting July 1, taxi and limo rides and pet grooming services will be subject to the state’s seven percent sales tax rate, as will clothing and shoes costing more than $250.

• The Associated Press offers a smart analysis of tensions within state Republican parties and their impact on a variety of state legislative activities, including tax policy debates. Written by a senior AP reporter in Missouri, it reveals (among other things) that moderate Republicans played a role in thwarting some of the more conservative members’ plans.

New Jersey and Ohio don’t have much in common when it comes to their gambling industries.  New Jersey’s Atlantic City is home to a dozen different casinos, the oldest of which has been in operation for over three decades.  Ohio, on the other hand, only legalized casino gambling in 2009, and its first two casinos opened barely a month ago.

But despite their differing backgrounds, all signs from both states are pointing to the same thing: legalized gambling isn’t the revenue miracle that lawmakers often promise.

In New Jersey, a brand new mega-casino called Revel is already a disappointment.  Even with the opening of Revel’s 2,500 slot machines, 120 table games, 1,800 rooms, and 14 restaurants, Atlantic City’s gambling revenues are down nearly 10 percent overall compared to a year ago.

And the explanation from gambling industry analysts (and anyone else who’s been paying attention)? Market saturation. With casinos popping up across the country, gamblers no longer need to travel to distant gambling destinations, and states that rely on casino revenue are increasingly raising that money from their own residents rather than pulling in the coveted out-of-state dollar.

In Ohio, meanwhile, recent reports indicate that the state’s new casinos will cut deeply into the casino revenues in Indiana, Michigan, Pennsylvania, and West Virginia.  Even so, a recent survey by the Cincinnati Enquirer found little optimism among Ohio’s local governments when it comes to the gambling revenues they expect to collect. “Everybody thinks it’s going to fix the world, and it isn’t … I have a hard time believing we have so many people around there that have this kind of money to throw into casinos,” says one county official. According to another, “This is all a big shell game … We’re not really getting anything. All the new money we’re getting is going to be offset by cuts in [state aid].” And in Ohio, the state cuts to cities and counties continue to mount.

For more on the empty promise of gambling revenue, read this policy brief (PDF) from the Institute on Taxation and Economic Policy (ITEP).

• Last night’s Washington Gubernatorial debate did not answer the call  to shift their focus to the state’s broken revenue system.  Instead, the Republican candidate, Attorney General Rob McKenna said that the Democrats “just keep insisting we need higher taxes.”  Whoever wins, they will have to contend with the fact that Washington State has the most regressive tax structure in the nation.

• Last week we reported on public scrutiny of a $336 million “small business” tax break in North Carolina that is, in fact, going to benefit some of the state’s wealthiest individuals. Yesterday, Senate Republicans – torn between public outrage and affluent constituents – successfully wiggled out from under having to vote on a measure to modify it so it targets truly small businesses, as intended.  

• New Hampshire voters will go to the polls in November to decide whether the state’s lack of a personal income tax should be enshrined in the constitution. In better news, the state’s lawmakers heeded the advice of the New Hampshire Fiscal Policy Institute and defeated a constitutional amendment requiring a supermajority to pass any tax or fee increase.

• Here’s an interesting read on the economic development impact of the arts. A new study contends that not only do the arts make Nebraska (for example) a better place to live, but they also contribute to state and local coffers to the tune of $18 million. For more on the impact of the arts in other states check out the study, Arts & Economic Prosperity IV.

 

School vouchers are always controversial, but a front-page story in the New York Times describes how at least eight states have embarked on a quiet strategy of back-door vouchers which divert taxpayer money through tax rebates to private donors. While two states allow individuals to exploit this tax break, most are structured as corporate tax breaks.  So they are like conventional vouchers, except minus the accountability, and offering a special tax shelter for corporate profits.

You’d think you can’t make this stuff up, but somebody did.  

Sometimes called “neo-vouchers,” (PDF) the system involves corporate tax credits being doled out to businesses that contribute money to private-school scholarship funds. At their worst, they allow profitable corporations to actually make money from these contributions (they also get a write-off for charitable contributions on top of the dollar-for-dollar tax break match), reducing their income taxes by more than they actually contributed to schools.  And of course, this funnels needed public school funds (and those are taxpayer dollars) to private schools that often aren’t even subject to the same educational standards as a state’s public schools.

This trend is especially troubling now because elementary and secondary school funding already faces a perfect storm: the bursting of the home-value bubble is depressing property tax collections nationwide, and the end of stimulus-related federal aid to states has further constrained education funding. And as the Times documents, these tax credits cum vouchers are often poorly designed and subject to little oversight: some states don’t require the private schools receiving these scholarships to administer the same achievement tests as public schools, while others have no mechanism for directing scholarships to needy families. In fact, there is anecdotal evidence that some students benefitting from the scholarships would have attended these private schools anyway—which means their parents are being paid, by other taxpayers in their state, to do what they were planning to do anyway. 

Why, at a time when adequately funding K-12 education has been so difficult for states, are lawmakers in these states so cheerful about directly siphoning tax revenue away from cash-starved public schools through these “neo-vouchers?” Maybe because they think that tax breaks aren’t the same thing as direct government spending? One source tells the Times, “there are private dollars coming from a private individual and going to a private foundation. It drives the N.E.A. completely off the wall because they can’t say this is government funding.”  Another piece similarly argues that “[v]ouchers and tax-credits vary in important ways. Both programs enable students to attend public or private schools of their parents’ choice, but unlike tax-credit scholarships, vouchers are publicly funded, paid for with government appropriations.”

But these statements are both ludicrous.  When a state government provides tax breaks for corporate contributions to private schools, the effect on state budgets is exactly the same as if the government had spent the money directly. It’s “government funding” either way. The critical difference is that tax breaks typically involve less oversight and public debate than dilrect spending, even as they divert public resources away from families still enrolled in underfunded public schools.

Some advocates of these tax giveaways have argued that this approach actually saves money, because the per-pupil cost of educating children in the private schools receiving the scholarships is lower than the per-pupil cost of public schools. Yet as a helpful new analysis from the National Education Policy Center shows, this claim assumes that the credit allows parents to move their children from public schools to private schools—and there is no evidence that it is having that effect.

And on top of all this, neo-vouchers are an actual money-maker for corporations. Remember, the system offers not only dollar-for-dollar state tax credits for contributions, but the ability of corporations to write off charitable contributions on their federal tax forms.  Companies can actually make a profit from these tax giveaways, collecting more in federal and state tax breaks than they actually spent on the contribution! And Florida’s credit, which was expanded by lawmakers earlier this year, is now the single most expensive (PDF) corporate tax credit allowed by the state, at $72 million a year.

So far, despite growing scrutiny of these perverse tax breaks in Georgia (PDF) and other states, lawmakers in New Jersey and North Carolina (details) appear undeterred and are poised to enact similar plans.

Photo of North Carolina Private School Students via  Harris Walker Creative Commons Attribution License 2.0

North Dakota voters hit the polls yesterday and overwhelmingly (76 percent) said No to Measure 2, a proposal to eliminate — and constitutionally ban into perpetuity — their property taxes.

Among those against the measure, the state’s tax commissioner opposed it on the grounds it was fiscally unsustainable, and the state’s League of Cities opposed it for undermining local control over revenues and budgets.

Spearheading the measure was a group called Empower the Taxpayer, ET for short.  Proponents regularly cited North Dakota’s recent energy boom and the surplus of oil revenue it has created as one reason the state could afford to get rid of such a reliable revenue source – which constitutes roughly a quarter of all state revenues.  We note, however, that ET’s director said, “We started this movement before the oil boom…. This isn’t about being flush with oil money.”  

It is true that, thanks in large part to the state’s energy boom, North Dakota was the only state to weather the economic recession without taking a hit to its revenues.  But the oil and gas making the state rich today will run out one day, and banning property taxes would have undoubtedly made North Dakota more vulnerable when that happens, leaving the state unable to fund even the most basic level of services in future “bust” years.  In the end, voters recognized it was unwise to permanently eliminate a relatively stable revenue source in favor of a highly volatile and unsustainable one.

The North Dakota property tax repeal failure is the latest in a line of unsuccessful attempts this year to repeal, reduce or phase out major state taxes.  Its advocates have vowed to fight another day but for now, it goes to show that just as Americans want federal taxes to support government services, they also value strong schools, safe communities, accessible health care, and well maintained roads over tax cuts in the states they call home.

Photo of North Dakota Oil Field via Porchlife Creative Commons Attribution License 2.0

• North Dakotans go to the ballot box today to decide the fate of their state’s property tax.  If it passes, it won’t be good news. Stay tuned.

• It looks like New Jersey Governor Chris Christie has agreed to abandon his tax cut plan (which cut income taxes and favored the wealthy) in support of a Senate alternative (which limits property tax credits to homeowners and renters with incomes under $250,000).  Still, some Senators are saying any tax cut at this time is “insanity” and will attempt to stop the compromise.

• Voodoo economics is alive and well in Tennessee.  Gov. Haslam continues to insist  that the state’s recent phase out of the inheritance tax is actually going to increase tax revenue for the state, citing  research from Arthur Laffer – that has been thoroughly debunked by the Institute on Taxation and Economic Policy (ITEP) and seriously questioned by other researchers.

• ITEP responds to an unusually biased opinion piece and sets the record straight about the Illinois and California tax systems . See ITEP’s letter in the Chicago Tribune.

• Cutting taxes has consequences.  When Ohio’s estate tax expires, local governments will be forced to make up the $6.1 million annual difference.  One local government official said, “Losing the estate tax is basically a police car” for his town.

Political gamesmanship is on full display in the tax policy debates happening in Michigan.  Last Wednesday, the state House passed a tiny, temporary income tax cut that would kick in a month before voters head to the polls in November.  This after paying for a $1.6 billion business tax cut last year with a $1.4 billion individual tax hike which falls most heavily (PDF) on Michigan’s poorest taxpayers.

Do Lansing politicians really think that temporarily cutting the state’s flat tax rate a fraction, from 4.35 to 4.32 percent, is going to make voters forget their recklessness? Here’s how the Associated Press is reporting on the plan:

A few dollars in savings doesn’t make a big difference for Mark Lankin, a machine operator who lives in the Detroit suburb of Ferndale. He said he’d rather see more money go to fixing roads.  “I don’t think a lot of normal people would miss $10 … if that money could go to something more useful,’’ said Lankin, 53, who described himself as politically independent. “If you didn’t have it in your hands, it really wouldn’t matter.’’

The token tax cut was also panned in a Detroit Free Press editorial:

“Some people have more money under their couch cushions than the amount the Legislature intends to give back to Michigan taxpayers this year…. The point is that a $103-million tax cut, which might allow an individual taxpayer to buy an extra can of name-brand soup every other week, is a decent chunk of change when it’s aggregated and put to work for everyone in Michigan.

They’re right. An analysis by the Institute on Taxation and Economic Policy (ITEP) showed that a family of four earning $25,000, for example, would see just three percent of last year’s tax hike offset by this election year stunt.  But if used in a more thoughtful way, that money could do a lot of good, as the Detroit Free Press’ impressive list of alternatives showed.

All this criticism apparently got to House lawmakers, but rather than drop the tax cutting charade, they decided to up the ante.  On Thursday, they proposed a much more expensive proposal that would drop the state’s flat income tax rate to 3.9 percent.  Unlike their previous plan, it certainly can’t be accused of being “token” relief, but that doesn’t make it good policy.  And lest anyone think they were serious policy makers, these legislators even designed the cut to phase in slowly, so they wouldn’t face any tough decisions about what public services to eviscerate in order to pay for it.

ITEP will soon complete a full analysis of this newest plan, but two things are already clear.  First, Michigan can’t afford to pile a personal income tax cut on top of the massive business tax cuts enacted last year unless the corporate income tax is increased.  And second, if lawmakers do insist on providing individual tax relief, there are much fairer and more affordable options for doing so, like boosting the Earned Income Tax Credit (EITC), as recommended by the Michigan League for Human Services.

Massachusetts taxpayers now have a better idea of where $171 million of their tax dollars are going.  Thanks to legislation enacted in 2010, the state’s Department of Revenue just issued its first-ever report identifying recipients of so-called economic development tax credits.  The biggest winner in 2011 was Columbia Pictures, which received $11.6 million Bay State tax dollars for a movie that, ironically, depicts a teacher trying to raise money for his under-funded public school.

Then there’s the fraudulent use of film tax credits, which is a whole other thing!

Revenue to fund bridge repairs is falling short in Oklahoma, so Governor Mary Fallin signed a bill this week that takes money away from education and other general fund services to cover the costs.  The move follows similar actions taken last year in Nebraska, Utah and Wisconsin (and almost in Virginia).  Oklahoma has gone 25 years without raising its gas tax—the state’s traditional source of transportation revenue.  That’s longer than any state except Alaska.

Calling all Kentuckians! Here’s a chance to make your pitch for tax fairness to the Blue Ribbon Tax Commission, which holds public hearings through the summer.

Late in North Carolina’s legislative session last summer, lawmakers quietly passed a $336 million tax cut – one of the largest tax cuts the state has seen in the past decade.  Originally intended to target “small businesses” – defined as those with less than $850,000 in annual revenue – the final legislation removed the cap and exempted the first $50,000 of pass-through income for any size pass-through business. That’s a roughly $3,500 tax break that is now available to law firm partners, doctors, dentists, and in some cases the same lawmakers who passed the legislation.

An article in the Raleigh News and Observer this week finally shone some light on this expensive and ill-targeted tax break, and illustrates the provision’s effect with examples like this:

“…lawyers who are equity partners at Womble Carlyle Sandridge & Rice, the state’s largest law firm, will each receive that tax break for income they earned in North Carolina. The Winston-Salem based firm brought in $279 million in 2011, and generated profits equal to $590,000 per partner, according to The American Lawyer, a trade publication.”

That is, because it’s a structured as a pass-through firm, the partners report its profits and pay its taxes. The proponents of the tax cut argue (as usual) that it will spur private-sector job creation- close to 4,000 jobs over the next two years, according to a study they cite.  But as the article points out, the cost of the tax break is equivalent to 6,400 state employee positions.  You do the math there. As Gary Hancock, a lobbyist interviewed for the article, said:

 “…it makes no sense to provide a tax break – particularly to those who don’t need it – while cutting teachers and other public employees who perform needed services…As a general proposition, tax breaks for the wealthy while we are starving public schools and public services is bad government.”

The News and Observer story was cited in a scathing editorial from the Charlotte Observer which had this to say:

“When many of the people being helped by a tax break end up criticizing it, questioning it or refusing comment on it, something’s badly amiss. N.C. lawmakers in the Republican-dominated General Assembly should take note of this reaction to a tax break they gave to businesses in last year’s legislative session…. At a time when lawmakers are slashing funding for schools, law enforcement and other vital services, a perk for those who don’t need it is misguided and feels callous.”

The Observer editorial characterizes the state’s current tax system as “inadequate, outdated and unfair” and in need of real reform. We concur. And given the enterprising journalism and good policy analysis available, it’s time to get that process started.

If it wanted to, the United States Congress could easily solve the government’s long term fiscal gap by doing what it does best: nothing.

According to a new report from the non-partisan Congressional Budget Office (CBO), the United States federal government debt is projected to peak in 2015 and then drop substantially over the coming decades, all by itself if Congress can just sit on its hands and stop handing out tax breaks to individuals and corporations.

Unfortunately, Republicans are bent on extending all of the Bush tax cuts, which the CBO found earlier this year will add $5.4 trillion to the debt in the next decade alone.

And the Democrats proposals aren’t much better. President Obama’s proposal to extend the tax cuts for the first $250,000 a family makes and the first $200,000 a single person makes would actually result in an extension of 78% of the Bush tax cuts and would cost $3.5 trillion in the next decade. (This is still preferable to House Democratic Leader Nancy Pelosi’s proposal to extend the tax cuts for the first $1 million of income a family makes.)

Congress should, however, increase the budget deficit temporarily if the result will be greater economic growth. But extending the Bush tax cuts would provide very little boost in economic output (compared to proven measures like increased unemployment insurance, food stamps or other types of spending programs).

What Really Would Drive Us Off a Fiscal Cliff

The CBO looked at a few scenarios, including one called the “extend alternative fiscal scenario,” in which Congress extends tax cuts and repeals spending cuts. The result of this one would be the federal debt spiraling out of control, indefinitely. In contrast, CBO’s “baseline scenario,” the scenario in which Congress does nothing, leads to our public debt stabilizing (and slightly falling) after 2015.

Now, there are several people and organizations who’ve made a fetish of reducing the deficit and that focus on spending cuts as the path to a balanced budget. One of the most famous, of course, is Pete Peterson, who runs a foundation, organizes national tours and subsidizes the Committee for a Responsible Federal Budget all in the name of his definition of fiscal responsibility, which means cutting Social Security and Medicare, for starters.  Peterson recently contributed an astonishing $458 million to his own foundation, and hosted a recent Fiscal Summit which featured Bill Clinton, John Boehner, Tim Geithner, Paul Ryan and more journalists than we want to think about.

And indeed, much of the media has accepted this distorted vision of our fiscal situation. Consider  a recent news headline about the same CBO report: “US Risks Fiscal Crisis Without Budget Changes, CBO Says.” The CBO actually said the exact opposite.