Month: April 2015

A proposed constitutional amendment that would implement a flat income tax has stalled in the Alabama Senate. A vote on the measure, titled the “The Simplified Flat Tax Act of 2015,” was postponed by a Senate budget committee after sponsor Sen. Bill Hightower asked for more time to work on the measure. The bill would implement a flat income tax and eliminate some exemptions, credits and deductions. Opponents of the bill, including the advocacy group Alabama Arise, note that the changes would reduce revenue for the Education Trust Fund by hundreds of millions of dollars, and that some of the credits and deductions eliminated would impact retirees and working families. Kimble Forrister, executive director of Alabama Arise, cited ITEP data showing the bill would benefit mainly the wealthy while hurting the poorest Alabamans. He told the committee that “Alabama can’t move forward as long as we have an outdated, upside down tax system.” Sen. Hightower wants to make the bill revenue neutral and prevent any tax hikes for low-income Alabamans.

A committee in the Connecticut General Assembly passed a bill that would raise revenues in the state. Members on the Finance Revenue and Bonding Committee voted to approve a tax package that increases personal income tax rates for the wealthy and broadens the sales tax base. The top marginal income tax rate would increase to 6.99 percent for individuals making $500,000 or more and joint filers making $1 million or more. The measure also creates a new supplemental tax on capital gains income of 2 percent for the same group. The state sales tax rate would be reduced from 6.35 to 5.35 percent, while the base would expand to include more services, including engineering, veterinary services, laundries and dry cleaners, golf courses, and accountants. The measure is expected to raise $1.7 billion over the next two fiscal years, and would reverse many of the deep cuts proposed in Gov. Dannel Malloy’s budget. The bill incorporates some of the progressive tax changes proposed by Connecticut Voices for Children, which incorporated ITEP analysis into their report.

Efforts to repeal the Hall Income Tax have failed again in Tennessee after the legislature failed to act on two repeal measures before the close of session. The Hall Tax is a 6 percent tax on income from stocks, bonds and dividends that is the state’s only tax on personal income. A significant portion of the revenues raised by the tax supports county and municipal governments. Opponents of the Hall tax won a small victory, however, as they succeeded in increasing the exemption allowed for citizens over the age of 55.

A measure to raise the sales tax in Iowa advanced out of a Senate subcommittee on Monday, while a parallel bill is being discussed in the House. Senate Bill 1272 would increase the sales tax by three-eighths of one percent to generate new revenue for natural resources and outdoor education – as much as $150 million annually, according to its sponsors. The bill has wide support, including “representatives of conservation, environmental, farm and outdoor recreation groups.”

Do you have a story you think should be in the next Rundown? Email sdpjohnson@itep.org with your idea!

New Hampshire business leaders, nonprofits and civic organizations have come together to oppose business tax cuts proposed in the legislature, arguing that they would jeopardize needed investments in education, infrastructure and other areas. The inclusion of business leaders in the coalition led by the New Hampshire Fiscal Policy Institute represents a rare but growing alliance between businesses who understand that investments are needed for economic growth and progressive organizations that advocate on behalf of working and middle-class families. The state Senate passed two bills in March that would cut corporate tax rates. One would reduce the business profits tax from 8.7 to 7.9 percent, while the other would reduce the business enterprise tax from 0.75 to 0.675 percent.

Kansas lawmakers want to take another look at Gov. Sam Brownback’s tax exemption on pass-through business income after more than 300,000 Kansans claimed the exemption at a cost of millions in state revenue. Initial estimates suggested that fewer than 200,000 taxpayers would be eligible for the exemption, a key part of the governor’s 2013 tax cuts. Many lawmakers, including members of Brownback’s own party, believe the business pass-through exemption is unfair because it has “created situations where a business owner may not pay tax on income, but an employee making less would.” Other legislators believe the exemption has contributed to structural imbalance in the budget, which currently has a $400 million hole.

Minnesota Gov. Mark Dayton rejected a budget proposal from legislators in the state House, saying the $2 billion tax cut package is a “non-starter” because of its fiscal irresponsibility. The House plan would give many Minnesotans a temporary income tax break, permanently phase out the statewide business property tax and reduce taxes on Social Security benefits. The governor refuses to begin budget negotiations until House leaders come up with a plan that is closer to his own targets. Dayton also asserted that the House plan would cost $4 billion annually once implemented, turning the state’s $1.9 billion surplus into a deficit. Gov. Dayton’s budget plan would use the surplus to shore up investments in education, particularly on a push for universal pre-kindergarten.

Nebraska Gov. Pete Ricketts and state legislators are headed for a showdown over a 6 cent-per-gallon increase in the state’s gasoline excise tax that, if approved, would raise $180 million after four years. The measure has already passed the initial hurdle in the state’s unicameral legislature, but two additional votes are needed before it is sent to the governor’s desk. Ricketts has said he does not support the measure. A recent article in the Omaha World-Herald found that inflation has eroded the buying power of Nebraska’s gasoline excise tax by $1 billion since 1995. ITEP’s Carl Davis, who was interviewed for the article, noted that “It’s an inevitable fact that if gas tax rates are not updated from time to time, the tax is not going to keep pace with construction costs.” 

Things We Missed:

• Arizona ended its legislative session on Saturday, April 25th.
• North Dakota Gov. Jack Dalrymple signed Senate Bill 2349, which cut the state’s corporate income tax rate by 5 percent and the personal income tax rate by 10 percent. This is the ninth straight year that the state’s leaders have cut income taxes. The House also passed a tax cut for oil companies.

States Ending Session This Week:
Montana (Monday)
Indiana (Wednesday)
Florida (Friday)
North Dakota (Friday)

Guest Post by John Ruoff of the Ruoff Group, Click here for orignal post

Who will pay to fix our roads? The burden, as a percentage of income, will fall hardest on those making less than $19,000 a year. Facing massive shortfalls in repairs and maintenance on our state roads and highways, the General Assembly is looking at ways to fund those needs. Everyone understands that, in the end, new revenues to fund the roads are needed. The Governor, seeing an opportunity to pull off a massive income tax cut, proposed that massive cut tied to a much more modest increase in the gas tax. Three proposals have been placed on the table: the Governor’s, a House-passed Plan that combines some tax increases with a much more modest income tax cut and a Senate Finance plan which increases revenues without an income tax cut.

In order to figure out who will pay for these changes, we asked the Institute on Taxation and Economic Policy (ITEP), a Washington, DC, based think tank that produces widely-respected tax incidence studies to model these changes. Their Who Pays? provides detailed analyses of which income groups pay what shares of their income towards various taxes. You can see the most recent analysis of South Carolina here. The ITEP modeling allows us to look at gross income, unlike the estimates from the Office of Revenue and Fiscal Affairs which are based on taxable income.

They modeled three plans:

• Governor Haley proposes trading a 10 cent per gallon gas tax increase for an eventual reduction in marginal tax rates of 2 %. That translated, according to the SC Office of Revenue and Fiscal Affairs, to $1.7 billion reduction in General Fund Revenue by 2025.
• The House version combines an effective 10 cent per gallon increase in the gas tax and raises the cap on sales tax for cars from $300 to $500 with a broadening of income tax brackets that produces a maximum $48 per year tax cut. Other provisions were not modeled.
• The Senate Finance Plan contains no tax cut but increases the gas tax by 12 cents per gallon and the sales tax cap on cars to $600. Other provisions were not modeled.

The Governor’s plan creates a very large tax cut for those with higher incomes. In the Top 1 % of incomes, the tax cut,on average, is $6,893. Meanwhile, those in the lowest 20 % of incomes would face, on average, a tax increase of $34.

The House and Senate Finance plans raise taxes and revenues across the board. The House Plan, netted for a modest income tax cut, raises on average the  annual taxes for the lowest income group, which averages $12,000 a year, by $39. The Top 1 %, which averages $987,000 in income, would pay on average an additional $414.

As a share of income, the various plans hit harder on the most vulnerable. The Senate Finance Plan would cost our lowest income quintile, on average, .4 % of their income, compared to .1 %, on average, of the income of the Top 1 %. The House Plan calls on the poorest in our state to pay, on average, an additional .3 % of income while costing our wealthiest 1 % only, on average, .04 %. As percent of income, the Governor would raise taxes on taxpayers in the Lowest 20 % by .3 %, on average, while cutting them for the Top 1 % by, on average, .7 %.

Legislative debates frequently resound with arguments that the rich pay the most taxes and lower income people “don’t pay taxes”. They, of course, mean that most lower income taxpayers don’t pay income taxes. We all pay taxes and we have increasingly in South Carolina relied on regressive sales taxes that take a larger cut of poor people’s income than rich people’s. ITEP’s most recent statewide analysis of actual tax burden (Who Pays?, 5th Ed., Jan. 14, 2015) shows that in South Carolina the lowest income group pays, on average, about 7.5 % of income for all state and local taxes. The Top 1 % pay only, on average, 4.5 % of their income in state and local taxes.

Advocates of cutting taxes repeatedly argue, often to the accompaniment of anecdotes, that cutting income taxes drives in-migration of rich people who bring or start companies. The actual evidence suggests, at best, a very modest relationship between income taxes and economic development. That relationship is far outweighed by the effects of spending on things like infrastructure and education.

Recognizing both that road funding is a critical need for all of us and that gas and sales taxes hit harder on lower than upper income South Carolinians, there are additional approaches which could meliorate these effects on our most vulnerable taxpayers.

A refundable State Earned Income Tax Credit (EITC) has many desirable policy effects. Ronald Reagan and many conservative policy leaders recognize the EITC as the most effective anti-poverty measure we have. The EITC encourages personal responsibility by rewarding work, since only working people get the EITC.  In addition, a state EITC keeps money in the hands of folks who will spend it in local communities with local businesses. It’s good for the economy. An EITC pegged at 10 % of the federal EITC, would cut taxes for the Lowest 20 % receiving the credit by, on average, $262 and $331 and $190 to the next two quintiles according to another analysis by ITEP.

Rather than raising the cap on sales taxes on cars (not to mention yachts and airplanes), flipping the cap so that it was a floor would provide relief to folks who can only buy cheap cars while shifting more tax burden to those better able to afford it. That way, instead of stopping the tax when a car’s price reaches $6,000, $10,000 or $12,000, it would start at one of those points. Either of these approaches would reduce revenues for roads overall, but would make the tax system fairer.

The Governor’s Plan appears to be a nonstarter in the General Assembly. The House and Senate Finance plans are not that far apart. A critical flaw in our gas tax has been its failure to adjust for inflation and both legislative plans make provisions for indexing the gas tax (within limits) to inflation. That is a good thing.

What is absolutely clear is that something needs to be done to raise funds to ensure future economic development and safer roads. Clearly, income tax cuts are not the answer, although the House’s approach is far preferable to the Governor’s massive tax cut masquerading as a road funding plan. Equity for our poorest taxpayers needs more legislative attention, since all of these plans ask them to contribute a larger share of income to fixing the roads than their better-off fellow taxpayers.

Alabama senators have proposed a constitutional amendment that would establish a flat personal income tax and lower the corporate tax rate, despite facing a devastating budget shortfall. The proposal would lower the top income tax rate from 5 percent to 2.75 percent and reduce the corporate tax rate from 6.5 to 4.59 percent while eliminating all deductions, exemptions and credits. The bill’s sponsors claim that the measure would make the state more competitive and attract new businesses. Opponents argue that Alabama’s antiquated tax system (unchanged in 82 years) is already a flat tax in practice, since the top tax rate takes effect at $3,000 for single filers. The Montgomery Advertiser notes that “a household of four begins paying state taxes at $12,600 – well below the poverty threshold of $24,250 for that family, meaning the state taxes households operating below the poverty level.”  An ITEP analysis of this plan found that the lowest-income Alabamans would see a tax hike under this change while most other taxpayers would see a small reduction.

A new poll finds that the majority of Oklahoma voters don’t want planned tax cuts to take effect because of the state’s budget deficit. The poll, commissioned by the Oklahoma Policy Institute, found 64 percent of registered voters in Oklahoma opposed moving ahead with a scheduled cut to the top personal income tax rate, while 74 percent of voters felt the state spent too little on education. Legislators in the state have vowed to let the cuts take effect next year despite a $611 million revenue gap.

Colorado Gov. John Hickenlooper wants to implement a plan that in future years would reduce the likelihood that the state would issue taxpayers a refund as mandated under the Taxpayer Bill of Rights (TABOR) amendment to the state’s constitution. Hickenlooper would reduce the share of state revenues subject to the TABOR limit by moving hospital provider fees out of the general fund and into an “enterprise account.” He would also target some TABOR refunds to low-income households via a state Earned Income Tax Credit (EITC). While conservative lawmakers have decried the move, the governor has gained the support of an important hospital lobbying group, which said the plan would “ensure that Colorado has the flexibility to support its top budget priorities, including funding for transportation and K-12 education.”

Maine Gov. Paul LePage threw down the gauntlet to state legislators on Tuesday, filing a bill that would eliminate the state’s income tax by 2020 and giving leaders in the House and Senate a short deadline to announce their support. In the past, Gov. LePage has pledged to campaign against those who oppose his plans to get rid of Maine’s income tax and replace it with higher consumption and property taxes. So far, no legislative leaders have announced support for his plan. 

Stymied in their efforts to fully repeal the Affordable Care Act (ACA), Republican leaders in Congress continue their efforts to undermine the law by starving it of funding.

Today, the Senate Finance Committee will consider legislation that would repeal some of the tax changes enacted to pay for the ACA. Republican lawmakers have indicated their interest in repealing the tax on medical devices since before it took effect in 2013, a position that is perhaps related to an ongoing lobbying spree by the medical device industry. Their efforts have generated some bipartisan support due to claims the tax hurts small business. But if their repeal efforts reflect a desire to protect medical device companies from the $2 to $3 billion a year the tax has been forecast to raise, then congressional tax writers should keep in mind that big, profitable medical device corporations have likely avoided more than 30 times that amount in federal income taxes by shifting their U.S. profits offshore.

Enacted as part of the 2009 Affordable Care Act, the medical device tax is a 2.3 percent excise on the sale of most medical devices sold in the United States. It applies both to U.S.-based companies and to their foreign competitors on sales within the United States. Congress enacted it, in part, to help fund expanded access to health care. The underlying rationale is that the medical device industry would reap substantial financial benefits from more consumers accessing health care through ACA and could, in turn, take on a small tax.

The 15 biggest U.S.-based medical device companies, as measured by 2014 revenues, will likely pay some of the tax. These companies have another thing in common: they have all chosen to shelter some of their profits from U.S. tax by declaring them to be “permanently reinvested” in foreign countries (see table). The companies, which include General Electric, Johnson& Johnson, 3M, Baxter and Abbott Laboratories, collectively disclosed $257 billion in permanently reinvested foreign profits at the end of their most recent fiscal years.

Corporations that declare their profits to be permanently reinvested abroad don’t have to report any deferred federal income tax on those profits to their shareholders. And these companies typically flout rules requiring them to estimate how much U.S. income tax they would owe if and when these profits become taxable in the United States. Just 57 companies in the Fortune 500 disclose the tax rate they would pay on these profits.

Two of these 15 device companies report their likely tax rate on repatriated profits, but the other 13 do not. If the 13 non-disclosing U.S. device makers paid income tax at the same 29 percent tax rate disclosed by the 57 companies included in our recent report, their resulting federal tax bill would be $69 billion. Added to the $4.5 billion tax bill collectively disclosed by the 2 device companies on this list, the 15 medical device companies profiled here may be avoiding almost $74 billion in federal income taxes on profits that they hold (at least on paper) offshore. It is possible that these companies have avoided even more tax than is calculated here.

President Barack Obama has proposed a half-measure that would subject the permanently reinvested earnings of U.S.-based multinational corporations to a one-time 14 percent tax. But there is little legislative momentum behind efforts to ensure that these companies’ offshore cash is taxed at the regular 35 percent corporate income tax rate, as it should be. The result is that the 15 companies profiled here will likely continue to avoid roughly $74 billion in federal income taxes on their offshore cash.

The medical device tax, by contrast, has been forecast to raise less than $30 billion over the next ten years. Many of the biggest medical device makers are foreign-based corporations, so these 15 companies will pay only a fraction of the $2-3 billion annual yield of the medical device tax. As long as these companies continue to avoid paying taxes on their offshore stash, it’s hard to see why Congress should prioritize repealing the medical device tax. 

With funding for the Highway Trust Fund (HTF) set to expire yet again on May 31st, many states are already delaying much needed infrastructure projects due to concerns over the fund’s ongoing solvency. Such delays and the fund’s impending expiration are putting fire to the feet of congressional lawmakers to find a solution to the perennial lack of dedicated revenue, due to our out-of-date gas tax, needed to pay for all of the infrastructure projects supported by the fund. In looking for a way to bridge the gap in funding, Congress should reject proposals to patch the HTF using some form of a tax on the repatriation of offshore profits and instead focus on a more permanent fix through the modernization of the gas tax.

Good: Raising the Gas Tax

Why does the HTF always seem to be in constant and dire need of additional funding? The answer is that lawmakers have repeatedly refused to update and reform the federal gas tax, the primary funding source of the HTF. The federal gas tax has not been increased since 1993, and the 18.4 cent-per-gallon tax has lost more than 28 percent of its value due to construction cost inflation and fuel efficiency in the time period since being fully dedicated to transportation in 1997.

With the HTF deadline again nearing, many Democrats and Republicans finally seem to be catching on to the need to increase the gas tax to make up for its longtime loss in value. Last week for example, a bipartisan group of House members proposed increasing the gas tax by indexing it to inflation, and scheduling further gas tax increases to occur in the future unless lawmakers agree on another funding mechanism.

Now would be an especially advantageous time to increase the gas tax given that gas prices have dropped to relatively low levels in recent months. These lower prices would make it easier for consumers to absorb the impact of a gas tax increase since they are already experiencing the benefit of the significantly lower prices.

The bipartisan push for increasing the gas tax and indexing it to inflation also makes a lot of sense given that it’s the only viable approach offered so far that would provide a long term solution to the HTF’s constant funding problems. In addition, the gas tax is a sensible way to fund transportation infrastructure because it generally requires those who use our infrastructure the most, by driving long distances or heavy vehicles, to bear most of the responsibility of its upkeep.

Bad: Repatriation

Besides modernizing the gas tax, the most often talked about way to fill in the gap in funding for the HTF has been either a voluntary or mandatory tax on profits held offshore by corporations. The problem with such proposals is that they would reward and encourage offshore tax avoidance, while at best only providing a temporary fix to the gap in funding.

The worst form of these proposals is a repatriation holiday, such as the one recently proposed by Senators Barbara Boxer and Rand Paul. Under their repatriation holiday proposal, multinational corporations could voluntarily bring back profits held offshore by paying a tax rate of 6.5 percent rather than the 35 percent rate they would normally owe.

On its face, this and other similar repatriation holiday proposals cannot be used to fund the HTF, or anything else, because they would actually lose revenue instead of raising it. In fact, the nonpartisan scorekeepers at the Joint Committee on Taxation (JCT) found that a proposal similar to the Boxer-Paul proposal would lose $96 billion over 10 years. The reason behind this is that the holiday would encourage companies to hoard even more of their profits in offshore tax havens moving forward in anticipation of another holiday, and much of the money repatriated under a holiday would have been eventually repatriated at a higher tax rate anyway.

In contrast to a repatriation holiday, many lawmakers have also proposed raising revenue to fund infrastructure through a mandatory or deemed repatriation tax on profits held offshore by corporations as part of a broader corporate tax reform. For example, President Obama has proposed to pay for infrastructure using a 14 percent mandatory tax on unrepatriated profits as part of a broad corporate tax reform that would include a 19 percent minimum tax on foreign profits moving forward. Similarly, Representative John Delaney has proposed a mandatory tax rate of 8.75 percent and would default to a tax system with a minimum tax of 12.25 percent on corporation’s foreign profits.

The trouble with either proposal is that they would reward companies for their current offshore tax dodging with a rate lower than the current rate of 35 percent, and over the long term would put in place international tax regimes that continue to incentivize companies to shift operations offshore. In addition, while both proposals would raise a substantial amount of revenue, they would only patch the HTF for a limited number of years, after which lawmakers would have to find another funding sourcing to pay for the gap in infrastructure funding. Finally, using revenue gained from taxing offshore profits to bridge the gap in the HTF would mean that this revenue would not be available for a variety of other important public investments where this revenue could be used.

Around the nation, environmentally minded Americans are taking steps to achieve e a greener nation. The tax code may not be the most obvious tool for achieving environmental change, but reforming some tax giveaways to oil and gas companies could help level the playing field between fossil fuel manufacturers and more sustainable energy sources. 

• Stop pretending oil companies are “manufacturers.” In 2004, Congress decided to enact a special tax deduction for 9 percent of the income of domestic manufacturers. A lobbying frenzy quickly transformed the bill so that the definition of manufacturing included film production, coffee, and, yes, the oil and gas industry. Paring back the manufacturing deduction to focus on actual manufacturing—and excluding oil and gas production from this lucrative tax break—would be a fine way to put fossil fuels on a level playing field with more sustainable energy sources.

• Repeal expensing of intangible drilling costs. In general, when companies make investments in capital assets, they are allowed to write off the cost of those investments gradually, over the life of the assets. But when oil companies spend money on materials and equipment for drilling, thanks to their lobbying clout, they get to write off these expenses immediately. This amounts to an interest-free loan from the federal government.

• Repeal “percentage depletion” tax breaks for oil and gas. It’s bad enough that oil and gas companies can write off their investments faster than they wear out—but thanks to a special tax break, when these same companies gradually write off the cost of their oil fields, they can routinely deduct more than the fields are actually worth. This is because the so-called “percentage depletion” rule lets oil companies write off a flat percentage of their gross revenues from production, even after already writing off the full cost of the oil fields.

A number of lawmakers have sensibly proposed paring back or repealing these tax breaks. Most recently, the “End Polluter Welfare Act,” jointly sponsored by Sen. Bernie Sanders (I-VT) and Rep.Keith Ellison (D-MN) would repeal two of the tax breaks mentioned above—expensing of intangible drilling costs and the “manufacturing” designation for oil and gas production—was introduced this week.

As we have noted before, these tax breaks are part of a network of unwarranted tax breaks that subsidize the production and use of fossil-fuel technologies, to the tune of billions of dollars a year. As millions of Americans observe Earth Day by making an effort to live in more sustainable, environmentally friendly ways, Congress’s to-do list to mark the occasion should start with pulling these tax breaks out by the roots. 

Legislators in the Pennsylvania House released an alternative to Gov. Tom Wolf’s tax reform plan last Tuesday. The House plan would increase income and sales tax rates to provide significant property tax cuts, as would the governor’s plan. One difference is that the House plan would raise the sales tax rate to 7 percent but leave the base unchanged, while Wolf’s plan would increase the sales tax rate to 6.6 percent and expand the sales tax base. The House plan also would not provide property tax rebates for renters as the governor’s plan would. While the House plan would provide even more funding for property tax cuts, ($4.9 billion vs. $3.9 billion under the governor’s plan) their package is essentially revenue neutral and does not include increased investments in public education which is a signature piece of the governor’s plan. The House Finance Committee is expected to vote on the House plan next week. Stay tuned to the Tax Justice Blog for a more in-depth analysis of tax reform efforts in Pennsylvania.

The Ohio House is set to approve Gov. John Kasich’s proposed tax cuts while nixing his proposals for new tax revenue. Kasich originally proposed $5.7 billion in income tax cuts and $5.2 billion in consumption tax increases over two years– specifically an increase in the sales tax rate from 5.75 percent to 6.25 percent, an expansion of the sales tax base, and increases in the commercial activities tax and severance tax on natural gas extraction. The House is expected to pass a smaller income tax cut and to reject all of the proposed tax increases; whereas the governor wanted to lower the top personal income tax rate to 4.1 percent, the House will likely reduce the rate to just under 5 percent. At the same time legislators blocked the governor’s proposed cuts in public school funding, a welcome but contradictory move.  Stay tuned to the Tax Justice Blog for a more in-depth analysis of tax cutting efforts in Ohio.

The South Carolina House approved a bill by a veto-proof majority that would increase the states gas tax by 10 cents and provide most residents with a modest income tax cut of $48. It is expected to generate $400 million in new revenue for road construction, tax cuts excluded. The margin of passage is important because Gov. Nikki Haley, who vowed not to increase the gas tax without significant income tax cuts, feels that the cuts passed by the House are not enough. The bill also does not contain the Department of Transportation reform measures demanded by Haley, who seeks to assert more control over road funding and construction. The Senate is also considering a road funding plan.

Following Up:
Florida: Senate President Andy Gardiner says the $600 million in tax cuts championed by Gov. Rick Scott and passed by the House last week are “on the shelf” until the fight over Medicaid expansion is resolved. Federal subsidies to Florida for healthcare providers who treat the poor are scheduled to expire, but the governor is resistant to expanding Medicaid coverage under Obamacare to make up for the lost revenue.

In Case You Missed It:

• ITEP released a report on undocumented immigrants’ contributions to state and local tax systems. The report found that undocumented immigrants paid an estimated $11.84 billion in taxes in 2012. Check out this blog post for more!
• In honor of Tax Day, the Tax Justice Blog highlighted the great work done by our state partners around tax issues.  

Despite its setting among rugged coastlines and quaint lighthouses, there will be nothing picturesque about the coming tax battle between Gov. Paul LePage and legislative leaders in Maine. The current debate is the latest in a string of Maine tax reform efforts; in 2013 the “Gang of 11” proposed an ambitious bipartisan plan that was dashed like a fishing boat along a rocky shore, and in 2009 lawmakers passed a tax package that was soundly rejected by voters at the polls.

LePage unveiled his budget proposal back in January, and it included a package of changes that would fundamentally change the way Maine taxes its residents. The governor wants to cut income taxes through across-the-board rate reductions. The threshold for the zero income tax bracket would increase from $5,200 to $9,700. Any income between $9,700 and $50,000 would be taxed at a reduced rate of 5.75 percent, and income between $50,000 and $175,000 would be taxed at 6.5 percent. Income beyond $175,000 would be taxed at just 5.75 percent – an outrageous concession to the already well-off.. His plan also increases the exclusion for pension income from $10,000 to $30,000, introduces a refundable sales tax credit (though the state’s nonrefundable Earned Income Tax Credit is axed under the plan), and boosts the state’s targeted property tax fairness credit.

LePage has gone on record as wanting to eliminate Maine’s income tax – most recently at a Tax Day press conference – calling it “an obsolete form of taxation.” If the state income tax were eliminated, half of Maine’s annual $3 billion in revenue would go with it.

LePage wants other provisions that would inordinately benefit wealthy Mainers as well. His plan would eliminate Maine’s estate tax at a cost of $85 million over four years, and the top corporate income tax rate would fall from 8.93 percent to 6.75 percent.

To pay for his proposed cuts, Gov. LePage wants to increase the sales tax rate to 6.5 percent and expand the sales tax base to include personal and professional services. He makes further changes to the personal income tax as well, including eliminating itemized deductions. He would also end the state’s practice of sharing revenue with municipalities, while allowing cities and towns to implement a new tax on large nonprofit organizations in their jurisdictions. Lawmakers and local officials fear this will upend municipal budgets and force property tax increases at the local level.

The governor’s plan would shift revenues from progressive income taxes to regressive sales and property taxes, and the state will net a revenue loss of $300 million if all changes take effect. The shift would also make state finances more volatile over the long run; as this ITEP brief explains, the income tax displays more robust growth over time than do sales and property taxes.

Last week, legislative leaders in the Maine House and Senate unveiled an alternative to Gov. LePage’s plan entitled “A Better Deal for Maine.” The alternative proposal would also cut income taxes and increase sales taxes, but the benefits would be targeted to middle-income Mainers rather than the wealthy. The average taxpayer with income under $167,000 would get an income tax cut, but the top personal income tax rate would remain untouched and many of the state’s richest residents would see a modest tax increase under the plan. Rather than increasing the 0 percent bracket, the alternative plan boosts the state’s standard deduction and phases out the benefit for upper-income taxpayers. 

The sales tax rate would remain at 5.5 percent, but the base would be expanded to include services, as it would under LePage’s plan. Like the governor’s plan, the alternative introduces a new refundable sales tax credit and increases the property tax fairness credit, but it retains the current pension exclusion amount.

The Better Deal alternative proposed by legislators does not eliminate revenue sharing with municipalities, as the governor would. Under the alternative plan, the Homestead Exemption property tax benefit would be doubled to $20,000 for all homeowners; under the plan proposed by LePage, the homestead exemption was doubled only for homeowners over 65 years of age. Unlike the governor’s plan, the alternative plan is revenue neutral.

An ITEP distributional analysis found that the “Better Deal for Maine” plan would provide bigger tax cuts for more Mainers while protecting investments in critical services like education. Under Gov. LePage’s plan, the average taxpayer in the top 5 percent of Mainers would see significant cuts, while the alternative plan would see taxes increase modestly for most in the same group. Overall, the alternative plan would make Maine’s tax system more fair.

The “Better Deal for Maine” plan has already won an opening salvo, garnering the support of many of the state’s major newspapers. The Bangor Daily News praised the alternative for its focus on reducing property taxes, which fall more heavily on the bottom of the income scale, than income taxes that are felt more heavily at the top. The Morning Sentinel and Kennebec Journal said in a joint editorial that the alternative plan would “boost demand and lead to economic growth” because it targets middle-class consumers rather than wealthy businesses.

An ITEP report released today found that the 11.4 million undocumented immigrants living in the US  contribute significantly to state and local taxes – to the tune of $11.84 billion in 2012, our analysis shows. Under the terms of President Obama’s executive actions on immigration that figure could increase by $845 million a year; if legal status were granted to all undocumented immigrants their state and local tax contributions would increase by $2.2 billion a year.  

Immigration reform efforts have languished in Congress since 2005, and more recently the House of Representatives failed to consider a comprehensive immigration bill passed by the Senate in 2013. A frustrated President Obama announced last November that he would offer temporary legal status to close to 4 million undocumented immigrants who are parents of US citizens or lawful permanent residents and who pass a background check. He also expanded his 2012 order to defer deportation for undocumented immigrants who arrived in the country as children. Roughly 5.2 million undocumented immigrants could benefit from the president’s 2012 and 2014 proposals.

In February a federal judge in Texas temporarily blocked the president’s executive actions in response to a lawsuit against the federal government by 26 states. Judge Andrew Hanen granted the injunction on the grounds that the suing states “would suffer irreparable harm in this case” were the executive actions enforced before the lawsuit wound its way through the federal judiciary, since a revocation of legal status would be extraordinarily unlikely and since the states would be forced to increase “investment in law enforcement, health care and education. 

Our recent report shows that granting legal status to undocumented immigrants would be a net benefit to states since these workers already contribute to paying for state and local services and would pay even more taxes were they allowed to work legally. In Texas, where the injunction was granted, undocumented immigrants already pay an estimated $1.5 billion a year in taxes, and under the terms of Obama’s executive actions they would pay an additional $57 million.

Despite contrary claims – similar to the falsehood that 47 percent of Americans do not pay taxes – the reality is that undocumented immigrants contribute to paying for local and state services. Those who make these arguments focus narrowly on federal income taxes, ignoring the sales, excise and property taxes to which all Americans contribute and which make up a significant share of taxes collected. Extending lawful permanent residence to those who are currently undocumented would be a positive benefit for the economy and the communities where undocumented immigrants live, allowing them to fully contribute and support the important work we do together.