Who Loses Which Tax Breaks Under President Obama’s Proposed Limit on Tax Expenditures?

March 29, 2013 01:33 PM | | Bookmark and Share

The Deduction for State and Local Taxes Tops the List of Items Obama Would Limit

Read this report in PDF.

President Obama has proposed to limit the tax savings for wealthy taxpayers from itemized deductions and certain other deductions and exclusions to 28 cents for each dollar deducted or excluded. This proposal would raise more than half a trillion dollars in revenue over the up­coming decade.[1] Despite this large revenue gain, only 2.4 percent of Americans would receive a tax increase under the plan in 2014, and their average tax increase would equal just 1 percent of their income.

The deduction for state and local taxes would make up over a third of the total tax expenditures limited by the proposal. In combination, the deduction for state and local taxes and the deduction for charitable giving would make up more than half of the tax expenditures limited.

The proposal would apply only to taxpayers with adjusted gross income (AGI) above $250,000 for married couples and above $200,000 for singles.

The proposal is a way of limiting tax expenditures for the wealthy. The term “tax expenditures” refers to provisions that are government subsidies provided through the tax code. They have the same effect as direct spending subsidies (because the Treasury ends up with less revenue and some individual or group receives money) but are sometimes less noticed because they’re implemented through the tax code.

Under current law, there are three income tax brackets with rates higher than 28 percent (the 33, 35, and 39.6 percent brackets). People in these tax brackets could therefore lose some tax breaks under the proposal. (Some people with AGI below $250,000/$200,000 could be in the 33 percent tax bracket but would be exempt from the proposal.)[2]

Currently, a high-income person in the 39.6 percent income tax bracket saves almost 40 cents for each dollar of deductions or exclusions. An individual in the 35 percent income tax bracket saves 35 cents for each dollar of deductions or exclusions, and a person in the 33 percent bracket saves 33 cents. The lower tax rates are 28 percent or less. Many middle-income people are in the 15 percent tax bracket and therefore save only 15 cents for each dollar of deductions or exclusions.

This matters because tax deductions and exclusions are types of tax expenditures used by Congress to subsidize certain activities, like giving to charity, borrowing to buy a home, or buying bonds from state and local governments. If Congress provided such subsidies through direct spending, there would likely be a public outcry over the fact that rich people are subsidized at higher rates than low- and middle-income people. But because these subsidies are provided through the tax code, this fact has largely escaped the public’s attention.     

President Obama initially presented his proposal to limit tax expenditures in his first budget plan in 2009, and included it in subsequent budget and deficit-reduction plans each year after that. The original proposal applied only to itemized deductions. The President later expanded the proposal to limit the value of certain “above-the-line” deductions (which can be claimed by taxpayers who do not itemize) like the deduction for health insurance for the self-employed and the deduction for contributions to individual retirement accounts (IRA). [3]

The proposal was also expanded to include certain tax exclusions, like the exclusion for interest on state and local bonds and the exclusion for employer-provided health care. Exclusions provide the same sort of benefit as deductions, the only difference being that they are not counted as part of a taxpayer’s income in the first place (and therefore do not need to be deducted).

Exempting the Charitable Deduction from the Limit Would Reduce the Revenue Impact by 19 Percent

Any proposal to limit tax expenditures gives rise to a debate about which tax expenditures should be subject to such a limit and which should be exempt. For example, some charities have objected to the limit applying to the deduction for charitable giving, on the mistaken view that limiting this deduction would significantly reduce charitable giving.[4]

Excluding a tax expenditure from the proposed limit may reduce the revenue impact of the proposal slightly more than or less than the corresponding percentage in the table on the first page.

For example, while the table on the first page illustrates that the charitable deduction makes up 17 percent of the tax breaks that would be limited under the President’s proposal, exempting the charitable deduction from the limit would actually reduce the revenue impact by 19 percent. While the table on the first page illustrates that the deduction for state and local taxes makes up 37 percent of the total tax breaks limited by the proposal, exempting this deduction from the limit would reduce the revenue impact of the proposal by 34 percent. The reason for these slight differences has to do with interaction between various tax provisions.

Exempting the Charitable Deduction from the Proposed Limit would Largely Turn the Remaining Proposal into a Limit on the Deduction for State and Local Taxes

Some tax-exempt organizations, particularly universities and museums, have expressed fear that the limitation on the charitable deduction will result in less charitable giving. Research suggests this fear is unfounded.[5] But another point that has received little attention is that amending the President’s proposal to “carve out” the charitable deduction would concentrate the effects of the proposal even more on the deduction for state and local taxes — which is the most justifiable of all the tax breaks the President proposes to limit.

The deduction for state and local taxes paid is sometimes seen as a subsidy for state and local governments because it effectively transfers the cost of some state and local taxes away from the residents who directly pay them and onto the federal government. For example, if a state imposes a higher income tax rate on residents who are in the 39.6 percent federal income tax bracket, that means that each dollar of additional state income taxes could reduce federal income taxes on these high-income residents by almost 40 cents. The state government may thus be more willing to enact the tax increase because its high-income residents will really only pay 60 percent of the tax increase, while the federal government will effectively pay the remaining 39.6 percent.

But viewed a different way, the deduction for state and local taxes is not a tax expenditure at all, but instead is a way to define the amount of income a taxpayer has available to pay federal income taxes. State and local taxes are an expense that reduces one’s ability to pay federal income taxes in a way that is generally out of the control of the taxpayer. A taxpayer in a high-tax state has less income to pay federal income taxes than a taxpayer with the same pre-tax income but residing in a low-tax state.

Another argument in favor of the itemized deduction for state and local taxes paid is that the public investments funded by state and local taxes produce benefits for the entire nation. This can be seen as a justification for the deduction for state and local taxes paid because it encourages state and local governments to raise the tax revenue to fund these public investments that the jurisdictions might otherwise not make. 

For example, state and local governments provide roads that, in addition to serving local residents, facilitate interstate commerce. State and local governments also provide education to those who may leave the jurisdiction and boost the skill level of the nation as a whole, boosting the productivity of the national economy. State and local governments may have an incentive to provide less of these public investments than is optimal for the nation because the benefits partly go to those outside the jurisdiction. The deduction for state and local taxes may counter this inclination of state and local governments to under-invest in these areas.


[1] A recent CTJ report explains that the Treasury is likely to estimate that the President’s proposal to limit tax expenditures for the wealthy would raise $583 billion over a decade while the Congressional Joint Committee on Taxation (JCT) is likely to estimate that it will raise $513 billion over a decade. See Citizens for Tax Justice, “Working Paper on Tax Reform Options: End Tax Sheltering of Investment Income and Corporate Profits and Limit Tax Breaks for the Wealthy,” February 4, 2013. http://ctj.org/ctjreports/2013/02/working_paper_on_tax_reform_options.php

[2] Many of the wealthy taxpayers whose deductions and exclusions are targeted by the proposal would also experience a change in their alternative minimum tax (AMT). The AMT is a backstop tax, meaning it forces well-off people who effectively reduce their taxable income with various deductions and exclusions to pay some minimal tax. If a tax change only increases the regular income tax and not the AMT, some taxpayers who currently pay AMT will not be affected at all. Very generally, one of the AMT changes in the proposal essentially ensures that the increase in a taxpayer’s regular income tax would also be applied to the AMT to ensure that the tax increase shows up on the final income tax bill. The other AMT change would limit the savings for each dollar of deductions or exclusions to 28 cents for those whose income is within the “phase-out range” for the exemption that prevents most people from being affected by the AMT. The impacts of these changes are included in the estimates shown here.

[3] The most recent description of the proposal provided by the Obama administration can be found in Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals,” February 2012, page 73. http://www.treasury.gov/resource-center/tax-policy/Pages/general_explanation.aspx 

[4] For example, see Joseph Cordes, “Effects of Limiting Charitable Deductions on Nonprofit Finances,” presentation given February 28, 2013 at the Urban Institute. Cordes finds that the President’s proposal to limit the tax savings of each dollars of deductions and exclusions to just 28 cents would reduce charitable giving by individuals by between 2.1 percent and 4.1 percent, and the actual loss of total charitable giving would be smaller because some charitable contributions are made by foundations, corporations and other entities rather than individuals affected by this proposal.  http://www.urban.org/taxandcharities/upload/cordesv5.pdf  

[5] Id.

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SCOTUS Rulings Could Change Same-Sex Spouses’ Taxes

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This week the Supreme Court heard arguments on two cases looking at the constitutionality of same-sex marriage. Specifically, the cases were about measures that ban recognition of gay marriage by the federal government and the state of California. At the federal level, the Court heard about the Defense of Marriage Act (DOMA), which bans the recognition of a same-sex marriage and entails over 1,100 different laws that consider marriage status when determining an individual’s rights and responsibilities.  And some of those laws determine how much that individual owes in taxes.

The discriminatory effect of the DOMA, which was signed into law in 1996, in tax law is at the center of United States v. Windsor. The original petitioner in the case, Edith Windsor, was forced to pay $363,000 more in federal estate taxes because under DOMA, her same-sex marriage is not recognized for tax purposes and thus is not eligible for the “surviving spouse” estate tax exemption available to heterosexual spouses. If the Supreme Court rules in favor of Windsor and declares DOMA unconstitutional, it would mean that same-sex marriages will be recognized by the federal government for all purposes, including taxes.

While such a ruling would have a relatively small impact in terms of the estate tax since almost no one pays it, there are many other federal tax provisions that do affect most married couples. The New York Times, for example, points to the fact that DOMA prevents same-sex spousal health benefits from being treated as a tax-exempt benefit, therefore increasing the tax bill of individual same-sex couples by a few thousand dollars each year. 

Perhaps the most widespread tax impact would be on same-sex spouses who are not currently allowed to file their federal tax returns jointly. According to an analysis by CNN and tax experts, some same-sex spouses may currently be paying as much as $6,000 in extra taxes each year because of DOMA. While many same-sex spouses could receive a substantial tax benefit from filing jointly, they could also end up paying more in taxes due to the infamous marriage penalty, depending on each spouse’s level of income.

There is also a larger fiscal effect to consider. A 2004 Congressional Budget Office (CBO) report (PDF) estimated that federal recognition of same-sex marriage would actually reduce the deficit by roughly $450 million each year, through a combination of higher revenues and lower outlays. In other words, ruling DOMA unconstitutional would not only end same-sex marriage discrimination in the tax code and other parts of federal law, but would also have the bonus effect of slightly reducing the deficit.

State News Quick Hits: Clergy Oppose Jindal Plan, Chamber of Commerce Supports Fallin Plan, & More

Oklahoma Governor Mary Fallin’s proposal to repeal the state’s top personal income tax bracket is “gaining traction,” according to The Oklahoman.  The plan has already passed the House, and has the support of the state Chamber of Commerce. But the Oklahoma Policy Institute explains that this cut is stacked in favor of high-income residents: “the bottom 60 percent of Oklahomans would receive just 9 percent of the benefit from this tax cut, while the top 5 percent would receive 42 percent of the benefit.”  

Texas and Washington State are continuing to search for ways to make it easier to identify and repeal tax breaks that aren’t worth their cost.  The Texas Austin American-Statesman reports on a bill that “would put the tax code under the microscope, examining tax breaks in a six-year cycle similar to the Sunset process that evaluates whether state agencies are performing as intended.”  And the Washington Budget and Policy Center explains in a blog post how “all three branches of state government have taken, or are poised to take, actions that could greatly enhance transparency over the hundreds of special tax breaks on the books in Washington state.”

This Toledo Blade editorial gets it right about Ohio Governor Kasich’s plan to broaden the sales tax base to include more services: “There is merit, in theory, to expanding the sales tax to include more services. But the experience in states such as Florida — which broadened its tax base, then abandoned the effort as unworkable — suggests it should be done slowly and for the right reasons.” Broadening the sales tax base is good policy, but the Kasich plan is bad for Ohioans because overall the plan (according to an Institute on Taxation and Economic Policy analysis) increases taxes on those who can least afford it while cutting taxes for the wealthy.

ITEP is waiting for full details of Louisiana Governor BobbyJindal’s tax swap plan, but already clergy and ministers in the state are weighing in against the Governor’s plan to eliminate state income taxes and replace the revenue with a broader sales tax base and a higher rate. In this commentary, the Right Rev. Jacob W. Owensby, (bishop of the Episcopal Diocese of Western Louisiana), worries: “It is difficult to see how increased sales taxes will pass the test of fairness that we would all insist upon. Our tax system has lots of room for improvement. But relying on increased sales tax will not give us the fair system we need. Raising sales taxes will increase the burden on those who can least afford it.”

Senate Budget Debate Shows Support for Increased Revenue, Sales Taxes on Internet Purchases, and More

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On Saturday, the Senate approved the budget resolution that was crafted by Budget Chairman Patty Murray of Washington State, by 50 votes. (The resolution would have received 51 votes if New Jersey Senator Frank Lautenberg not been absent due to an illness.)

The most important implication of this vote is that a majority of Senators agreed that Congress should raise $975 billion over a decade and cut spending by the same amount, rather than attempt to achieve deficit-reduction entirely through spending cuts. Indeed,  the Senate rejected several amendments that would have reduced or eliminated the revenue increase.

The description of the plan from Murray’s budget committee staff explains that revenue would be raised by “closing loopholes and cutting wasteful spending in the tax code that benefits the wealthiest Americans and biggest corporations.” But a great deal is left to be determined because, as we explained earlier, this budget resolution offers no details on which loopholes or wasteful tax expenditures might be limited.

Murray Plan in the Senate a Stark Contrast to the Ryan Plan in the House

In any event, the Senate budget resolution is so different from the resolution approved by the House (the plan crafted by House Budget Chairman Paul Ryan) that it’s difficult to imagine how a Senate-House conference committee could ever “reconcile” or “merge” the two documents.  As CTJ has already demonstrated, the Ryan plan would provide millionaires an average net tax cut of at least $200,000, and possibly much more.

Senate Would Give States the Right to Require Online Retailers to Collect Sales Taxes

The Senate approved, by a vote of 75 to 24, an amendment to allow states to require out-of-state remote retailers (like Internet retailers) to collect sales taxes from their customers. This amendment has no binding effect but it shows that there are enough votes in the Senate to pass important legislation (the Marketplace Fairness Act) that would give states this authority.

Currently, a state is allowed to require a retailer to collect sales taxes from its customers only if the retailer is “physically present” in the state. This creates an unfair advantage for a company like Amazon, which is selling its products remotely, over a company like Target, which is physically present (because of its stores) almost everywhere it does business. Even worse, states are losing more and more revenue as more commerce happens online — a trend that can only increase with time.

It’s worth repeating (as CTJ has explained before) that this proposal would not actually increase taxes, but would only facilitate the collection of taxes that are due (but rarely paid) under current law.

Many Other Amendments Have Little Meaning

Votes taken on amendments during the Senate budget debate are generally not binding. Their greatest significance is that they show whether or not enough votes can be gathered to pass a given proposal in the Senate. For example, the vote on allowing states to require remote retailers to collect sales taxes demonstrates that there are more than the 60 votes needed in the Senate to approve that proposal when it comes to the floor as an actual bill.

But other amendments are not as helpful in determining support for actual legislation, and can be best described as posturing with little real meaning.

For example, the Senate rejected a Republican-sponsored amendment to repeal the estate tax, but then approved by 80-19 an amendment sponsored by Democratic Senator Mark Warner “to repeal or reduce the estate tax, but only if done in a fiscally responsible way.”

The Senate’s approval of this amendment does not indicate that an actual bill to reduce or repeal the estate tax would get 60 votes because an actual bill would either have to include specific provisions to offset the costs, or the bill would clearly increase the deficit. There have been votes on such bills in the Senate many times and they have never received the needed 60 votes, much less 80 votes.

To take another example, the Senate voted 79-20 to repeal a tax on medical device manufacturers that was enacted as part of health care reform. This was one of the taxes enacted with the idea that companies that would benefit from health care reform should share in its costs. The budget amendment says that legislation should be passed to repeal the tax “provided that such legislation would not increase the deficit.”

An actual bill to repeal this tax would require some sort of provisions to offset the cost, or it would increase the deficit, and Senators voting in favor would have to be ready to support those offsetting provisions or the increase in the deficit. It’s not obvious that any such bill would get 60 votes.

There are many other examples of amendments that were mostly about posturing, and many would be terrible policy if they were enacted as actual legislation. The estate tax, for example, has been gutted in recent years even though it’s the one tax that addresses concerns about income inequality and the richest one percent pulling away from everyone else. And the medical device tax was part of the intricate compromise that was necessary to enact virtually universal health coverage without increasing the budget deficit. It’s unfortunate that so many Senators feel a need to pander to the special interests who want to repeal these taxes.

Mobile Millionaires and the Search for the Holy Grail Tax Jurisdiction

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Actor John Cleese, most famous for his central role in the British comedy group Monty Python, has decided to move back to Great Britain from Monaco, after concluding that the tax benefits of moving to the tax haven last year were not worth it after all. The actor’s return to Great Britain provides a high profile counterpoint to the false narrative that “high” taxes are driving wealthy people to migrate to low-tax jurisdictions, like Florida in the United States, or like Monaco, Russia or Bermuda for the globe trotting set.

The quest for a lower tax rate has not proven to be as much of a factor for wealthy individuals as anti-tax advocates would have you believe. Several studies confirm this, including a recent academic analysis based on actual tax returns that concludes the effect of tax rates on migration is “negligible” between the different tax jurisdictions in the United States.

What anti-tax advocates ignore is the fact that taxes actually play a very small role in an individual’s decision where to live, especially compared to factors like employment opportunities, family and friends, housing and even weather. In addition, lower taxes may actually discourage migration if they result in lower quality government services (a well-funded Ministry of Silly Walks  maybe especially close to John Cleese’s heart for example). What wealthy person wants to move to a jurisdiction with poor public schools, dirty streets and parks, and inadequate law enforcement?

The real lesson is that non-tax benefits of living in a location usually outweigh higher taxes, even in cases where the individual could save substantial sums of money by moving elsewhere. A recent case in point? The billionaire hedge-fund manager John Paulson’s decision not to move to Puerto Rico, despite the fact that doing so would have allowed him to avoid billions of dollars in capital gains taxes. In other words, Paulson has indicated that he’d just as soon keep paying billions more in taxes for the advantages of living in New York City. Colorful anecdotes and threats aside, the holy grail of tax codes ends up being the one that allows for a quality of life worthy of millionaires – and everybody else.

Business Tax Cuts Crammed Into Final Moments of New Mexico Session

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New Mexico lawmakers recently approved a cut in the corporate income tax rate and special tax breaks for manufacturers and filmmakers. State officials estimate that the bill will eventually cost (PDF) the state about $55 million in lost revenue per year, but they admit that they’re not especially confident in their estimates.  The Santa Fe New Mexican explains how the vote in the House literally came down to the final seconds of the legislative session, and says that House Speaker Kenny Martinez “acknowledged that some [House] members may not have been familiar with [the bill] at all.”

The largest single tax cut contained in the bill is a reduction in the corporate income tax rate from 7.6 to 5.9 percent, phased-in over five years.  The Institute on Taxation and Economic Policy (ITEP), recently found that the corporate income tax is one of New Mexico’s few progressive taxes in a tax system that is sharply regressive overall.  On top of this cut, lawmakers voted to give manufacturers the option to use a tax break known as single sales factor (PDF) that only benefits businesses selling most of their products out-of-state.  The package also expanded tax giveaways for filmmakers that are widely understood to offer little economic benefit.

To pay for a portion of the cost of these cuts, the bill raises sales taxes on manufacturers, cuts aid to local governments (though it lets them raise their own sales taxes), trims some existing tax credits, and limits the tax avoidance opportunities available to some “big box” retailers through the adoption of mandatory “combined reporting” (PDF) for those companies.

Overall, however, the corporate tax rate cut represents a case of misplaced priorities in a state whose tax system is fundamentally unfair and where funding for things like higher education has been slashed in recent years.


ITEP on How Federal Tax Reform Can Affect State and Local Governments

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There’s a lot of talk in the halls of Congress about reforming the federal tax code, but few people think about how that might impact state and local governments and their ability to raise enough revenue to fund the services their residents use on a daily basis.

As the tax-writing committee in the House of Representatives examined this issue on Tuesday, CTJ’s partner organization ITEP submitted written testimony to clear up some little-understood points.

The federal tax system accommodates the taxing authority of state and local governments in a few different ways, which could be altered for better or worse, depending on what Congress does.

The Deductions for State and Local Taxes

For example, the federal personal income tax allows a deduction for taxes one pays to state and local governments. ITEP’s testimony points out that in many ways this is one of the most justified of the federal tax deductions and therefore should not be eliminated. Most deductions are for spending that the taxpayer has control of — like home mortgage interest or charitable giving — but this is not true of state and local taxes. It makes more sense to think of state and local taxes as reducing the amount of income a taxpayer has to pay federal taxes.

Perhaps more importantly, eliminating the deduction would make state and local governments more hesitant to tax the incomes of wealthy residents (who know that the deduction offsets part of those taxes). This tax revenue is badly needed as the U.S. has underinvested in infrastructure, education and other goods that are largely funded with state and local taxes.

State and Local Bonds

Another accommodation made by the federal tax system is its exclusion of state and local bond interest from taxable income. State and local governments can borrow at lower interest rates, because the interest payments they make are not taxable for the bondholders (who are thus willing to accept lower rates than are paid on ordinary bonds).

But, as ITEP’s testimony explains, the current tax subsidy is inefficient because some of the revenue given up by the federal government falls into the hands of very high-income bond-holders rather than the state and local governments that the exclusion is ostensibly supposed to help.

The Obama administration has a proposal that would remedy this by reviving Build America Bonds. These bonds were available for two years under the economic recovery act Obama signed into law in 2009, and are designed differently so that they support state and local government projects without creating a windfall for the wealthy.

Marketplace Fairness Act

Congress has additional opportunities to accommodate state and local governments’ taxing authority. For example, we have written recently that anyone who lives in a state with a sales tax and purchases something online owes sales tax on that purchase. But states and local governments are not allowed to require remote sellers to collect these sales taxes, which they can and do require of retailers who are physically present in the state. The Marketplace Fairness Act (MFA) is a bill in Congress that would fix this.  

The MFA is a common sense bill. It would not even increase taxes but only facilitate the collection of the sales taxes that people already owe but usually fail to pay.

State News Quick Hits: No Tax Break for Girls Scouts, The Virtue of the Gas Tax and More

A story in the Arkansas News show why all citizens should be concerned about the bad design (PDF) of state gasoline taxes. Arkansas’ gas tax hasn’t been raised in over a decade, during which time it has lost about a quarter of its value due to rising construction costs alone. In order to offset those losses, lawmakers are debating a bill that would transfer $2.3 billion away from other areas of the state budget in order to pay for roads and bridges over the next 10 years.  At a rally protesting the idea, Rich Huddleston of Arkansas Advocates for Children and Families ticked off just some of the state services that would have to be cut: “education, higher education, Medicaid and health services for vulnerable populations, services for abused and neglected children, juvenile justice services for kids … public safety and corrections and pre-K and child care for our youngest populations.”

Girl Scouts in Idaho are seeking out a special sales tax loophole for selling their cookies so that they can keep an extra 22 cents on every box sold. There is no tax policy reason to exempt Girl Scout cookies from the sales tax. If enacted, this break would be a true “tax expenditure” — a state spending program grafted onto the tax code (PDF) in a way that exempts it from the normal processes used to manage state spending year in and year out.

Minnesota Governor Mark Dayton is traveling the state on a “Meetings with Mark” tour to discuss his budget and tax plans with voters. Last week the Governor unveiled a revised tax plan, but minus the sales tax base expansion from his original proposal.  Wayne Cox of Minnesota Citizens for Tax Justice supports the new proposal as it retains two crucial pieces of the original – an income tax hikes for wealthy Minnesotans and a cigarette tax hike. “Gov. Mark Dayton’s new budget is a blueprint for fairer taxes and a brighter future for Minnesota families.  His reforms pave the way for new jobs, healthier lives and a better-educated workforce. Education and health experts around the state have praised Gov. Dayton’s reforms. Future economic growth depends on these changes.”

In response to Ohio Governor John Kasich’s regressive proposal to expand the state sales tax base and lower income taxes, Policy Matters Ohio (using ITEP data) released a paper reminding Ohioans how beneficial an Earned Income Tax Credit (PDF) could be to low-income families hit hardest by an increased sales tax.

Here’s a powerful column from the Atlanta Journal Constitution citing ITEP data. Advocating against a state Senator’s proposal to raise the Georgia sales tax and freeze revenues into the future, Jay Bookman writes: [h]e has proposed two amendments to the state constitution that, if approved by voters, would lead to significantly higher taxes on the vast majority of Georgia households, while sharply reducing taxes on the wealthiest. That ought to be controversial under any circumstances. As it is, lower- and middle-income Georgia households already pay a significantly higher percentage of their income in state and local taxes than do the wealthy. The Shafer amendments would make that disparity considerably worse.”

Chart: New Gas Tax Plan in Maryland House of Delegates

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UPDATE: As of March 29, 2013 this plan has passed both the House and Senate and is expected to be signed into law by the Governor.

This week, the Maryland House will vote on a plan to raise and reform the state’s gasoline tax. The plan is very similar to one proposed by Governor Martin O’Malley that our partner organization, the Institute on Taxation and Economic Policy (ITEP), analyzed when it was released two weeks ago.

An updated chart from ITEP shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not raise the gas tax, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years. Only in 1922 and 1923 did Maryland levy a lower gas tax.

Moreover, the gas tax increase under consideration in the House, like the one proposed by the Governor, is actually very modest. The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 12 cent increase by 2015. That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised. Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the House plan is enacted, the inflation-adjusted rate over the next decade would average just 32.8 cents.

What You Should Know about the RATE Coalition’s Quest for a Lower Corporate Tax Rate

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This week, members of Congress will receive a visit from the tax vice presidents of major corporations that have come together in the so-called Reforming America’s Taxes Equitably (RATE) Coalition, a corporate lobbying group pressing lawmakers to reduce the corporate tax rate.

U.S. Corporate Tax Is Actually Lower than What Multinational Corporations Pay Abroad

The first thing you should know about the RATE Coalition is that their rhetoric about the U.S. having a high corporate tax is nonsense. The U.S. statutory corporate income tax rate of 35 percent, which RATE wants to reduce, is not as important as the effective corporate tax rate — the percentage of profits that corporations actually pay in taxes after accounting for all the loopholes and breaks that lower their tax bills.

This is explained in a CTJ report appropriately titled, “The U.S. Has a Low Corporate Tax.” The report also explains that CTJ examined most of the Fortune 500 companies that were consistently profitable from 2008 through 2010 and found that two-thirds of those with significant offshore profits actually paid a higher effective tax rate in the other countries where they did business than they paid in the U.S.

RATE Agrees with CTJ on Closing Tax Loopholes, Disagrees about What To Do with the Savings

The second thing you should know about the RATE Coalition is that they agree with all of the findings of CTJ’s studies documenting corporate tax avoidance due to corporate tax loopholes. They simply disagree with us about what should be done with the revenue savings if Congress ever closes those loopholes.

The RATE Coalition cites CTJ at length in a recent post on its website:

“Because of these reductions [due to corporate tax breaks], the effective tax rate is closer to 18.5 percent on average, according to Washington, D.C. think tank Citizens for Tax Justice (CTJ), making the rate one of the lowest of any developed country…

A 2011 report on 280 corporations conducted by CTJ found that nearly a third paid no federal income tax in at least one of the three previous years, while 30 of those surveyed recouped more federal dollars than they paid in taxes in one of the previous three years…”

The RATE Coalition’s website admits that “corporate tax base-broadeners [provisions to close corporate tax loopholes] should be on the table.” But they seem to believe that all of the revenue saved from such loophole-closing should be given right back to corporations in the form of a reduction of their corporate income tax rate.

Citizens for Tax Justice has explained (in this fact sheet, for example) that most, if not all, of the revenue savings from closing tax loopholes should be used to fund the public investments that build the American economy and the American middle-class.

CTJ is not alone in holding this position. For example, in May of 2011, U.S. Senators and Representatives received a letter from 250 organizations, including organizations in every state, calling on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments. The 250 non-profits, consumer groups, labor unions and faith-based groups called for a corporate tax reform that raises revenue. In December of 2012, over 500 organizations from around the country joined a similar letter that was sent to each member of Congress.

Tax-Dodging Corporations like Boeing Extremely Influential in Washington

Despite polling showing that most Americans want our corporations to pay more in taxes and despite the evidence that these companies are not paying very much now, Congress and the administration are taking seriously proponents of a “revenue-neutral” reform of the corporate income tax.

Lawmakers of both parties and even President Obama have shown an alarming level of deference to these companies.

For example, CTJ’s figures show that Boeing, one of the corporations that is a member of the RATE Coalition, paid nothing in net federal income taxes from 2002 through 2011, despite $32 billion in pre-tax U.S. profits. In fact, Boeing has actually reported more than $2 billion in negative total federal taxes over that period.

Amazingly, this did not stop President Obama from telling a crowd at a Boeing plant in Washington State that revenue saved from closing offshore tax loopholes “should go towards lowering taxes for companies like Boeing that choose to stay and hire here in the United States of America.”

President Obama has also signed onto the overall goal of the RATE Coalition, a “revenue-neutral” reform of the corporate tax, which CTJ has criticized in detail.

It’s hard to know how much longer members of Congress and the President can ignore the opinions of the majority of Americans who want corporations to pay more in taxes. Perhaps as more people feel the effects of the sequester and other service cuts supposedly necessary to balance they budget, the more they’ll demand to know why their elected leaders are allowing so much corporate tax revenue to go uncollected.