Month: August 2013

There is a strong consensus among scholars, think tanks and advocates around the country that there are concrete benefits to providing earned income tax credits (EITCs) – refundable credits (PDF) designed to offset income tax liability for low-income families and individuals. Not only has the EITC been shown to help alleviate poverty, but it has also succeeded in encouraging greater participation in the workforce, improving infant health, and boosting school achievement, among other things.

While most discussions are about the federal and state EITCs, there are two local EITCs that are often overlooked, including Montgomery County, Maryland’s Working Families Income Supplement (WFIS). Originally introduced in 2000 as a tool to help the county’s poorest residents cope with an extremely high cost of living, the WFIS is one of only two local EITCs in the country (the other is in New York City).

When originally implemented in 2000, the WFIS was set at 100 percent of the state EITC – that is, if a worker received $600 from the Maryland EITC, he or she would also receive $600 from the county. This supplement provided low-income Montgomery County families with the most generous combined EITC in the country. It also gave these households the ability to pay for basic day-to-day necessities like child care, school books, utility bills, and groceries – and most of all it helped reduce poverty and promote upward mobility. (Other reference materials on the WFIS can be found here.)

Through the mid-2000s, the number of people living in poverty declined even as unprecedented numbers of people moved into the county. When the Great Recession began to take hold in late 2007, however, these advances were reversed. As jobs were lost and incomes fell, Montgomery County experienced a spike in poverty even as the Washington, DC region as a whole weathered the recession better than most.

In a case of terrible timing, as county tax revenues began to fall, the Montgomery County Council decided to save a little money by scaling back the WFIS to 72.5 percent of the state EITC in FY 2011, 68.9 percent in FY 2012, and 72.5 percent in FY 2013. This decision only made things worse for low-income families: now, not only were they facing wide-spread layoffs prompted by a weak economy, but they were seeing a significant cut in a critical source of income.

Now, however, members of the Council have proposed a plan that would restore the 100 percent credit that was in place for nearly a decade.

Introduced in March and having undergone public hearings in July, Expedited Bill 8-13 (PDF) would gradually return the WFIS to 100 percent of the Maryland credit by Fiscal Year 2016. This expansion is estimated to help over 30,000 low-income households meet their basic day-to-day needs at a cost to the County of $3 million.  (For context, Montgomery County tax revenues are projected to grow by $30 million a year for the foreseeable future – even when factoring in the possible impact of the federal sequester).

With a committee hearing scheduled for early October, the Council members promoting the bill have just under two months to garner support and move its restoration forward. For over a decade, the Council has demonstrated its dedication to the needs of its low-income residents as it championed one of the most forward-looking income tax credits in the nation.  By restoring the Working Family Income Supplement to 100 percent of the state credit, the Council would be offering critical help to its most vulnerable residents, providing a ladder for upward mobility, and adding a boost to the local economy.

For more information on the structure and benefits of Earned Income Tax Credits:

Rewarding Work Through Earned Income Tax Credits

Institute on Taxation and Economic Policy, September 2011

“Low-wage workers often face a dual challenge as they struggle to make ends meet. In many instances, the wages they earn are insufficient to encourage additional hours of work or long-term attachment to the labor force. At the same time, most state and local tax systems impose greater responsibilities on poor families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve meaningful economic security. The Earned Income Tax Credit (EITC) is designed to help low-wage workers meet both those challenges. This policy brief explains how the credit works at the federal level and what policymakers can do to build upon it at the state level.”

Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School

Center on Budget and Policy Priorities, April 9, 2013

“The Earned Income Tax Credit (EITC), which went to 27.5 million low- and moderate-income working families in 2010, provides work, income, educational, and health benefits to its recipients and their children, a substantial body of research shows. In addition, recent ground-breaking research suggests, the EITC’s benefits extend well beyond the limited time during which families typically claim the credit.”

Ten Years of the EITC Movement: Making Work Pay Then and Now

Brookings Institution, April 18, 2011

“The Earned Income Tax Credit (EITC) … has grown to be called the nation’s largest federal anti-poverty program. The EITC has had significantly beneficial effects for its recipients and their communities. These include encouragement of work, reduction of poverty, and boosting of local economic activity.”

Supply-side economist Arthur Laffer has been very busy the last few years trying to convince state lawmakers that cutting taxes and making them more regressive will lead to an economic boom.  At the same time, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has done a lot of work pointing out the serious flaws in Laffer’s so-called research, and explaining why taxes and the public investments they pay for are key to healthy state economies.

Over at PBS, meantime, the fedora-donning business correspondent for the News Hour, Paul Solman, had gotten wind of ITEP’s critiques.  After reading ITEP’s “States with “High Rate” Income Taxes are Still Outperforming No-Tax States” and deeming it “a convincing piece of work,” Solman decided to sit down with Laffer and ask some questions.  Laffer’s response was predictable and anecdote-heavy.  Aside from recycling the same meaningless statistics ITEP has debunked before, he also included a data point that’s hard to rebut unless you live inside his brain, that he and his family moved to Tennessee “exclusively because of taxes.”  (Of course, a guy who’s made a living bashing taxes is not a particularly representative citizen.)

Happily, PBS’s Solman decided to do a little fact-checking and went looking for an expert, “impartial point of view” (his words, not ours) to help glean whether Laffer’s promise of sure-fire economic growth is all that – or all wet.  For his follow up piece, he turned to Joel Slemrod, noted public finance expert and chair of the Economics Department at the University of Michigan.

In one of many subtle but clear swipes at Laffer’s methods, Slemrod explained that while “economists have developed increasingly sophisticated statistical techniques to try to tease out the causal link between policies and performance … Laffer’s analysis is not sophisticated.”

Slemrod’s criticisms of Laffer closely parallel those made by ITEP in 2012 and early 2013.  For one thing, Laffer fails to control for non-tax factors that impact growth. For another, the economic measures he chooses (cherry picks, really) don’t capture “what’s happened to the … well-being of a typical resident.”  And, Laffer ignores how tax cuts require cuts in public investments that are hugely important to state economies.

On this last point, Slemrod notes that: “Laffer makes clear that … he believes more money does not provide better public services. This is a controversial statement that he backs with a few anecdotes, but it is not one that is widely held.”

In other words, Laffer and his supply-side compatriots have campaigned to frame most every government program as “wasteful” to make the idea (and their ideological obsession) of defunding government seem somehow justified.

Given all of this and his vast expertise, Slemrod concludes that ITEP’s study “make[s] arguably better methodological choices” than Laffer’s.  (We’ll take that as a compliment!) As Slemrod has pointed out in previous interviews, serious research has shown taxes to have little, if any, effect on economic growth; in fact, that “[r]aising taxes and using the money for education and certain infrastructure could certainly be beneficial to an economy.”  Laffer’s tax-phobic worldview notwithstanding, public services do matter to economic growth, and that means we will always need an adequate, fair, and sustainable tax system to pay for them.

If you’re looking for some summer reading, the Institute on Taxation and Economic Policy (ITEP) is in the process of updating its collection of policy briefs.  In the last couple weeks, ITEP has released updated briefs on sales tax holidays, state gasoline taxes, and efforts to collect sales taxes owed on purchases made over the Internet.

Bad tax ideas have already entered Arkansas’ 2014 race for governor.  After claiming that the personal income tax cuts signed this year by Governor Beebe aren’t “significant enough … to make us competitive with our surrounding states,” Republican candidate Asa Hutchinson announced that he would like to phase-down the personal income tax even further.  But ITEP has shown that the personal income tax is vital to both tax fairness and sustainability, and that the states with the highest top personal income tax rates are experiencing economic conditions at least as good, if not better, than those states without income taxes.

The Commonwealth Institute in Virginia writes that the state’s gubernatorial candidates shouldn’t assume it will be easy to pay for their tax cut promises by simply eliminating “wasteful” tax breaks.  According to the Institute, “When you exclude tax breaks that would disproportionately hit low-income and middle class families or those that are clearly not politically feasible, [eliminating] the rest would raise only about $850 million.”  Compare that with the $1.4 billion per year candidate Ken Cuccinelli proposes in personal and corporate income tax rate cuts alone.

Mississippi’s struggling infrastructure budget is in the news now that a new task force is beginning to study how the state can better fund its transportation system.  The Mississippi Department of Transportation (MDOT) says that asphalt costs have tripled in recent years while fuel taxes–which haven’t been raised since the 1980’s–have predictably failed to keep pace.  So far MDOT is responding by forgoing new construction in favor of simply maintaining the current system, but if taxes aren’t raised soon, Mississippi may run the risk of becoming yet another state that opts to siphon money away from education, human services, and other priorities to fill its growing infrastructure funding gap.

18 states across the country are gearing up for their 2013 Sales Tax Holiday season, but these tax-free shopping sprees are also increasingly under fire.  Designed to offer a temporary sales tax exemption for specific consumer items, these holidays typically last two to three days and most take place in time for back-to-school shopping. An updated policy brief (PDF) from the Institute on Taxation and Economic Policy (ITEP), however, lays out why there is so little to celebrate this Sales Tax Holiday season.

For starters, the economic benefit of sales tax holidays is unclear at best. While one commonly cited rationale for such holidays is that they increase local consumer spending, boosting sales for local businesses, available research concludes this “boost” in sales is primarily the result of consumers shifting the timing of their already planned purchases.

But not all consumers. And that’s one of the other problems with sales tax holidays as policy: they are poorly targeted. Advertised as a way to give hard-working families a break from paying the regressive sales tax, they actually end up benefiting wealthier taxpayers, who have more liquidity and therefore flexibility to shift the timing of their purchases and take advantage of the tax break.  (And that goes for more affluent consumers in neighboring states, too, who can easily make a road trip of a tax-free shopping weekend next door.)

What else is wrong with them? Sales tax holidays also cost states upwards of $230 million each year. Why, one may ask, do state lawmakers continue to approve these holidays year-after-year if they are ineffective and expensive? Massachusetts Governor Deval Patrick offered a candid answer, saying he’d support his state’s 2011 holiday “not because it is particularly fiscally prudent, but because it is popular.”

And that’s the thing. Sales tax holidays make great politics but they don’t solve real problems in regressive state tax codes.  They fall far short of accomplishing what advocates claim, that is, helping hard-pressed consumers and local retailers. In fact, those retailers would benefit more from the requirement that out-of-state Internet retailers be required to collect the same sales taxes as brick and mortar stores (that is, if the Marketplace Fairness Act became law).

More important, however, is that lawmakers who really want to help struggling consumers have smart alternatives. Popular tax holidays aside, good tax policy would be targeting tax credits for working families.

Republican Congressman Dave Camp of Michigan, chairman of the House Ways and Means Committee, reportedly told members of his committee on Wednesday that he would propose a tax reform based on the framework spelled out in the House budget resolution – also known as the “Ryan plan,” because it was developed by House Budget Committee chairman Paul Ryan.

The Ryan plan calls for Congress to enact some very specific tax cuts and offset their costs by eliminating or limiting tax expenditures that are left unspecified. A report from Citizens for Tax Justice concludes that no matter how the details of the plan are filled in, people who make over $500,000 would pay tens of thousands of dollars less each year and people who make over $1 million would pay hundreds of thousands of dollars less each year, than they do under the current tax system.

The Ryan plan calls on Congress to replace the current progressive rates in the federal personal income tax with just two rates, 10 percent and 25 percent, eliminate the AMT, reduce the corporate income tax rate from 35 percent to 25 percent, and enact other tax cuts. It calls on Congress to offset the costs of these tax cuts by eliminating or reducing tax expenditures which are left unspecified, although it is fairly clear that tax breaks for investment income (most of which goes to the richest one percent of Americans) would not be limited in any way.

CTJ’s report found that even if high-income Americans had to give up all the tax expenditures that could be eliminated under the Ryan plan, they would still benefit because the rate reductions under the plan are so significant. If Congress fills in the details of the plan in a way that makes it “revenue-neutral,” which Camp proposes, that can only mean that low- and middle-income people must pay more to make up the difference.

According to The Hill, on Wednesday Camp “told Ways and Means Committee members that he planned to push a framework similar to the tax revamp that was passed in the House GOP budget this year. That plan collapsed the current seven individual tax brackets into two — a 10 percent and a 25 percent bracket — while scrapping the Alternative Minimum Tax. Corporations’ top rate would drop from 35 percent to 25 percent under the plan, which would neither raise nor reduce revenue to the Treasury.”

Congressman Camp and Democratic Senator Max Baucus of Montana, the chairman of the Senate Finance Committee, have recently toured the country, making appearances in Minneapolis, Philadelphia, and suburban New Jersey to promote an overhaul of the tax code even though they do not say what that overhaul would look like during their appearances. As the Republican and Democratic chairmen of the two tax-writing committees, they argue that Congress can enact a bipartisan tax reform. However, the Ryan budget plan, which Camp says will be the basis of his proposal, failed to receive a single Democratic vote when versions of it were approved by the House in 2011, 2012 and 2013.

The Hill also reported that Camp planned to mark up a bill before Congress acts to raise the debt ceiling, and that tax reform could be linked to legislation to raise the debt ceiling. The administration has already announced that it will not negotiate over the debt ceiling, and that instead Congress must pass a “clean” bill to raise the ceiling to prevent a default on U.S. debt obligations and the economic tailspin that would result.