Month: May 2013

Some members of Congress are pushing ahead (or at least creating the appearance that they are pushing ahead) with tax reform without addressing the most important issue of the debate: revenue. As we have pointed out before, the $975 billion in tax increases called for in the recent Senate budget resolution would not even raise revenue high enough to fund the level of spending that Ronald Reagan presided over. To discuss addressing the tax code without raising any new revenue at all is simply absurd. 

Lack of Attention to Revenue in House and Senate

In the Ways and Means Committee, the tax-writing committee in the House of Representatives, Republican chairman Dave Camp has made clear that he wants tax reform to be “revenue-neutral,” meaning loopholes and tax expenditures (subsidies provided through the tax code) may be reduced, but the revenue savings would all be used to offset the cost of reducing tax rates.

Camp split his committee members into working groups that spent several weeks focused on various tax issues and receiving comments from interested parties (dominated as usual by big business). The Congressional Joint Committee on Taxation (JCT) just published an enormous report summarizing different facets of the tax system and summarizing the comments and suggestions submitted to these working groups. The suggestions include everything imaginable, from reducing the tax expenditure for capital gains to boosting the tax expenditure for capital gains, from ending “deferral” of taxes on offshore corporate profits to exempting those profits completely with a territorial system.

But almost none of the suggestions summarized in the report actually touch upon the biggest question facing anyone trying to overhaul a tax system: How much revenue should we collect?

Meanwhile, Senator Max Baucus, the chairman of the Finance Committee, the tax-writing committee in the Senate, seems to believe that he can carry out a debate over tax reform without actually addressing how much revenue should be collected. A CTJ op-ed published last month criticized Baucus’s approach. We noted that

Democratic and Republican tax-writers are holding bipartisan talks to craft a tax reform bill, even though there is no agreement between the parties on what the basic goals of such reform ought to be. One party recognizes a need for more revenue while another has pledged to not raise more revenue. This would be like holding bipartisan talks on immigration reform — if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions…

Some more recent comments from Senator Baucus have indicated that he at least might try to get some revenue from tax reform. He recently said during a hearing,

“We will close billions of dollars of loopholes. Some of this revenue should be used to cut taxes for America’s families and help our businesses create jobs, and some of the revenue raised in tax reform should also be used to reduce the deficit,” Baucus said. “It’s all about finding common ground.”

We’d feel better if Senator Baucus acknowledged that raising revenue should be the main purpose of tax reform because our most pressing need is revenue to fund public investments.

Deficit-Neutral Tax Reform Has No Place in a Plan to Address the Deficit

The most ridiculous idea aired recently is for Congressional Republicans to demand revenue-neutral tax reform in return for agreeing to President Obama’s request that the federal debt ceiling be raised.

The last time the Republican majority in the House of Representatives agreed to pleas of President Obama and the Senate to raise the debt ceiling, they demanded that the deficit be reduced by the sequestration that is in effect today. No revenue was raised in that deal.

Now, some Republican lawmakers are discussing extracting a different concession: an agreement that would provide a fast-track process to enact tax reform. But the tax reform they propose would be revenue-neutral (meaning it would be deficit-neutral). There is simply no logical connection between the deficits that require us to raise the debt ceiling and a tax reform that would do nothing to reduce those deficits.

Will “Dynamic Scoring” Paper Over the Revenue Question?

Some lawmakers have tried to confuse the debate by arguing that Congress should enact a tax reform that is revenue-neutral according to the revenue-scoring methods officially used by Congress but revenue-positive if Congress switches to a different method that they claim is more accurate. This method is known as “dynamic scoring,” which assumes that reducing tax rates increases incomes and profits so dramatically that the additional tax collected on the new income and profits would partially offset (or more than offset) the revenue lost as a result of the rate reduction. In other words, a tax cut (because it causes the economy to expand) could pay for itself or even raise revenue.

There is no evidence that the money channeled into the economy by reductions in tax rates expands the economy in this way. But even if we all agreed that it did, that would logically require us to agree that spending cuts could suck enough money out of the economy to have the opposite effect. But Chairman Camp and his colleagues support the spending cuts in the Ryan budget and would never want to admit that spending cuts have macroeconomic effects that blunt or even reverse any deficit-reduction that these lawmakers are trying to accomplish.

Members of Congress have a serious disagreement over revenue, and they can’t paper over it by using the gimmick of “dynamic scoring.” There is only one real resolution, and that’s to acknowledge a need for tax increases.

The Oklahoma legislature recently approved a cut to the state’s top personal income tax rate, at the urging of Governor Mary Fallin. When the plan is fully implemented in 2016, the state’s top tax rate will fall from 5.25 to 4.85 percent, at a cost to the state of $237 million per year.  While a slim majority (52 percent) of Oklahomans support the idea of an income tax cut in the abstract, that support evaporates (falling to 31 percent) once the plan is explained in more detail.

That detail is as follows. According to an analysis by our partner organization, the Institute on Taxation and Economic Policy (ITEP), roughly 4 in 10 Oklahomans—generally lower- and middle-income families—will receive no tax cut at all under the plan, while the average tax cut for a middle-income family will be just $30.  The wealthiest 5 percent of taxpayers, by contrast, will receive 40 percent of the benefits, with the state’s top 1 percent of earners alone taking home a tax cut averaging over $2,000 per year.

When these basic facts about the tax plan now on Governor Fallin’s desk were explained to a random sample of registered Oklahoma voters, 60 percent of them said they opposed it, with a full 47 percent describing themselves as “strongly opposed.”

Voters’ reaction was similar upon being informed that the plan will require reducing state services like education, public safety, and health care. This vital piece of information resulted in support for the tax cut dropping to just 34 percent, and opposition rising to 56 percent (with 44 percent “strongly opposed.”)

These polling results are backed up by interviews with Oklahoma citizens conducted by the state’s largest newspaper, The Oklahoman. One Oklahoma resident explains, for example, that “If [the tax cut] harmed education I don’t want it. I have a niece that is a schoolteacher and I’d rather have more teachers than the little bit of money.” Another says that “It sounds like the rich are just getting richer.”

Meanwhile, the Oklahoma Policy Institute (OPI) explains that the plan isn’t just unpopular—it’s fundamentally irresponsible: “We have seen no evidence that Oklahoma will be able to afford a tax cut in [2015, when the first stage of the cut takes effect]. Indeed, we are already seeing signs of faltering revenue collections, with revenue falling below last year.” Concern about the sustainability of Oklahoma’s revenues is compounded by the possibility that “the state could be on the hook for as much as $480 million” in additional expenses if a court ruling against its tax break for capital gains is upheld. The Associated Press reports that when the impact of this court ruling is “combined with an estimated $237 million price tag for a tax cut approved by the Legislature this year and expected to be signed into law by Gov. Mary Fallin… the cost to the state could amount to 10 percent of the total state appropriated budget.”

Given these challenges, it’s hard to argue with OPI’s policy prescription: “Now that cuts are scheduled, the only responsible path forward is to pursue real tax reform that goes beyond the top income tax rate. To fund education and ensure a prosperous future for Oklahoma, we need real action to reign in unnecessary tax credits and exemptions that cost us hundreds of millions of dollars every year.”

Washington, DC – Today, the U.S. Senate is expected to pass the Marketplace Fairness Act, a bipartisan bill that would finally let state governments enforce their sales tax laws on purchases made over the Internet. Currently, retailers are only required to collect sales taxes from their customers if they have a store, warehouse, sales force, or other “physical presence” in the same state as the customer. In all other cases, online shoppers are required to pay the sales tax directly to their state government, but this requirement is unenforceable and routinely ignored. President Obama has indicated that he will sign the bill if it also passes the House of Representatives.

In anticipation of the vote, Carl Davis, senior analyst at the Institute on Taxation and Economic Policy (ITEP), issued the following statement:

“State lawmakers across the country will be celebrating today’s Senate vote aimed at ending the fiscal nightmare that online shopping has become. This vote begins to untie states’ hands in the fight against online sales tax evasion.

“Billions of dollars of revenue go uncollected every year because a court ruling from the days of floppy disks and dial-up allows online merchants to dodge their responsibility.

“We are not talking about a new tax here, these taxes are due by law. For the sales tax to work, retailers – no matter where they’re located – have to participate in collecting the tax from customers.

“State and local governments would have an additional 23 billion dollars a year to invest in education, infrastructure, law enforcement and other public services if they could collect online sales taxes due. Today they are one step closer to being able to make those investments.”

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

The debate over how to effectively tax property in Iowa has raged for years. A new report from the Iowa Fiscal Project (IFP) compares and contrasts the property tax reform proposals put forward by the Iowa House and Senate. The report was described in this Des Moines Register editorial with high praise: “No matter which approach prevails, the Iowa Fiscal Partnership deserves credit for an unbiased examination of the impact of the competing property tax proposals on real businesses in Iowa.”

Currently, commercial property taxes are based on 100 percent of their actual values. Residential property is treated very differently. IFP reports that most recently residential property was assessed at just 52.8 percent of actual value. This disparity is something that Governor Branstad, the Iowa House and Senate are working to address. The Senate bill would create a property tax credit which would ultimately mean that some commercial property would be taxed like residential property. The House bill (which has the support of Governor Branstad) would ultimately tax commercial property at 80 percent of its actual value. In its report, IFP raises important questions about how local governments will be reimbursed for the resulting reductions in a significant local government revenue source should either bill become law. The Senate bill provides more targeted tax relief to corporations, whereas the House bill provides a property tax reduction to all businesses.

It could be that this issue gets put on hold for yet another year because Senator Joe Bolkcom (chair of the Ways and Means Committee) is vowing, as he has before, that no compromise on a tax bill will be reached until an increase in Earned Income tax Credit (EITC) is signed into law.

Good Jobs First (GJF) has a new in-depth report revealing how the most aggressively promoted and publicized measures of states’ “business climates” are nothing more than messaging tools “designed to promote a particular political agenda.”  According to the study’s co-author, PhD economist Peter Fisher, “When we scrutinized the business climate methodologies, we found profound and elementary errors. We found effects presented as causes. We found factors that have no empirically proven relationship to economic growth. And we found scores that ignore major differences among state tax systems.” Yet too often, such rankings are reported uncritically in the media and – worse – cited by lawmakers seeking to change policy. Of course, this is precisely the goal of the corporate-backed, ideologically driven organizations generating these simplistic reports.

Looking at indexes from the Tax Foundation, ALEC and other anti-tax groups, GJF finds that “the one consistent theme that the indexes harp on is regressive taxation, especially lower corporate income taxes, lower or flat or nonexistent personal income taxes, and no estate or inheritance taxes.”  While the biggest problem is that none of the indexes show any actual economic benefits from their policy prescriptions, GJF also spotlights a slew of methodological problems that in some cases border on comical:

The Tax Foundation’s State Business Tax Climate Index is compiled by “stirring together no less than 118 features of the tax law and producing out of that stew a single, arbitrary index number.” Since the Tax Foundation index gets sidetracked into trivial issues like the number of income tax brackets and the tax rate on beer, it should come as little surprise that their ranking bears no resemblance to more careful measures of the actual level of taxes paid by businesses in each state. GJF concludes that “it is hard to imagine how the [Tax Foundation] could do much worse in terms of measuring the actual amount of taxes businesses pay in one state versus another.”

The index contained in the American Legislative Exchange Council’s (ALEC) Rich States, Poor States report fails an even more fundamental test. After running a series of statistical models to examine how states that have enacted ALEC’s preferred policies have fared, GJF concludes that the index “fails to predict job creation, GDP growth, state and local revenue growth, or rising personal incomes.”

The Beacon Hill Institute’s State Competitiveness Report misses the purpose of these indexes entirely by assuming that things like the creation of new businesses and the existence of state government budget surpluses somehow cause economic growth—rather than being direct result of it. 

Finally, the Small Business and Entrepreneurship Council’s (SBEC) U.S. Business Policy Index has a somewhat more narrow focus: grading states based on policies that the SBEC thinks are important to entrepreneurship and small business development.  But GJF explains that “the authors apparently believe that there are in fact no government programs or policies that are supportable … State spending on infrastructure, the quality of the education system, small business development centers or entrepreneurship programs at public universities, technology transfer or business extension programs, business-university partnerships, small business incubators, state venture capital funding—none of these public activities is included in the [index].”  Unsurprisingly, then, GJF also finds that a state’s ranking on the SBEC index has no relation with how well it actually does in terms of variables like the prevalence of business startups and existence of fast-growing firms.

But while each index has its own problems, GJF also points out that when it comes to tax policy, there’s a much more fundamental flaw with what these organizations have tried to do:

State and local taxes are a very small share of business costs—less than two percent … State and local governments have a great deal of power to affect the other 98+ percent of companies’ cost structures, particularly in the education and skill levels of the workforce, the efficiency of infrastructure, and the quality of public services generally. … The business tax rankings examined here … are worse than meaningless – they distract policy makers from the most important responsibilities of the public sector and help to undermine the long run foundations of state economic growth and prosperity.

Read the report

President Obama has proposed to limit the tax savings for high-income 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. 

A new report from Citizens for Tax Justice (CTJ) analyzes the proposal and models its effects on taxpayers nationally and state-by-state. Findings include:

• Only 3.6 percent of Americans would receive a tax increase under the plan in 2014, and their average tax increase would equal less than one percent of their income, or $5,950.
• The deduction for state and local taxes and the deduction for charitable giving together would make up just over half of the tax expenditures (deductions, etc.) limited under the proposal.
• Arkansas and West Virginia have the lowest percentage (1.6 percent) of taxpayers who would see a tax increase from this proposal; Washington, D.C. would have the largest percentage (8.9 percent) followed by Connecticut and New Jersey (both 6.7 percent).

Read the report.

Michigan’s former Treasurer, Robert Kleine, explains in a Detroit Free Press op-ed that “there is no evidence that … [a 2011 tax change] reducing business taxes by $1.7 billion has created new jobs in Michigan.”  Among other things, Kleine observes that “state business taxes are such a small part of a business’ costs that even large changes have a minor impact.”

Gas taxes remain a major topic of debate in the states.  Since publishing our mid-session update on state gas tax debates two weeks ago, Vermont Governor Peter Shumlin signed a gas tax increase into law, Iowa Governor Terry Branstad reiterated that a gas tax hike is still on the table in his state, and The Olympian reports that raising Washington State’s gas tax is “now widely seen as a topic for special session.”

New Jersey Governor Chris Christie has been traveling the state seeking support for his more than $2 billion tax cut proposal (once fully phased-in) ever since using Tax Day 2013 to announce his renewed push for the plan he first championed last year. An op-ed from the Better Choices for New Jersey Campaign says the proposal was “a bad idea then, and it remains one today.”  Why?  Simply put, the state cannot afford even the scaled-back tax cut the governor is proposing for 2013 without reducing spending.

A new report from the North Carolina Budget and Tax Center takes on two common myths about the state’s economy that policymakers often use to justify cutting or eliminating taxes: North Carolina’s economy is uncompetitive compared to neighboring states and high tax rates drive North Carolina’s high unemployment. The report found that North Carolina is actually either leading or in the middle of the pack in every major indicator of economic health except for unemployment.  And, the explanation for high unemployment? A decline in specific industries the state has long relied on – like textiles and furniture – that are highly vulnerable to offshoring, outsourcing and other global pressures, not high tax rates.

Anti-Taxer-in-Chief Grover Norquist recently travelled to Minnesota where he met up with Congresswoman Michele Bachmann to rally against taxes. Minnesota is actually one of the bright lights this year for tax justice advocates who are supporting House and Senate plans there that would raise taxes on the wealthiest Minnesotans.

The Missouri House and Senate have each passed their own versions of a “race to the bottom” tax plan in a misguided effort to keep up with neighboring Kansas, where a radical tax plan that is eviscerating the state’s budget might actually be followed up by another round of tax cuts (currently being debated by the legislature).

Both the Missouri Senate and House plans would reduce income tax rates, introduce a 50 percent exclusion for “pass-through” business income, reduce corporate income tax rates, and increase the sales tax. The Senate plan is summed up in this St. Louis Post-Dispatch editorial, Missouri Senate Declares Class War Against Citizens.

“The poorest 20 percent of Missourians, those earning $18,000 a year or less, will pay $63 a year more in taxes. Those earning between $18,000 and $33,000 a year will pay $129 more. The middle quintile — those earning between $33,000 and $53,000 a year — will pay $150 a year more. The fourth quintile ($53,000 to $85,000 a year) will pay $149 a year more. That’s a grand total of 80 percent of Missourians who will pay more and get less: crummier schools, higher college tuitions (because state aid will continue to fall) and less access to worse state services. The poor are used to this. It remains to be seen whether the middle class will put up with it.”

Despite the fact that similarly reckless tax proposals in other states have failed (Louisiana and Nebraska) or been scaled back (Ohio), it seems the proposals are moving forward in Missouri, thanks in large part to Americans for Prosperity. This national group uses state chapters to throw money at anti-tax, anti-government agendas its corporate funders like, and it has launched a “Bold Ideas Tour” to travel Missouri advocating for deep tax cuts as the state’s legislature approaches its closing date of May 17.

Governor Jay Nixon has vowed he will veto a tax cut bill of this magnitude, rightly saying, “Making a veteran with aches and pains pay more for an aspirin so that an S Corporation can get a tax cut does not reflect our values or our priorities. I have long opposed schemes like this one that would shift costs onto families because they reflect the wrong priorities and do not work.”

The Governor’s position is supported by multiple experts, including the Institute on Taxation and Economic Policy (ITEP), and it looks like Missouri could be a state where good information comes between the national anti-tax movement and their legislative agenda.