Reforming Tax Breaks Is Not a Substitute for Higher Tax Rates: Both Are Necessary to Raise Adequate Revenue

November 30, 2012 04:35 PM | | Bookmark and Share

The revenue goals set out by President Obama are alarmingly low, but unfortunately most proposals circulating around Washington today would fall far short of them. The $1.6 trillion of revenue that the President proposes to save over the next decade depends on allowing the Bush-era reductions in tax rates to expire for high levels of income and limiting deductions and other breaks. Doing one or the other will not raise enough revenue.

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No Dancing on Grover’s Grave

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A cynic might think it’s a little bit of theater we’re witnessing, political pantomime deliberately staged to make Republicans look like they’ve gone all reasonable and are willing to raise taxes.  Others see this week’s headlines as the meticulously orchestrated end game in a 30-year strategy laid out by Grover Norquist and his Americans for Tax Reform.  More likely it’s just a rush among journalists to tell a big story: Republicans are renouncing their fealty to Grover’s no-tax pledge and are ready to support tax hikes.

The media loves a good story, and this one is the stuff of drama. An awkward little man who rose to power as leader of an anti-government movement faces sudden mutiny, with his followers peeling off and his authority in question. In this story, Grover Norquist is part spurned lover and part emperor with no clothes.

We’re not buying it. Much as we love the idea of Grover losing his clout and credibility, there’s no evidence his followers (mostly Republicans, a few Democrats) have changed their minds about taxes. Even when they make noises about abandoning the pledge and embracing new revenues, they are nonetheless hewing to Norquist’s two-part pledge. Just listen to a few who’ve been making news with their allegedly new-found freedom:

Senator Bob Corker:I’m not obligated on the pledge.  I made Tennesseans aware, I was just elected, the only thing I’m honoring is the oath I take when I serve, when I’m sworn in this January.” But, “[my] proposal includes pro-growth federal tax reform, which generates more static revenue… by capping federal deductions at $50,000 without raising tax rates.

Senator Lindsey Graham: “I agree with Grover — we shouldn’t raise rates — but I think Grover is wrong when it comes to we can’t cap deductions and buy down debt…. I will violate the pledge, long story short, for the good of the country, only if Democrats will do entitlement reform.

Senator Saxby Chambliss: “Times have changed significantly, and I care more about my country than I do about a 20-year-old pledge…. If we do it (Norquist’s) way, then we’ll continue in debt.But (he tweeted), “I’m not in favor of tax increases. I’m in favor of significant tax reform 2 lower tax rates & generate additional revenue through job growth.

Rep. John Boehner: “….[R]aising taxes on the so-called top two percent – half of those people are small-business owners that pay their taxes through their personal income tax filing every year. The goal here is to grow the economy and to cut spending.  We’re not going to grow the economy if we raise tax rates on the top two rates.And, “[w]e’re willing to put revenue on the table as long as we’re not raising rates.

Rep. Tom Cole:  “I think we ought to take the 98 percent deal right now. It doesn’t mean I agree with raising the top two. I don’t.And, “I signed that pledge; I’m honored to do it. I don’t think in this case we would be breaking it by making what are temporary tax cuts permanent….I want to make all of them permanent, quite frankly.

None of these Republicans characterized as leading the mutiny against Grover’s no-tax pledge is getting anywhere near raising taxes, in both senses that the pledge mandates.  It is often forgotten that support for making all the Bush tax cuts permanent amounts to another rate cut because by law, those rates are scheduled to all go up on January 1, 2013.  They may cap a deduction here or there, but that will be outweighed by the generous Bush era rate cuts they (and to a large extent, the President) promise for 2013.  And that’s exactly what the pledge they’ve all signed spells out:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and
TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Increasingly, too, the Republican House leadership is demanding revenue cuts. Where are the President’s cuts? What are the Democrats’ plans for entitlement reform? This is what Speaker Boehner is tweeting several times a day. And his lieutenant, Eric Cantor, remains clear his party is opposed to tax rate increases.

An organization like Americans for Tax Reform doesn’t spend  upwards of $24 million in one election cycle if it’s not serious about getting its way, and Grover Norquist is a serious man.  As he told Politico just this week:

“I want pro-taxpayer candidates to survive and thrive….. My goal is to have the Democrats also all take the pledge…. I’m not planning on losing the tax debate we’re having right now, but the tax issue will be more powerful in 2014 and ’16 than today.  It gets more powerful.”

Let’s don’t kid ourselves or help the deep pocketed anti-tax lobbying machine peddle more myths.  It’s a testament to Norquist’s thirty-year effort that four years into an historic economic crisis, a couple of closed loopholes looks like a win for the good guys.  It’s not a win. Let’s view it instead as a chink in the armor, though – and redouble our own efforts.

Image of Norquist courtesy Liberaland.

Republican Rep. Tom Cole Is Right: Obama’s Proposal to Extend Most, But Not All, of the Bush Tax Cuts Is NOT a Tax Increase

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An Oklahoma Congressman who chaired the National Republican Congressional Committee is the first person in Washington to speak clearly about the debate over the looming expiration of tax cuts first enacted under President George W. Bush.

Politico reports that Rep. Tom Cole of Oklahoma has argued to fellow Congressional Republicans that voting for President Obama’s proposal to extend the Bush income tax cuts for income up to $250,000 (up to $200,000 for unmarried taxpayers) is clearly a vote for cutting taxes, not raising them, and therefore does not violate a no-tax-increase pledge promoted by Grover Norquist’s organization and signed by most Republican lawmakers.

In other words, the President’s approach is a tax cut, just not quite as big of a tax cut (particularly for the rich) as the Republican Congressional leadership has advocated so far. This is illustrated in the graph below, which is from CTJ’s recent reports on the competing approaches to these expiring tax cuts.



This issue has been muddled by both Republicans and Democrats in Congress and in the White House. For example, President Obama often refers to his proposal to extend the tax cuts for income up to $250,000 or $200,000 as a way to “raise revenue.”

But Rep. Cole is correct because the Bush tax cuts are temporary tax cuts that are specifically written to expire at a certain date. Any extension of part of those tax cuts is a new tax cut that reduces revenue, and is “scored” by the Joint Committee on Taxation and the Congressional Budget Office as a revenue loss.

President Obama’s approach would extend the Bush income tax cuts entirely for 98 percent of Americans and partially for the richest two percent of Americans. Rep. Cole is reported to argue that Congressional Republicans should settle right now for Obama’s proposal to extend the tax cuts entirely for 98 percent of Americans, before they expire, and debate the tax cuts for the richest two percent at a later date.

CTJ has long argued that President Obama’s proposal would extend far too many of the unaffordable Bush tax cuts, but Congress should enact his proposal for the short-term if it is the least irresponsible option being debated today. On the other hand, if anti-tax lawmakers in Congress refuse to follow Cole’s lead and instead block any tax bill that does not include an extension of all the tax cuts, then President Obama should simply allow all of the tax cuts to expire.

The logic used by most Congressional Republicans (not including Rep. Cole) is that allowing the expiration of a tax cut is the same thing as enacting a tax increase. But this logic is not applied consistently. While the Republican tax bills in the House and Senate would extend all the tax cuts first enacted under President Bush, they would allow the expiration of some expansions of the of the EITC and the Child Tax Credit that were first enacted under President Obama in 2009. That’s why the graph above shows that low- and middle-income groups would get slightly smaller average tax cuts under the approach of GOP Congressional leaders than they would get under Obama’s approach. (The difference is much more dramatic for the particular families affected.)

Somehow, followers of Grover Norquist don’t seem to consider the expiration of a tax cut to be a “tax increase” when only low- and middle-income people are affected. 

Quick Hits in State News: Wisconsin’s Income Gap, the Brownbacks’ Values Gap

Kansas First Lady Mary Brownback has been appointed an unofficial advisor to a task force addressing childhood poverty in the state. The Hays Daily News predicts that this could lead to some uncomfortable conversations between Governor Sam Brownback and his wife, especially regarding the tax package he recently signed into law that raised taxes on low-income families. The editors suggest, “[m]aybe the first lady can ask why the governor and state legislature agreed to an unprecedented reduction in income tax rates while at the same time eliminating various tax credits, such as the food sales tax rebate and breaks for child care and renters.”

Monday was the biggest day ever for online shopping. “Cyber Monday” shoppers spent 30 percent more this year than last. The Illinois Retail Merchants Association and other brick-and-mortar business groups used Monday’s online shopping surge to remind shoppers and policymakers alike that sales taxes should be collected on Internet purchases just as on items purchased in traditional stores: “The tax is supposed to be paid. If someone orders something from an online retailer or a catalog retailer that doesn’t collect the tax, the customer owes the money to the state.”

It appears that the gap between Wisconsin’s rich and poor continues to widen. The bottom two fifths of the state’s residents actually saw their incomes decline while the top fifth – and especially the top one percent – saw theirs climb over the last 25 years. One solution to this problem, identified by the Center on Wisconsin Strategy and the Wisconsin Budget Project, is to reform the state’s regressive tax structure because currently, “state and local taxes in Wisconsin increase income inequality rather than reduce it.”

A recent policy brief from the Washington State Budget and Policy Center identifies eight strategies to rebuilding the state’s economy. One of the goals identified is implementing a “Productive, Equitable Revenue System” through modernizing the tax structure and making it more fair. Washington has the most regressive state tax structure in the country; low income people pay far more of their income in taxes compared to wealthy Washingtonians. If state policymakers want to rebuild their economy, improving their tax structure is a good place to start.

This Holiday, The Tax Justice Team Is Thankful For…

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The collective investments the taxes we all pay allow us to make in our communities, our states and country.  Whether it’s providing public education, clean air and water, well-connected road and public transit systems, safe streets, affordable health care, or income supports for working families, taxes make a difference in all of our lives every day.  Our society is the product of generations of public investments that serve the common good.

That voters in so many states acted with an eye toward the future this November.  Michiganders rejected a constitutional amendment that would have made tax reform all but impossible.  Floridians opted not to strangle further revenue growth with a “TABOR” amendment.  New Hampshirites left the door open to a fairer tax system by not prohibiting any future tax on earned income. Oregonians decided to retain their estate tax and end the practice of giving corporations their taxes back when revenue growth is unexpectedly strong.  And Californians made an investment in their future by enacting a progressive revenue-raising package. And that nationally, we saw something of a watershed when Americans decided that after decades of tax cuts, it’s time to start restoring some revenues.

That the earned income tax credit (EITC) is offered on the federal level, and that many states have followed in the federal government’s footsteps and adopted their own credit. Offering the EITC is an indication that policymakers of all political persuasions realize that Americans who work and pay taxes but still live at or near the poverty level are deserving of tax relief.

And of course, for our supporters and friends across the country – and around the globe – who make our work possible. We wish all of you, our readers, donors, friends and Tweeps, a very happy Thanksgiving!

Taxpayer-Backed Sports Stadiums are a $31 Billion Rip-Off

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We’ve known for a while that government subsidies and tax breaks for sports stadiums are a raw deal for taxpayers. But a new book by Harvard University urban planning professor Judith Grant Long reveals that the costs are worse than we thought. According to Long’s book, Public/Private Partnerships for Major League Sports Facilities, taxpayers spent over $31 billion in tax or direct subsidies for the 121 sport facilities in use in 2010, which is $10 billion more than the cost estimated by the industry itself.

Most of the difference between Long’s and industry calculations is explained by the industry’s failure to fully account for the cost of land, infrastructure, operations, and lost property taxes as part of the cost of stadium construction deals. When all factors are taken into account, cities bore, on average, 78 percent of the cost of the public-private (so-called) partnership stadium construction deals. Long found in some particularly egregious cases, such as Indianapolis’s Lucas Oil Stadium and Paul Brown Stadium in Cincinnati, the public’s share of the cost actually surpassed the entire cost of building the stadium because of these unaccounted for external costs to the city.

What do taxpayers get in return for the billions they have to pay in subsidies? Not all that much, frankly. As the watchdog group Good Jobs First has chronicled, the costs of new stadiums do not pay off in terms of economic growth or job creation. The primary reason for this is that these entertainment venues tend to redirect consumer spending from other activities rather than generating entirely new economic activity. Even if you accept that new stadiums do generate some jobs (rather than just shifting those jobs from other industries), they aren’t any bargain considering that they can cost taxpayers as much as $200,000 per job “created.”

Just this week, the Miami Marlins reinforced every bad stereotype of sports teams acting in bad faith when it traded away its best players – and its National League competitiveness – in order to reduce salary costs. The trades were made in spite of the explicit promise by the team’s owner that he would spend whatever it took to build a power house team as part of a sweetheart deal that will end up costing taxpayers an astounding $2.4 billion.

With the case against subsidizing stadiums with public dollars growing ever stronger, lawmakers need to finally put a stop to this ludicrous form of corporate welfare.

Quick Hits in State News: Election Signals Changes in California, and More

A non-partisan group called “TBD Colorado” spent much of 2012 talking to Coloradans about the state’s long-term problems, and now has some sensible things to say about the state’s tax policies. While light on specifics, TBD urges (PDF) lawmakers to consider raising more revenue for things like education and transportation, and said that the state’s tax base should be broadened “so that it more accurately reflects Colorado’s underlying economy.”

For Colorado lawmakers that want a more specific assessment of what’s wrong with the state’s tax system, the Bell Policy Center’s new infographic: “5 trends that explain why Colorado’s revenue resources are shrinking” provides some additional insights.  The problems facing Colorado are familiar to many states, including exempting sales taxes for services (PDF), the decline of the gas tax and recent federal tax cuts on which the state has piggybacked.

A comprehensive overhaul of Minnesota’s tax and budget system is in the works for 2013. Governor Mark Dayton and other state policymakers are looking at long-term solutions that will set the state’s revenues on a sustainable path now and into the future.  At a public forum this week, Revenue Commissioner Myron Frans said that the Dayton administration is looking for changes that will make the system “fair, simple and support a strong and growing economy.”

A lot of attention has been given this past week to the passage of California’s revenue-raising ballot measure, Proposition 30.  But, the arguably more important election news from the Golden State is that when the dust settled, Democrats ended up with a supermajority in both houses, giving lawmakers the ability to tackle tax policy through the legislative process versus the ballot.  Senate leader Darrell Steinberg intends to make the most of the new makeup and will pursue tax reform in the coming year saying, “when we talk about revenue it ought to be in the context of tax reform, about broadening the base, about lowering rates, about creating a more competitive environment for business, and potentially bringing in more revenue.”

Utah lawmakers are looking at a proposal to double the sales tax applied to the purchase of food. They would couple the sales tax increase with two new refundable credits to offset the impact of the tax increase on low- and moderate-income families: a food credit (PDF) and state Earned Income Tax Credit (EITC) (PDF).  Generally, exempting food from a state’s sales tax base is a poorly targeted and costly policy since it makes the base much narrower, yields less revenue, and gives a large tax break to wealthier taxpayers who can easily afford to pay the sales tax on food.  Refundable credits of the nature being proposed in Utah are a less costly alternative that can be designed to reduce taxes for specific income groups.  

Beltway’s New “Lexus Lanes” a Symbol of Broken Tax Policy

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On Saturday, a stretch of the legendary I-495 Beltway encircling Washington, DC will grow from eight lanes to twelve.  But this modest expansion of the region’s famously inadequate transportation network isn’t designed to benefit everyone.  With so many federal and state lawmakers terrified to raise taxes for the public good, the Beltway’s new “express lanes” will be paid for in a different way—specifically, by the wealthier drivers who can afford to buy their way out of the congested lanes (Kia Lanes, perhaps?), and into these heavily tolled, so-called Lexus Lanes.

AAA Mid-Atlantic initially opposed the new Lexus Lanes, since by definition they only work when the rest of the transportation system is failing.  But an “acceptance of reality … about the sad state of transportation funding” led AAA to eventually change its mind and embrace the lanes on the grounds that they’re better than nothing.

Sad indeed.  The Institute on Taxation and Economic Policy (ITEP) has shown that much of our nation’s transportation funding woes can be traced back to the short-sighted design of federal and state gas taxes, and that there are straightforward ways to fix these glaringly broken taxes.  But raising and reforming the gas tax can be politically difficult, and thus here we are, with Band-Aid fixes like Lexus Lanes instead.

Extending Tax Cuts to Millionaires: Still a Terrible Idea

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President and Lawmakers Should Resist Proposals to Extend Income Tax Cuts for $1 Million of Income

The idea that Democrats and Republicans might “compromise” by extending the Bush income tax cuts for the first $1 million a taxpayer makes is back in the news, and it’s still a terrible idea.

Bill Kristol, editor of the right-ring Weekly Standard, said on Fox News that Congressional Republicans should be willing to give in on taxes, at least when it comes to higher taxes on millionaires. That set off chatter among some political observers and media outlets that perhaps there was a room for a “compromise” with Congressional Democrats, some of whom have called for extending the Bush tax cuts for income up to $1 million, rather than $250,000 for couples and $200,000 for singles as proposed by President Obama.

Here’s why the idea is absurd: Obama’s approach to the Bush tax cuts is already a huge compromise for the many lawmakers who originally opposed the Bush tax cuts. Remember, President Obama’s proposal is to extend 78 percent of the Bush tax cuts (in terms of revenue). His proposal would extend the Bush income tax cuts entirely for 98 percent of Americans and partially for the richest two percent, and would extend much of the Bush estate tax cut so that only 0.3 percent of deaths would result in estate tax liability.

In May, House Minority Leader Nancy Pelosi floated the idea of extending the income tax cuts for up to $1 million of income. CTJ estimated that this would reduce the revenue savings from Obama’s approach to the income tax cuts by 43 percent. (This was later confirmed by the Joint Committee on Taxation.) We also found that people making over $1 million would get half of the additional tax cuts that would result from moving the threshold from $250,000/$200,000 to $1 million.

Married Couples Making $250k to $300k would Lose Just 2% of their Tax Cuts under Obama’s Approach. So Why Should We Extend Even More Tax Cuts?

People have asked us how extending the tax cuts for income up to $1 million could possibly help people who make over $1 million. The answer is that all of these proposals would extend reductions in income tax rates for all the income a taxpayer makes up to whatever threshold is being proposed. Obama’s proposal would extend the income tax cuts for the first $250,000 a married couple makes. That means that a married couple making $300,000 would only pay the higher, pre-Bush tax rates on $50,000 of their income (at most).

Similarly, Pelosi’s proposal (which she subsequently backed away from) would extend the income tax cuts for the first $1 million a family makes. That means that a family making $1.1 million would pay the higher, pre-Bush tax rates on just $100,000 of their income (at most).

Many people, including those who write about these issues and enact tax laws, have failed to appreciate this. Much of the debate has revolved around whether or not people who make $250,000 should be considered “rich” if they live in higher-cost areas. This debate is utterly beside the point because someone making $250,000 would not have to give up any of their tax cuts under Obama’s proposal.

In fact, a CTJ study found that married couples making between $250,000 and $300,000 would lose just 2 percent of their Bush-era income tax cuts under President Obama’s proposal. People making up to half a million dollars would keep most of their tax cuts.

Congresswoman Nita Lowey of Westchester, NY, is one of the Democrats who have made noises about moving the threshold from $250,000 to $1 million. Her comments on the issue reflect this lack of understanding.

Earlier this year, she told the Star Gazette that “If you are making $200,000 and are a fireman and a teacher, you are not feeling too rich with all the property taxes and all your expenses. But when you are making over $1 million, you ought to pay your fair share so we can support basic services in our communities.”

Even if Rep. Lowey’s district is some Bizarro World where fire fighters and teachers make $200,000 a year, they would not lose any portion of the Bush tax cuts under President Obama’s approach. And they certainly are not going to be helped by extending the tax cuts for even higher levels of income.

The Making Work Pay Credit vs. the Payroll Tax Holiday

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Leading up to the election, prominent Democrats like Rep. Chris Van Hollen, ranking member of the House Budget Committee, were pushing to renew the payroll tax holiday in 2013, an idea that seemed all but dead in Congress just weeks earlier. The renewed push for extending the payroll tax holiday came amidst reports that the Obama Administration is considering replacing it with a new version of the Making Work Pay Credit.

The shift in debate toward renewing or replacing the payroll tax holiday is driven by concerns over ending such economically stimulative measures while the economy is still relatively weak. Compounding these concerns, a recent analysis by JPMorgan concluded that the payroll tax holiday’s expiration would reduce consumer spending by $100 billion and would cut the nation’s overall gross domestic product (GDP) by as much as 0.6 percent.

Most economists agree that a policy putting money in the hands of low- and middle-income people is likely to have a greater stimulative impact for each dollar spent than a policy putting money in the hands of high-income people.

From this perspective, the Obama Administration would be right to favor the Making Work Pay Credit; it is much more progressive than the payroll tax holiday, considering that only 27 percent of the holiday’s benefits goes to the bottom 60 percent, compared to 50 percent of the making work pay credit’s benefits. In addition, replacing the payroll tax holiday would also allay concerns from powerful voices, like AARP, that continuing the holiday will endanger the Social Security Trust Fund over the long term by weakening its dedicated funding source.

It still may be difficult to weigh the benefits of short-term stimulus provided by these tax cuts against their long-term impact on the debt. But it’s important to keep in mind that extending the entirety of the Bush tax cuts would cost $322 billion, which is more than two and half times the projected cost of the payroll tax holiday ($121 billion) and more than five and a half times the projected cost of the Making Work Pay Credit.