In North Carolina, An Anti-Tax Gubernatorial Candidate Who Should Know Better

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North Carolina is home to one of the great examples of how economies flourish when government gets involved: the Research Triangle Park. It was developed in the 1950s by a public-private partnership, depended heavily on more than one governor’s leadership and on the proximity of three major research universities (two of which are public), and succeeded in fundraising after it was granted nonprofit status from the state. It was designed with the goal of helping North Carolina transition into the modern economy, and it worked.

But a candidate for governor named Pat McCrory wants to turn the state into a low-tax, low-service loser that could never undertake such a visionary project. While McCrory takes full credit for overseeing Charlotte’s economic boom while he ran that city as its Mayor, if he follows through on his anti-government campaign promises, North Carolina won’t have the resources to usher in the economic boom McCrory says he can deliver statewide.

McCrory has made cutting taxes the centerpiece of his campaign for governor. He has pledged to cut the corporate income tax, the individual income tax and the estate tax if elected. Sadly, yet predictably, this candidate has also refused to release any details about the structure of these proposals, including their bottom-line cost in terms of revenues. What we do know, though, is that he’d have a friendly audience in the state capital, where GOP leaders – who control the legislature – have already proposed the outright elimination of personal and corporate income taxes. 

As the Institute on Taxation and Economic Policy (ITEP) has explained, corporate and personal income taxes are among the few tools state policymakers have for minimizing the stark regressivity of state tax systems, including North Carolina’s. An analysis (PDF) of all state and local taxes paid by Tar Heel State residents shows that the highest earners pay a far smaller portion of their income in taxes than do middle- and low-income families. McCrory’s proposed tax cuts would only exacerbate this gap. Indeed, the candidate has held up Tennessee and Florida as his models for state tax policy—two states that also happen to be among the five most regressive state tax systems in the country.

But McCrory doesn’t talk about tax fairness. Instead, he presents the party line and says tax cuts are a means to support North Carolina’s “economic development brand,” which he claims is diminished by high taxes.

Here are three reasons he is wrong.

One, while the state’s unemployment rate is stubbornly high (9.4 percent), the cause is the state’s dependence on waning manufacturing jobs, not its tax policy. The unemployment rate is just as high across the border in manufacturing-dependent South Carolina despite that state’s lower business and personal income tax rates. Two, as the News & Observer points out, North Carolina is already regarded as being very business-friendly in national surveys of executives and industrial recruiters. And three, as research from ITEP has shown, supply side arguments for cutting taxes to grow the economy simply do not hold up in the face of evidence.

Instead of making the state more enticing to business, McCrory’s race-to-the-bottom strategy on tax policy would threaten the public services that make the state so appealing. North Carolina’s public investments are already suffering from acute budget cuts. The legislature recently dealt a blow to the University of North Carolina system and the community college system, as well as to job recruitment and economic development programs. McCrory’s tax cuts would make additional cuts to such critical public programs all but inevitable, exacerbating the economic slump that is, of course, a nationwide phenomenon.

Any political candidate who’s serious about learning how taxes affect the economy should read ITEP’s Four Tax Ideas for Jobs-Focused Governors.  This short report explains that the way you make taxes support economic growth is not by cutting them, but rather by wisely deploying them as revenues in the public interest.

Cartoon by John Cole, NC Policy Watch

The Folly of Sales Tax Holidays

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This year, 18 states will encourage consumers to buy back-to-school items tax free. These sales tax holidays get lots of promotion and lots of press, but the reality is that sales tax holidays are no kind of deal for most taxpayers. State tax systems are known for the way they demand more from lower income families, and a three-day break barely makes a dent in that.

The reality is that sales tax holidays offer too little relief to the families that need it most. They require that you do your shopping during a brief window of time, which requires a financial flexibility that more affluent families have but those on tight budgets often don’t. On the retailers’ side, some stores have been shown to raise their prices during the tax holiday and others report it’s no net gain for them since they end up selling products they would have sold some other weekend anyway.

Sales tax holidays are political side-shows that might distract taxpayers, but they don’t solve any problems. Responsible lawmakers should instead implement fundamental reforms.  For example, year-round sales tax credits that can be claimed on tax forms offer a stable, reliable and more substantial break for working families. States have multiple options (PDF) for using the tax code to genuinely help families make ends meet.

The Institute on Taxation and Economic Policy has updated its Sales Tax Holiday policy brief to coincide with the back-to-school shopping season. You can read it here.

Quick hits in State News: Arthur Laffer Under Scrutiny, and More

To celebrate the five year anniversary of the first “Rich States, Poor States,” an Arthur Laffer/ALEC publication that ranks states based on how closely their tax and budget policies adhere to conservative economic principles, the Iowa Policy Project put it to the retrospect test and found it lacking.  They write, “The ALEC Outlook Ranking fails to predict economic performance. In fact, the less a state followed ALEC’s prescriptions, the better it did in terms of job growth, and the better it did on change in poverty rate and median income.”

New York just decided to throw even more taxpayer money at filmmakers, despite ample evidence that these giveaways don’t do much for long-term job growth or economic performance.

This Topeka Capital-Journal letter-to-the-editor from a registered Republican laments that the tax plan signed into law by Governor Brownback “will increase Kansas income tax on the poor and reduce taxes predominately for the wealthy.”

On Tuesday, Tennessee Governor Bill Haslam told the House Judiciary Committee that states need to be able to collect sales taxes on internet purchases. He said plainly, “This discussion isn’t about raising taxes or adding new taxes.” Instead it’s about “collecting taxes already owed.” We couldn’t agree more.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

Will Conservative Governors Reject the Deal of a Lifetime?

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According to one of the latest counts, officials in 30 state governments have indicated that their state plans to opt out of the Medicaid expansion that was enacted as part of health care reform, or are at least leaning in that direction. The reason many conservative state officials, like Florida Governor Rick Scott, cite for opting out (putting aside general criticism of the evils of “Obamacare”) is that participating would “strain state budgets.”

In reality, the Medicaid expansion is the deal of a lifetime for state governments. The nonpartisan Congressional Budget Office (CBO) estimates that the federal government will take on nearly 93 percent of the costs of the Medicaid expansion over its first nine years. On average, that means that states will receive over 9 additional Medicaid dollars for every 1 they spend themselves.

While this may already sound like a great deal, many states may end up actually saving money by embracing the Medicaid expansion. An in-depth study by state officials in Arkansas found that it would actually cost the state $3.4 million more to not participate in the Medicaid expansion. Similarly, a study by the Urban Institute found that health care reform overall will save state budgets between $92-129 billion dollars from 2014-2019.

In some cases, the failure of the state government to accept the Medicaid expansion may also have the side effect of putting even more strain on local budgets. Last year in Texas, for example, the decision by the Republican Governor Rick Perry and state legislators to cut Medicaid forced the El Paso County Hospital District to raise property taxes to make up for the increasing costs from nearly uninsured patients. This dynamic explains why many local officials in Texas support the Medicaid expansion, even as Governor Perry is one of its most outspoken critics.  

While many conservative governors are claiming that the Medicaid expansion would cost too much, they are at the same time continuing budget-busting tax breaks for the wealthy. Iowa Republican Governor Terry Branstad for instance has said that the Medicaid expansion would be “unaffordable” and “unsustainable”, even though its estimated cost would be less than 4 percent of the revenue that could be raised by ending the Iowa’s bizarre and regressive deduction for federal income tax payments.

Considering the generous deal that governors are being offered, many commentators believe that most if not all the states will ultimately take the deal, despite the recent election year grandstanding. The CBO is not so sure. On Tuesday, CBO released its latest cost projections of health care reform, which predicts that many states will choose to opt out of the Medicaid expansion resulting in 3 million fewer people insured.

Photo of Gov. Terry Branstad via Iowa Politics Creative Commons Attribution License 2.0

Top GOP Tax-Writer Proposes Fast-Track for Ryan Plan Tax Changes, Giving Millionaires Average Tax Cut of at Least $187,000 in 2014

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On Tuesday, House Republicans released a proposal, H.R. 6169, that would relax some of Congress’s normal procedural rules in order to enact an overhaul of the tax code — so long as the tax overhaul meets the objectives laid out in the House budget plan authored by House Budget Committee Chairman Paul Ryan.

H.R. 6169 was introduced on Tuesday by House Ways and Means Committee Chairman Dave Camp and House Rules Committee Chairman David Dreier and lays out several components that the tax overhaul legislation must have in order to be passed through the easier legislative procedure. All of these components are identical to those laid out in the Ryan Plan

The required components of the tax overhaul, which are also those laid out in the Ryan Plan, include:

  • replacing the personal income tax rates with just two rates, 10 percent and 25 percent (or less)
  • repeal of the Alternative Minimum Tax (AMT)
  • reducing the statutory corporate income tax rate to 25 percent (or less)
  • adoption of a “territorial” tax system (exempting offshore profits of corporations from U.S. taxes)
  • collecting revenue equal to between 18 and 19 percent of GDP

The “findings” section of the bill states that revenue will “rise to 21.2 percent of GDP under current law,” meaning its proposed revenue target of between 18 and 19 percent of GDP is an explicit cut in revenue.

A Huge Tax Break for Millionaires No Matter How It’s Structured

CTJ issued a report in March concluding that Ryan’s proposed changes to the personal income tax would provide taxpayers with income exceeding $1 million in 2014 an income tax cut of at least $187,000 on average

Like Ryan’s plan, the bill introduced by Camp and Dreier does not say which tax loopholes and tax subsidies should be closed to ensure that the tax system still collects revenue equaling between 18 and 19 percent of GDP even after the plan’s steep rate reductions and the repeal of the AMT are in effect.

We estimated that even if those with incomes exceeding $1 million were forced to give up all the tax expenditures Ryan could possibly want to take away from them — all their itemized deductions, tax credits, the exclusion for employer-provided health insurance and the deduction for health insurance for the self-employed — even then the net result for these taxpayers would be an average income tax cut of $187,000 in 2014. That’s because the income tax rate reductions Ryan proposed are so deep that they would far outweigh the loss of all these tax loopholes and tax subsidies.

Increasing Incentives for Corporate Tax Dodging

The CTJ report on the Ryan plan also explains that reducing the statutory corporate income tax to 25 percent would likely lose revenue when we should be raising revenue from corporate tax reform. (CTJ’s major study last year of most of the profitable Fortune 500 corporations found that their effective tax rate, the percentage of profits they actually pay in taxes, was just 18.5 percent, far less than the statutory rate of 35 percent that Ryan and Camp complain about.)

CTJ’s report on the Ryan Plan also explains that a territorial tax system — exempting offshore profits of corporations from U.S. taxes — can only increase the incentives that U.S. corporations already have to disguise their U.S. profits as “foreign” profits through shady transactions that shift their earnings (on paper) into offshore tax havens.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0

CTJ Statement on Passage of Senate Democrats’ Tax Proposal

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Today, a majority of U.S. Senators voted for a proposal that would extend for one year the Bush-era income tax cuts, except for those tax cuts going solely to the richest 2 percent of taxpayers, and would also extend some 2009 provisions that expanded parts of these tax cuts benefiting low-income working families. A minority of Senators voted for a proposal that would extend all the Bush-era income tax cuts, including those solely benefiting the richest 2 percent, but that would allow the 2009 provisions for low-income working families to expire.

The following is a statement from Robert McIntyre, director of Citizens for Tax Justice:

“Both of the tax bills taken up today by the U.S. Senate would extend far too many tax breaks, including tax breaks for those with the highest incomes, and would make future deficit reduction even more difficult. But the bill modeled largely on the President’s tax proposal is certainly the fairer and more responsible of the two.

“Our estimates show that under the Senate Democrats’ bill, which is modeled on President Obama’s proposal to extend most of the expiring tax cuts, people with incomes up to half a million dollars would, on average, continue to enjoy most of the Bush-era income tax cuts they enjoy today. It is ridiculous that a large number of U.S. Senators believe that this bill would not provide sufficient tax breaks to high-income taxpayers, and therefore voted for the Republican bill to extend all the Bush-era income tax cuts.

“The Republican bill that would extend all the Bush-era income tax cuts also would allow the expiration of the 2009 provisions that expanded the Earned Income Tax Credit and the Child Tax Credit that benefit low- and moderate-income working families. The expiration of these 2009 provisions would mean that 13 million families with 26 million children would lose tax breaks, according to our estimates. Virtually all of these families have incomes under $50,000, and in most cases they earn far less.

“A proposal that provides larger tax breaks for the richest 2 percent of taxpayers while allowing the expiration of tax breaks for 26 million children living in low- and moderate income families is the epitome of upside-down priorities. It is unfortunate that the majority party in the House has already lined up behind this coddle-the-rich-at-the-expense-of-tens-of-millions-of-American-children approach.”

The Senate Votes on the Bush Tax Cuts: Reviewing the Numbers

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UPDATED July 26, 2012:
On Wednesday the Senate approved the Democrats’ tax bill, modeled on President Obama’s plan to extend most of the expiring tax cuts, and rejected the Republican alternative. (See CTJ’s statement on the votes.)

The Republican proposal (S.3413) would extend all the Bush-era tax cuts but would allow more recent expansions of tax breaks for low-income families to expire. The Senate Democrats’ bill (S.3412) would implement most of President Obama’s proposal to extend the Bush tax cuts, except for certain provisions benefiting the rich, and to extend the more recent expansions of tax breaks for low-income families.

The Senate Democrats’ proposal would extend most of the Bush income tax cuts, but would allow the expiration of most of those income tax cuts going solely to the richest two percent of taxpayers — married couples making over $250,000 and singles making over $200,000. The Senate Democrats’ proposal would also extend some 2009 provisions that expanded certain parts of the Bush income tax cuts (related to the EITC and Child Tax Credit) that benefit low-income working families, while the Senate Republican proposal would allow these to expire.

A report published by CTJ last month compares how taxpayers in different income groups would be affected by the Congressional Republican approach to the tax cuts and by President Obama’s approach, which the Senate Democrats are generally following. (You can find state-specific versions of this report here.)

Senate Democrats’ Proposal Differs from Obama’s in only One Way that Matters

The Senate Democrats’ bill (S.3412) differs from President Obama’s proposal (which we examined in the reports discussed above) in a few ways, but most of these differences will not matter by the time Congress is finished determining how much we should pay in taxes for 2013.

For example, there are two important pieces of President Obama’s approach that Senate Democrats have left out of their proposal (extending relief from the Alternative Minimum Tax through 2013 and extending some, but not all, of the Bush estate tax cut into 2013), but it’s generally assumed that Congressional Democrats will try to enact these proposals later this year or, if necessary, early next year.

There is one real difference between the President’s approach and the Senate Democrats’ proposal in that the latter would extend part of the income tax cuts for stock dividends for those with incomes above $250,000/$200,000. This CTJ fact sheet explains the difference and demonstrates that it benefits the very rich (those making over $1 million) in a significant way.

Dispelling Myths and Calculating Your Taxes under Different Proposals

CTJ has also provided reports to address some of the most common misconceptions about these tax cuts.

For example, it is often asserted that taxpayers with any amount of income in excess of $250,000 or $200,000 will lose all of their tax cuts under the Democrats’ approach. This CTJ report demonstrates that married couples with incomes between $250,000 and $300,000 would lose just two percent of their income tax cuts under President Obama’s proposal and would lose just 1 percent of their income tax cuts under the Senate Democrats’ proposal.

To take another example, Republicans like to say that their proposal would result in lower taxes and that Democratic proposals would result in higher taxes. This CTJ report finds that 13 million working families would actually get more tax breaks under the Democrats’ proposal because it would extend the 2009 expansions of the EITC and Child Tax Credit, which the Senate Republican proposal would allow to expire.

Finally, for those who want to know how they would personally be affected by the competing approaches to the income tax cuts, CTJ has created an online calculator that will tell you what you’d likely pay in 2013 in federal income taxes under the President’s proposal and under the Congressional Republican proposal.

Tax Provisions Not Included in CTJ Figures

All of this work from CTJ has focused on proposals that extend all or part of the Bush tax cuts, and proposals that expand parts of the Bush tax cuts (like the 2009 provisions related to the EITC and Child Tax Credit). We have not included, in any of our figures, additional provisions in the Democratic and Republican proposals to provide tax breaks for small businesses, or the Senate Democrats’ proposal to extend the American Opportunity Tax Credit, which was first enacted in 2009 and helps families pay for post secondary education.

Photo of Senate Majority Leader Harry Reid via Talk Radio News Services Creative Commons Attribution License 2.0

Report Sounds Alarm Over State Revenue Squeeze

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A new report about the long-term fiscal problems facing the states is making news, and for good reason. While much of the report focuses on spending-side issues that we’ll leave for others to address, one of the main findings of the State Budget Crisis Task Force is that state tax bases are narrow, shrinking, and increasingly inadequate.  That finding is largely spot-on, even if it’s not terribly surprising.  According to the report, the causes of this growing inadequacy are, in no particular order:

  • Sales tax bases are shrinking as consumers spend more on personal services that, unlike tangible products, are not subject to sales taxes.
  • States are often unable to enforce their sales taxes on online shopping—which is on track to account for ten percent of all purchases in the next few years.
  • State corporate income taxes are declining due to a multitude of tax breaks given to business, and sophisticated tax avoidance strategies used by corporations.
  • State gas taxes are being squeezed by rising construction costs and growing vehicle fuel-efficiency, due largely to a structure that has left rates stagnant for decades.

The Institute on Taxation and Economic Policy (ITEP) has an array of policy briefs and reports that elaborate on and confirm these findings, and that offer suggestions for reforming their tax systems.

One area where the Task Force seems to have strayed from its mission, however, was in devoting excessive attention to concerns over tax volatility.  The Task Force’s suggestion for dealing with volatile revenues is a good one (use rainy day funds (PDF) more responsibly).  But it misses the mark by failing to point out that more volatile taxes are often the best (PDF) at addressing the Task Force’s main concern—inadequate long-term revenue growth.

Volatility is an inevitable part of state tax systems that can be managed.  But anemic long-term revenue growth is a much more serious problem that can only be addressed with fundamental tax reforms designed to allow state tax systems to operate effectively in the 21st century economy.

Quick Hits in State News: Decades-Old Tax Breaks Getting a Closer Look, Getting Real about Regressivity, and More

  • Louisiana is preparing to take a much closer look at the $4 billion it spends on special tax breaks each year, as the brand new Revenue Study Commission holds its first meeting this week.  The chairman of the state’s House tax-writing committee admits that “we don’t know” whether Louisiana’s tax breaks are working, even though “some of these things have been on the books for more than 80 years.”  Gov. Jindal may be the biggest obstacle to progress on this issue, as he’s said that eliminating an ineffective tax break is technically a “tax hike” that he would veto.
  • An op-ed in the Orlando Sentinel highlights the problems with Florida’s tax system, and how to fix them: “Our tax structure is inadequate to our needs, poorly matched with today’s economy and unfair to average Floridians and small business owners.”  Writing for the Florida Center for Fiscal and Economic Policy, the author urges closing corporate tax loopholes and other special interest tax breaks to begin addressing these problems.
  • As we’ve pointed out before, most of Indiana gubernatorial candidate John Gregg’s tax ideas so far have been short-sighted and unaffordable.  But Gregg’s newest idea to create a child care tax credit is a good one, as has been recommended (PDF) by the Institute on Taxation and Economic Policy (ITEP).
  • The Anniston Star Editorial Board has a numbers-heavy piece explaining the problems with the state’s tax system.  In a nutshell: “Alabama may be a low-tax state for people and businesses at the upper end of the income scale, but at the lower end, Alabama’s tax system adds to people’s misery.”  ITEP has found that Alabama has one of the ten most regressive state and local tax systems in the country.

Quick Hits in State News: Georgia Businesses Support Tax Hike on Consumers, and More

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In a little over a week, Georgia voters will decide whether to raise local sales taxes to better fund transportation.  The state’s business community supports the effort, but Jay Bookman at the Atlanta Journal-Constitution reminds readers businesses are one reason the state’s transportation spending is 49th in the nation. “In an effort to keep their own tax burdens as low as possible, Georgia business leaders have a long history of preaching that taxes are always destructive, government is always incompetent and untrustworthy and there is no problem that can’t be solved by cutting taxes even lower.”

Ohio Gov. John Kasich isn’t backing down from his plan to cut the state’s income tax, and pay for it with higher taxes on natural gas and oil.  All signs are that he’ll continue to push for that plan after the November election, but House Democratic Leader Armond Budish wants to go a different route, saying that: “Gov. Kasich’s proposal to modestly increase the severance tax on oil and gas companies is a step in the right direction … But we should be protecting local property taxpayers and prioritizing our communities, not passing more tax cuts that disproportionately benefit wealthy Ohioans.”

The Wall Street Journal writes about the trend toward more Republican governors embracing the enforcement of sales taxes on online purchases.  The trend has been so pronounced that Sen. Lamar Alexander (R-TN) says the federal government will enact legislation granting states sales tax enforcement powers “if not this year, then definitely by next year.”

Arizona voters may have a chance to vote on extending the temporary sales tax increase they approved in May 2010.  The Arizona Secretary of State initially blocked the measure from appearing on the ballot for technical reasons, but a Superior Court judge rejected that move, saying that 290,000 voter signatures should not be thrown out because of what amounts to “a photocopy error.”  It remains to be seen whether that decision will be appealed to the state Supreme Court.