Month: May 2015

At a time when many governors stubbornly rejected new revenues despite their states’ weak fiscal positions, former Maryland Gov. Martin O’Malley’s was one of only a few governors who championed tax increases to preserve his state’s public investments even during the Great Recession.

Early in his term, O’Malley made a substantial revenue increase the centerpiece of his economic agenda. The most notable piece of this package was a progressive measure, the “millionaires tax,” which temporarily created a slightly higher new tax bracket applicable solely to taxpayers with taxable income in excess of $1 million. This change raised millions in much-needed revenue from the very wealthiest Marylanders—a group that could clearly afford to pay more since, at that time (PDF), the top 1 percent of taxpayers in Maryland paid just 6.2 percent of their income in state and local taxes compared to an effective tax rate of almost 10 percent for the bottom 20 percent of earners.

Unfortunately, the millionaire’s tax faced substantial opposition from anti-tax conservatives who claimed that the tax was driving wealthy individuals to leave the state. In reality, these claims turned out to be entirely fallacious and were driven in large part by the Wall Street Journal’s reckless misreading of data.

Additionally, the package contained other regressive revenue raisers, which were more of a mixed bag. For example, O’Malley approved increases to the regressive sales tax and cigarette tax. He also attempted to substantially expand the sale tax base through taxing services, a smart move in terms of policy, but one that turned out to be to politically toxic.

Each of these tax increases disproportionately affected low- and middle-income taxpayers. However, these increases were part of a broadly progressive package and were critical in maintaining public services that benefit all families in the state.

Five years later, O’Malley moved to increase the sustainability and progressivity of the tax code by raising income tax rates and limiting tax exemptions for Marylanders earning more than $100,000. According to an analysis by the Institute on Taxation and Economic Policy (ITEP), these changes only affected 11 percent of Maryland taxpayers and a majority of it was borne by the wealthiest 1 percent of taxpayers in the state.

In terms of enhancing the sustainability of Maryland’s tax system, one of the best moves made by O’Malley was his push to reform Maryland’s gasoline tax, which is the state’s main funding source for transportation projects. Like most states throughout the country, Maryland had allowed inflation to gradually chip away at the value of the gas tax. If lawmakers failed to act, the tax was on its way to its lowest level (adjusted for inflation) in 91 years. Fortunately, O’Malley was able to usher through a reform that both raised the gas tax rate in the short term, and allows for further adjustments in the future to keep the rate in line with inflation and gas prices.

One of the more noteworthy ways that O’Malley improved his state’s tax system was with expansions of the state’s Earned Income Tax Credit (EITC) in both 2007 and 2014. According to an ITEP analysis, the state’s expanded EITC made the state’s tax system significantly less regressive for low- and middle-income families.

O’Malley has yet to articulate a detailed vision on federal tax policy, but he recently laid out some broader progressive principles. In a recent speech at Harvard, O’Malley lambasted the failure of “supply-side economics” and called for an end to “tax policies that not only underinvest in our nation, but grossly and disproportionately benefit corporations and the ultra-wealthy.”

In addition, he has recently argued in favor of raising the capital gains tax rate, which would make the tax system significantly more fair considering that capital gains receive a preferential rate compared to wages and primarily are received by wealthier Americans. This move could potentially position him to the left of Hillary Clinton, who has been mum on raising the capital gains tax rate so far this election and has expressed skepticism of increasing the rate in the past. 

Efforts to tie property taxes to household income face long odds in New York. Back in January, Gov. Andrew Cuomo proposed a $1.7 billion property tax circuit breaker for New York homeowners and renters meant to offset the cost of property taxes with an income tax credit. The measure enjoyed support in the state Assembly, but has since stalled in the conservative state Senate where lawmakers would prefer a broader property tax rebate not tied to income. The Senate plan, however, would provide less targeted relief and would only apply to homeowners. Supporters of Cuomo’s proposal say a property tax circuit breaker would help keep people in their homes in a state with some of the highest property taxes in the nation, while critics say the plan is a giveaway to suburban districts that doesn’t address the root cause of New York’s high taxes. ITEP has long advocated property tax circuit breakers as a way to fight poverty and make tax systems fairer – for more, check out this report.

A number of tax policy developments have come out of Alabama as the state nears the end of the legislative session. State Sen. Bill Hightower, who initially proposed replacing Alabama’s personal income tax with a flat tax version, scaled back his ambitions to a resolution that calls for a new taskforce to study the issue. Hightower’s initial proposal received pushback from groups who argued that a flax tax would increase the contributions of poor. A recent op/ed in The Huntsville Times notes that Alabama is among the few states that ask families below the poverty line to pay income taxes, noting that “the social and economic cost of taxing the poor might actually be higher than the dollar value of the revenues the state is collecting from them.” Meanwhile, Hightower also sponsored a successful bill that would require annual reports on the effectiveness of various tax credits, deductions and special rates, earning praise for going after ineffective tax loopholes that are used mainly by the wealthy.

Texas legislators reached a deal on transportation legislation that could send more revenue to road and bridge construction but reduce funding available for crucial investments in education and human services. House and Senate negotiators agreed on a proposed constitutional amendment that would divert $2.5 billion in sales tax revenue to roads if approved by voters. Sales tax revenue must exceed $28 billion for the measure to take effect, and the law will be on the books for 15 years. The deal also diverts 35 percent of any vehicle sales tax revenue over $5 billion to road construction, a measure that is expected to deliver an additional $250 million in new road money. 

Most Americans learned in their grade school government and civics classes about the three branches of federal and state government. Perhaps kids in Louisiana should also learn about a fourth branch, Grover Norquist of Americans for Tax Reform (ATR), who apparently has veto power over crucial legislation.

Louisiana’s leaders have grappled with how to close a $1.6 billion budget gap all session. The wound is self-inflicted; lawmakers and Gov. Bobby Jindal passed the biggest tax cut in Louisiana’s history back in 2008, when oil prices were high and the state had a $1 billion surplus, instead of investing money in priority areas like education, health care and infrastructure. After the economic slowdown, Jindal and state leaders turned to a variety of tax incentives and one-off revenue sources to increase job growth and balance the budget to no avail. Today, oil prices are at record lows and Louisiana lags the nation in growth. But instead of reversing tax cuts that haven’t lead to prosperity, lawmakers are cowering in fear of anti-tax advocate Grover Norquist, who doesn’t even live in the state.

Gov. Jindal, widely rumored to be preparing a presidential run, has insisted that any solution to the budget problem must be revenue-neutral and in accordance with the dictates of Norquist’s famous anti-tax pledge. The governor and legislators, caught between their need to balance the budget and kowtow to Grover, are tying themselves in knots to raise taxes without appearing to do so.

Take the bill recently under consideration in the state Senate that would make Rube Goldberg proud. Senators first considered a package of bills from the House that would raise $664 million to stave off devastating cuts to higher education, but did not include the offsets demanded by ATR. In order to pass muster with the national group, senators invented a new “fee” for college students that would raise the same amount as the House tax increases, then promptly offset this fee with a tax credit. At the end of the day, students won’t actually pay more, since the credit will apply at the same time that the fee is levied. And since fees don’t count under the ATR pledge, Gov. Jindal can claim that the tax increases were offset by the new student credit.

Again, the Louisiana Senate was forced to adopt a convoluted plan with a fake fee and fake tax credit as a smokescreen for raising revenue so that the governor could keep his promise to an anti-tax advocate in Washington, DC. That’s the world we live in.

The gambit appears to have fooled no one. The Hayride, a conservative blog proclaimed by ATR as “Louisiana’s premier political website,” has called the measure an outright tax increase. A number of senators refused to support the bill, saying legislators were “playing games.”

The entire bait-and-switch wouldn’t even work if it weren’t for the ATR’s strange distinction between raising taxes (terrible!) and raising fees (meh). The conventional wisdom in some quarters is that charging fees for state services is better that raising taxes broadly because fees fall directly on beneficiaries. But while this seems fairer, it is the opposite in practice. Fees rarely rise with inflation, the way that conventional tax revenue does. They place a bigger burden on low-income residents, who have less ability to pay. And many of the services that states have turned to fees to fund, like higher education, have many indirect benefits for society that should be supported through broad taxation. Sadly, as more and more lawmakers defer to the opinions of Grover Norquist and his ilk rather than adopting commonsense fiscal policies, more states have come to rely more heavily on fees.

The solution to this mess isn’t gimmicky legislation. The solution is for legislators and governors to grow a backbone and stand against Grover’s anti-tax zealotry. Lawmakers should consider their obligations to their constituents rather then bending to the caprice of a beltway insider.

Former Pennsylvania senator and now Republican presidential candidate Rick Santorum has long touted himself as a champion of the “blue-collar” crowd, yet his record on tax policy indicates he’s more interested in championing hedge-fund moguls.

During his time in the U.S. senate, Santorum voted continually for the budget-busting and extremely regressive Bush tax cuts, earning him an “F” in Citizens for Tax Justice’s (CTJ) congressional scorecard. Nearly a third of the benefits of the Bush tax cuts went to just the wealthiest 1 percent of taxpayers and added $2.5 trillion to the deficit through 2010.

Not only did Santorum help usher in the Bush tax cuts, 85 percent of which have been made permanent, as a presidential candidate in 2012 he also promised to double down on this blunder by proposing another $9.4 trillion in regressive tax cuts over a decade. A preliminary CTJ analysis of Santorum’s 2012 tax plan found that the wealthiest one percent of taxpayers would receive an average annual tax break of $217,000, while the middle fifth of Americans would receive an average tax break of $2,160. Because the tax cuts aren’t paid for, the plan would require either draconian cuts in basic public services or would it would explode the deficit going forward.

During a GOP primary debate in 2012, the moderator asked if any of the candidates would support a deal that included ten dollars in spending cuts for every one dollar in new tax revenues, at which point Santorum joined the other candidates to affirm that he would absolutely reject such a deal.

In the years since his 2012 run, Santorum has spelled out a series of problematic corporate tax cuts he supports. For example, in his 2014 book “Blue Collar Conservatives,” Santorum advocates cutting the corporate income tax rate from 35 percent to 20 percent for all corporations except for manufacturers, for which he proposed a zero tax rate.

Like Santorum’s other tax proposals, his corporate tax plan would substantially increase the deficit, since even eliminating all corporate tax expenditures (with the exception of “deferral” on “foreign” profits) would only allow the rate to be lowered to 29.4 percent without losing revenue over the long term. Although Santorum does vaguely propose to eliminate most corporate tax expenditures, he would retain and double the size of the broken research credit, while creating a massive new and economically distortive tax expenditure by exempting manufacturers and expanding the exemption of foreign corporate profits from taxation. Altogether, Santorum’s corporate tax plan would blow a massive hole in the budget to provide a large windfall to corporations, which already face relatively low tax levels.

In contrast to his slew of regressive proposals, Santorum has recently proposed one progressive tax change: doubling the child tax credit. Doubling the credit could provide a much needed boost to many families, although not to those with the lowest incomes. Such a substantial expansion to the credit could also add to the deficit if revenue is not raised in some other way to pay for it. In a recent interview, Santorum suggested that this idea could be a potential opportunity for the left and right to come together to help working families.

Finally, while he has not explicitly endorsed the so-called “Fair Tax,” a regressive plan to replace all federal taxes with a national sales tax, in his book he wrote that there is “much to commend it as a starting point for discussion.” A study by the Institute on Taxation and Economic Policy (ITEP) found that a revenue-neutral national sales tax would increase taxes on the bottom 80 percent of taxpayers by an average of $3,200 a year, while cutting taxes by an average of $225,000 a year on the top one percent. This radically regressive tax shift is not a sound “starting point” for discussion.

Santorum’s overall tax policy platform would likely increase the deficit, reduce funding for basic services and do nothing for working families.

Earned Income Tax Credits (EITCs) are one of the most popular and effective tools available for fighting poverty through the tax code. In 2013 alone, the federal EITC helped lift 6.2 million working families, including 3.2 million children, out of poverty. Numerous studies show that federal EITC expansions in the 1990s helped boost work effort among single mothers and female heads of households, and that the women who participated in the program saw higher wage growth over time. The EITC has also been associated with better health and educational outcomes for the families that it benefits. It’s no wonder that EITCs have gained bipartisan support at both the federal and state level.

Maryland offered the first state EITC to its residents in 1987, and 25 states and the District of Columbia now provide their own version modeled on the federal credit. During this legislative session, two more states – California and Massachusetts – are considering EITC proposals that would provide a hand up to working families.

California lawmakers are considering implementing a state EITC for the first time, with competing proposals from the Assembly, Senate and governor. Gov. Jerry Brown   included an EITC proposal in his revised budget plan last week which would provide qualifying working families in California an average credit of $460 a year; the maximum credit for a family with three or more kids would be $2,653. Qualifying families can earn a maximum of $13,870 under the governor’s proposal, about the average income of California’s bottom fifth of taxpayers but relatively low considering California’s median household income of $60,194. Brown’s plan is much less generous than two bills under consideration in the legislature, but the fact that the governor’s budget contains an EITC proposal and both houses of the legislature are considering their own plans is a good sign that California will adopt an EITC in the near future. Senate Bill 38 and Assembly Bill 43 propose EITCs with no income cutoff for eligibility. According to an ITEP analysis, SB 38 would provide an average credit of $781 to the bottom fifth of taxpayers, as well as generous credits to middle-income taxpayers. AB 43 would provide an average credit of $602 to the bottom fifth.

In Massachusetts, leaders in the Senate want to fund an expansion of the state’s existing EITC by freezing the state’s personal income tax rate at 5.15 percent. Otherwise, the rate will fall to 5.1 percent in January. The Senate plan also includes a modest increase in the personal exemption. An ITEP analysis of the Senate plan found that the average taxpayer in the bottom 60 percent of Massachusetts’s income distribution would get a tax cut. According to senators who support the plan, this is all about fairness: “It’s about rewarding work and not just rewarding wealth,” argues state Sen. Ben Downing. Gov. Charlie Baker wants to double the state EITC by eliminating the state’s film tax credit and leaving the planned income tax cut in place, a good sign that the state EITC will be strengthened if the governor and legislature can agree on how to pay for it.

Sadly, some states are moving backwards on state EITCS. In North Carolina, where legislators have an unexpected revenue windfall, progressive groups have called on lawmakers to restore the state EITC that was allowed to expire last year, costing nearly one million families an important lifeline. A House Committee rejected an amendment that would do that, electing moments later to instead renew a tax break for buyers of airplanes and yachts.

After the defeat of a ballot measure to raise additional road funding through a sales and gas tax expansion, conservative lawmakers in Michigan unveiled a proposal that would fund road repairs in part by eliminating the state EITC. About 780,000 Michiganders received the EITC in 2013, with most of the benefits going to those earning between $15,000 and $20,000. Many legislators want to avoid raising sales or gas taxes in order to fund roads, but eliminating this crucial program for working families is not the answer.

To learn more about the role that state EITCs can play in supporting working families and creating more prosperity for everyone, check out this ITEP report.

A Louisiana Senate committee passed a package of eleven bills that would raise an additional $615 in revenue next fiscal year. If passed, the package will raise the state cigarette tax by 32 cents per pack, scale back business subsidies, and decrease many of the state’s existing tax breaks through a 20 percent across-the-board cut. Most of the new revenue raised by the package of bills would go toward preventing deep cuts to higher education and healthcare programs. The bills have garnered opposition from many business groups, and are likely to have a tough time gaining the governor’s signature. Gov. Bobby Jindal has pledged to veto any measure considered a net tax increase by Grover Norquist, who is the head of Americans for Tax Reform and not a resident of Louisiana.

Minnesota’s lawmakers are headed for a special session after Gov. Mark Dayton pledged to veto a $400 million education spending bill that does not include additional funds for universal pre-kindergarten. The veto comes after an offer by Dayton to drop his insistence on universal pre-kindergarten in exchange for $125 million in additional educational funding was rebuffed by conservative lawmakers. The veto and call for a special session cap five months of negotiations and failed compromises over the budget. In the press conference announcing his planned veto, Gov. Dayton railed against lawmakers for considering billions of dollars in tax cuts but balking at funding education, saying “It’s astonishing that with a $1.9 billion projected surplus and more than $1 billion on the bottom line for future tax cuts, there would not be more invested in our schools this year.”

Oklahoma lawmakers passed an unbalanced budget deal that would cut the higher education budget deeply but allow disastrous tax cuts to take effect. Facing a $611 million budget deficit, the legislature decided to address most of the shortfall through the use of $589 million in agency and reserve funds. The rest of the shortfall was made up in cuts to higher education ($24.1 million). Some agencies will see budget cuts of up to 7.25 percent, while a proposal to increase teacher pay and add days to the school year will likely be scrapped. Meanwhile, a cut in the top personal income tax rate from 5.25 to 5 percent will continue as planned, despite the revenue shortfall and its cost of $200 million over two years. The cut will overwhelmingly benefit the wealthy, with ITEP data revealing that the top 1 percent of Oklahoma taxpayers will receive an average cut of $2,127 while those in the middle will get an average cut of just $31. The Oklahoma Policy Institute called for the rejection of the budget deal  as it “barely maintains some vital services only by using up hundreds of millions in one-time revenues that will immediately dig another large budget hole for next year. Oklahoma will not be able to kick this can down the road much longer. Legislators should reject this budget and demand a balanced plan that includes sustainable revenue options.”

House Republicans today are planning to pass a deficit-financed tax cut that mainly benefits already profitable big businesses under the premise that the tax cut will spur innovation. The bill, which has bipartisan support, would expand and make permanent the research credit at a cost of $182 billion over a decade. If anything, the research credit should be significantly reformed or allowed to expire, rather than being made a permanent part of the tax code.

Corporate lobbyists and their allies in Congress argue the research credit provides companies with an extra incentive to invest in research that could provide positive benefits for society as a whole. While wanting to promote research and innovation seems as wholesome as apple pie, the research credit more closely resembles a cow pie.

One of the biggest problems with the research credit is that it largely subsidizes activities that no one would consider research that is broadly beneficial to society. For example, companies can receive the credit for “developing new packaging” and new “soft drink flavors.” To fix this problem, Congress could limit the credit to actual scientific research, by implementing the common sense regulations put forward by the Clinton Treasury, but withdrawn by the George W. Bush Administration.

Adding to this, the research credit does a poor job of incentivizing additional research of any sort. The most egregious example of this is the fact that companies are now allowed to apply for the tax credit retroactively by filing amended tax returns. It’s highly implausible that a company would do more research in response to a tax credit it didn’t know it was eligible for. A simple fix to this would be for Congress to disallow companies to claim the credit on amended returns.

Rather than making these critical reforms to the research credit, the House legislation would make matters worse by doubling the cost of the credit by increasing the percentage rate at which “research” is subsidized.

The House legislation is unpaid for so the $182 billion loss in revenue over ten years would directly increase the deficit. In fact, with the passage of the research credit, House Republicans will have approved more than $300 billion in deficit busting tax breaks for corporations and wealthy individuals since the start of the year.

While House Republicans appear content to add $182 billion in tax breaks for corporations onto the deficit, they have at the same time refused to make permanent expansions to the earned income tax credit (EITC) and the child tax credit (CTC), which would cost around $155 billion over the next decade. These credits are critical in helping working families get ahead, and if they are allowed to expire at the end of 2017, more than 13 million families would lose an average of $1,073 a year.

While the research credit has bipartisan support, there is likely enough opposition from President Obama and many Democrats to stop full passage of the legislation. In fact, the White House has issued a formal veto threat against the bill. The real concern moving forward is that in the push to renew the now-expired research credit and other tax extenders, lawmakers will try and make many of these provisions permanent as part of a large corporate tax giveaway package later this year.

Congress seems to be nearing agreement on a plan to extend transportation infrastructure spending for another two months, but it also appears to be at a loss for ideas on how to continue these critical investments after the fund becomes insolvent toward the end of July. 

The root cause of this recurring crisis is an obvious, easily fixable flaw in the gas tax’s design—the tax remains the same, with no adjustments for inflation unless lawmakers agree to change it.  States that recognize the economic importance of their transportation networks are increasingly taking steps to address this flaw, but federal lawmakers lack the political will to increase the gas tax and have repeatedly sidestepped the issue with 33 short-term fixes.

As with most things in our economy, the cost of building and maintaining our transportation network grows more expensive over time.  Asphalt, concrete, and machinery prices are subject to inflation in much the same way as food, furniture, and all the other products that shoppers have seen grow in cost over the years.

This is not an unusual or surprising problem.  But it does require that we pay for our transportation network with a sustainable revenue source.  Unfortunately, the federal gasoline tax (the single largest source of transportation funding in the county) does not fit this description because of a glaring flaw in its design.  Rather than growing with inflation each year, the federal gas tax has been fixed at 18.4 cents for more than 21 years.  Because of this, drivers have been paying roughly $3 in federal tax on each tank of gas for two decades, despite the fact that $3 buys significantly less maintenance and construction than it did in the 1990’s.

The nearby chart shows that if the federal gas tax rate is measured relative to growth in road construction costs, the tax has lost 38 percent of its value since Congress last increased it in 1993.  To be clear, this does not suggest that construction costs have grown in an unprecedented or unexpected way.  The problem has been a long, slow, inevitable decline in purchasing power for which lawmakers failed to plan.  If we measure the gas tax rate relative to a broader, more familiar measure of general inflation in the economy (the Consumer Price Index), the result is almost identical: a 39 percent decline.

Offsetting these decades worth of inflation would require an immediate increase in the tax rate of 11 or 12 cents per gallon.  But a one-time boost in the gas tax rate will not address the unavoidable, ongoing impact that inflation will have in the future.  For that, lawmakers should look to other parts of the tax code for inspiration.  Numerous tax brackets, exemptions, deductions, credits, and even the Alternative Minimum Tax are now tied to inflation so that they can grow modestly every year and retain their “real” value.  A very similar fix—which is growing in popularity at the state level—would put an end to these recurring funding crises for years to come, and would allow for infrastructure maintenance and expansions that are vitally important to the economy.