Month: June 2015

Sen. Rand Paul (R-KY) outlined the broad contours of his plan for restructuring the federal tax system in a Wall Street Journal op-ed today.  He proposes replacing the personal income tax and payroll taxes with a flat-rate14.5 percent income tax, and replacing the corporate income tax with what amounts to a value-added tax (VAT). A CTJ preliminary analysis of the plan finds that it would likely cost $1.2 trillion a year and $15 trillion over a decade.

Paul’s plan would repeal the progressive personal income tax, the estate tax, and the federal payroll tax and replace them with a single 14.5 percent “flat tax” on all types of personal income. The plan would keep a few features of the current tax code, including itemized deductions for mortgage interest and charitable contributions and the Earned Income Tax Credit, and would create a large “no tax floor” by exempting the first $50,000 of income (for married couples) from the new income tax. A CTJ analysis estimates that the switch from the progressive personal income tax to the new flat-rate tax on personal income would cost more than $700 billion in 2016 alone.

Repealing payroll taxes, the estate tax and all customs duties would cost an additional $1.6 trillion, leaving a $2.3 trillion hole in the budget. Paul proposes to fill some of that hole with a 14.5 percent “business activity tax,” which appears to be conceptually identical to a VAT. While it’s uncertain exactly what would be included in the base of Senator Paul’s VAT, a VAT at this rate could plausibly raise about $1.1 trillion a year.

When the dust clears, this would leave the federal government with $1.2 trillion less in tax revenue in fiscal year 2016 if the plan were implemented immediately—a reduction of about one-third in total federal revenues. Over a decade, the plan would cost a stunning $15 trillion.

Sen. Paul seems unfazed by this math, arguing that these massive tax cuts would act as “an economic steroid injection” that would make it possible to balance the federal budget—something Paul has proposed he would do as President. (If this line seems familiar to residents of Kansas, it’s because they’ve heard it from their governor repeatedly over the past four years.)

But it’s hard to see how this could be possible. Even the Tax Foundation, which he cites as providing evidence that his plan wouldn’t cost anything, finds that the Paul plan would cost $960 billion over ten years when “dynamic scoring” is factored in. And the Tax Foundation’s approach to dynamic scoring notoriously assumes that while tax cuts always spur economic growth, government spending on education, roads and health care has no positive impact on the economy at all. A more clear-eyed approach to measuring the “dynamic” effect of federal tax changes would at least attempt to quantify the very real—and very beneficial—effect of public investments on the national economy.

It should go without saying that given the fiscal challenges facing America—and given the chronic deficits Congress and the President have authorized in recent years—the most sensible first step toward sustainable tax reform should be to raise more revenue. But it seems very likely that Paul’s plan would blow a trillion-dollar hole in the federal budget each year. That’s the furthest thing from a sustainable tax plan. 

South Carolina Senator Lindsey Graham, yet another entrant into the 2016 GOP presidential race, has a history of supporting extremely regressive tax proposals, yet at the same time has deviated from anti-tax conservatives on a number of issues.

In terms of regressive tax proposals, Sen. Graham is the latest candidate in the presidential race to voice his support for the extremely regressive flat tax. Other supporters of the flat tax include Gov. Rick Perry, Sen. Ted Cruz, Sen. Rand Paul, Ben Carson and yet to announce candidate Gov. John Kasich.

While none of the candidates, including Sen. Graham, have specified the exact details of their proposed flat tax plans, a flat tax would make our tax system substantially more regressive and likely actually increase taxes on all but the wealthiest Americans. An analysis of a flat tax proposal by Citizens for Tax Justice (CTJ) found that the plan would actually increase taxes on the bottom 95 percent of Americans by an average of $2,887 annually, but at the same time provide the top one percent of taxpayers with an annual tax break of $209,562.

Sen. Graham’s enthusiastic support on the campaign trail for a flat tax should come as no surprise given the senator’s history of supporting extremely regressive tax reform proposals in the U.S. senate. For example, Sen. Graham co-sponsored legislation that would have replaced the federal income tax with an 8.4 percent consumption tax, which he dubbed the “BEST tax.” Given that the federal income tax is the most progressive part of the federal tax code, replacing it with a regressive consumption tax would substantially increase taxes on low- and middle-income families, while at the time providing the wealthiest Americans a massive tax cut.

Sen. Graham’s support for regressive tax change goes well beyond his support for the flat tax. During the mid-2000s for instance, Sen. Graham earned an “F” on a CTJ congressional report card for his support of the regressive and budget-busting Bush tax cuts. In addition, Sen. Graham has co-sponsored a bill to repeal the estate tax entirely, a move that would provide the richest 0.2 percent of estates with $268 billion in tax breaks over the next decade.

Although Sen. Graham has fought to make our tax system more regressive, he has shown a few moments of moderation on tax issues relative to his more conservative colleagues. The biggest deviation has been his willingness to push back against the anti-tax militancy of many of his GOP colleagues. In 2012, Sen. Graham rejected Grover Norquist’s infamous taxpayer pledge saying that he was “willing to move my party, or try to, on the tax issue.” Similarly, Sen. Graham said that he would accept a deficit reduction deal in which there were three dollars in spending cuts for every one dollar in revenue raised, which makes him distinct from Rick Perry, Rick Santorum and the entire 2012 GOP field that rejected the notion of even a ten dollars in spending cuts to one dollar in tax increases deal.

One other sensible tax position that Sen. Graham has taken is his support of the Marketplace Fairness Act, which would empower states to collect sales tax on online and other remote purchases. The move would finally end the special competitive tax advantage given to Amazon and other online retailers and provide states with additional much needed revenue.

A final, potentially praiseworthy deviation by Sen. Graham from anti-tax conservatives was his support for a cap-and-trade system. Whether it’s through an explicit carbon tax or a cap-and-trade system, either way would help combat global climate change by putting a price on to carbon and thus creating a market incentive against its use. Of course, adjustments would have to be made to other taxes to mitigate the regresssivity of a carbon tax, and it’s not clear that Graham would support these essential adjustments.

While Sen. Graham’s support of regressive tax proposals and the flat tax specifically place him well within the rightwing tax camp, his support for a variety of revenue-raising measures sets him somewhat apart from his rabidly anti-tax colleagues.

This week both the House Ways and Means Committee and the Senate Finance Committee are holding hearings to discuss how to deal with the looming insolvency of the Highway Trust Fund (HTF), and how to sustainability finance the nation’s transportation investments in the long-term.

In written testimony submitted to both committees, ITEP’s Carl Davis explains that the core reason the HTF is in crisis is that the federal gas tax is poorly designed.  On October 1st, the 18.4 cent federal gas tax rate will have gone precisely 22 years without being increased.  Over this same period of time, however, the cost of transportation construction has risen by 60 percent.  A stagnant gas tax rate coupled with inevitable inflation in the construction sector is a recipe for unsustainability.

In his testimony, Davis discusses how many states are leading the way with reforms that boost the gas tax’s long-term yield by allowing the tax rate to grow over time.  He also explains why experimental taxes on each mile driven are a promising long-run idea, but cannot raise revenue in the short-run and are susceptible to some of the same problems as the current gas tax.  Finally, Davis’ testimony notes that repatriation tax proposals actually lose revenue in the medium- and long-terms, and that these policies encourage corporations to conduct more of their operations offshore (either on paper or in reality).

Read the testimony

The drama that ensued over the last few weeks in Topeka is the stuff of telenovelas. Kansas Gov. Sam Brownback got emotional when urging lawmakers to vote for a sales tax hike, even calling legislators from the hospital where his granddaughter was just born. Staunch anti-tax legislators broke their no new taxes pledge. Lawmakers accused the governor of blackmail, and the legislative session went on for an extra 23 days.

In the end, many Kansans will pay more in taxes due to an increase in sales and cigarette taxes, a freeze in income tax rates and limits for itemized deductions.

But every good soap opera deserves a twist. It’s well known that these tax increases were precipitated by irresponsible, top-heavy tax cuts championed by Gov. Brownback and passed in 2012 and 2013. An ITEP analysis of all Kansas tax changes over the last four years (including this year’s) found that the poorest 20 percent of Kansans, those with an average income of just $13,000, will pay an average of $197 more in taxes in 2015 as a result of the Gov. Brownback tax changes, and, even with the increases Gov. Brownback is expected to sign into law today, the richest 1 percent are still paying about $24,000 less.

Early on in his tax-cutting frenzy, the Governor offered that Kansas was a “real live experiment” for other states in terms of showing the positive impact of supply side economics. Those words have come back to haunt him and other supporters of trickle-down economic theories. If Kansas is an experiment, Friday’s vote makes it clear that the experiment failed.

One of the biggest and most regressive tax cuts included in the Governor’s 2012 tax cuts is its full exemption of non-wage business income. It’s the only state in the nation to fully exempt all pass-through business income. Lawmakers missed a real opportunity to fix this costly loophole.  Instead, they approved a new tax on guaranteed payments to ensure that some tax on small business income is levied, but accountants can easily manipulate the books so their clients don’t pay this new tax.

Most importantly, Kansas’s tax changes, even the provision that allegedly exempts 380,000 low-income people from income taxes, will do nothing to alter the fact that the Sunflower State earlier this year earned a spot on ITEP’s “Terrible Ten” list because it has 9th most regressive tax structure in the country.

The tax bills that barely passed the Senate (and passed the House at 4 am that same morning) included the following:

• Income Tax Rate Freeze: Income tax rates were scheduled to fall to 2.3 and 3.9 percent, but the budget instead froze the rates at 2.6 and 4.6 percent
• Itemized Deduction Reform: The bill limits itemized deductions  for mortgage interest and property taxes paid.  This change is expected to generate $97 million in FY2016.
• Sales Tax Rate Hike: The sales tax rate (including groceries) increases from 6.15 to 6.55 percent. This rate increase is expected to bring in $164 million in FY2016.
• Cigarette Tax Rate Hike: The cigarette tax increases by $0.50 per pack to $1.29 beginning July 1.  The tax hike is expected to generate $40 million in FY2016 and will almost certainly generate less in years to come.
• Low Income Exemption: Taxpayers with taxable income less than $5,000 ($12,500 for married couples) are exempt from paying the personal income tax.
• Guaranteed Payments: These payments, received from some types of pass-through business income, will now be taxed. This change is expected to bring in $23.7 million in FY2016.

The Kansas tax drama is over for the time being, but stay tuned. Chances are this soap opera will continue as lawmakers grapple with the impact of tax hikes in the context of unaffordable tax cuts.

Stephen Moore, a member of the supply-side triumvirate along with Art Laffer and Travis Brown, recently wrote a deeply misleading op-ed for The Wall Street Journal hailing North Carolina’s revenue surplus as vindication for supply-side economics and the state’s regressive tax policy. Don’t buy it.

Moore paints a rosy picture of the economic health of the Tarheel State, where lawmakers passed massive tax cuts for the wealthy in 2013 and are gearing up for another round this legislative session. The 2013 cuts prompted public outcry from citizens concerned about the drastic spending decreases needed to make the tax cuts possible, as well as the focus on slashing taxes – the estate, personal income and corporate income taxes –overwhelmingly paid by the well-off.

Worse, the 2013 cuts came on the heels of years of declining investment due to the national recession, a decline lawmakers have been slow to reverse. A 2014 Budget and Tax Center report found that spending in that year was still 6.6 percent below pre-recession levels, far from the norm in other states and for North Carolina in previous recessions.

Moore’s op-ed pretends that states can have massive, top-heavy tax cuts and still adequately meet their public obligations. But that’s only true if they’re in a race to the bottom. The state of public education funding in North Carolina is abysmal. The percentage of state dollars dedicated to K-12 education has gone down for the past 30 years; one study suggests that if public education had the same funding support now as in 1985, “schools would have an extra $1 billion a year in state money, which could [raise] teacher salaries [and presumably attract more talent] above the national average and could boost spending on items such as textbooks.” According to one NEA study, North Carolina ranked last nationally in teacher salary increases over the last decade. Dozens of school districts were forced to cut teaching positions or increase class sizes in 2013, a slow-burning economic blow that the state will contend with for years to come.

Moore also employs smoke and mirrors to tout North Carolina’s job and employment growth as a rebuttal to those who thought tax and spending cuts were the wrong policy. “The job market is vastly improved and people didn’t go hungry in the streets,” he reasons (it’s unclear how he knows this, but it’s worth pointing out that one in four North Carolina children are food-insecure). The truth is the number of employed North Carolinians is still below pre-recession levels and lags national averages. Despite an 18.5 percent increase in state domestic product since 2007, wages have actually fallen. And the economic recovery has been massively uneven along geographic, ethnic and socioeconomic lines.

Instead of acknowledging the challenges North Carolina faces, Moore crows about a one-time budget surplus. “Even with lower rates, tax revenues are up about 6% this year according to the state budget office,” he writes. “Gov. McCrory announced that the state has a budget surplus of $400 million while many other states are scrambling to fill gaps.”

Sounds great, right? Except that correlation does not imply causation, as every economist (including, presumably, Stephen Moore) knows. The $400 million is an unexpected windfall from business and capital gains growth – similar to revenue surpluses in at least ten other states, some of which did not cut taxes and at least one (California) which raised taxes. Even Art Pope, North Carolina’s former budget director and the architect of the 2013 cuts, doesn’t think the surplus stems from his tax policy changes.

Furthermore, plenty of other states that have embraced supply-side tax cuts ended up with massive deficits, Kansas and Louisiana being the prime examples. A recent CBPP report found that “Four of the five states that enacted the largest personal income tax cuts in the last few years have had slower job growth since enacting their cuts than the nation as a whole.”

Moore concedes the point on Kansas, most likely because he couldn’t get away with ignoring the biggest repudiation to his economic philosophy in years. But he obfuscates on the issue, noting that “Art Pope says one difference between the two states is that ‘we cut spending too. Kansas didn’t.’” And yet isn’t that the snake oil that Moore and his associates sell? That tax cuts will pay for themselves without spending cuts?

In Kansas, where lawmakers are still scrambling to close a $400 million shortfall, every supply-sider has counseled patience. The architect of the Kansas experiment, Art Laffer, said that the tax cuts there could take a decade to work. But not so in North Carolina, where two years and a one-time revenue boost are enough to declare “Mission Accomplished.”

The assertions of Moore and his compatriots in corporate welfare would be laughable were they not exceedingly dangerous. Even now, North Carolina lawmakers are preparing to waste the unexpected $400 million on additional tax cuts – on top of revenue triggers that will automatically drop the corporate rate from 6.9 to 4 percent by 2016. Senate Republicans have suggested further cutting personal income tax rates, calculating corporate income taxes on the basis of a single sales factor, and slashing the franchise tax by a third. These lawmakers claim their goal is to provide “balanced tax relief,” but don’t hold your breath. In 2013, the top five percent of taxpayers got 90 percent of the net tax cut, while the bottom 80 percent ended up paying more. Even after accounting for a sales tax base expansion, this new plan will lose $1 billion in state revenues. In other words, lawmakers are using a one-time surplus of $400 million to justify a billion dollar tax break for the wealthy. This is the state of fiscal conservatism.

So North Carolina, just as one should beware Greeks bearing gifts, you should be extra careful around Wall Street Journal editorial board members selling voodoo economics. Chances are they’re looking for a doll. 

The nonpartisan Congressional Research Service (CRS) just released a report that makes a strong case for making permanent EITC provisions that are set to expire in 2017 and also improving the credit for low-income workers without children.

The 2009 American Recovery and Reinvestment Act (ARRA) expanded the EITC by temporarily increasing benefits for families with more than two children and increasing the income level at which the credit phases out for married couples. However, these two improvements are slated to expire at the end of 2017, which Citizens for Tax Justice (CTJ) estimates would result in a decrease or loss of benefits for approximately 6.3 working million families, including 14.7 million children.

The following are four of the main takeaways from the CRS report.

1. EITC Increases Employment

There is strong empirical evidence that the EITC increases labor force participation among single mothers. In fact, one study found that 34 percent of the increase in employment for this group between 1993 and 1999 can be attributed to expansions of the EITC.

2. EITC Reduces Poverty

The EITC has been associated with significant reductions in poverty for households with children. For example, studies have found the EITC reduces poverty rates for single workers with one child by about 15 percent and for married couples with three children by nearly 30 percent.

3. EITC Benefits Much Greater for Workers with Children than for Childless Workers

While the EITC leads to substantial poverty reduction among recipients with children, it reduces poverty rates for childless workers by a much smaller degree (0.14 percent for single workers and 1.39 percent for married couples). The EITC generally lifts households with children above the federal poverty line, but childless workers often remain below the poverty line even after the EITC.

In addition to differences in poverty reduction rates, there are also significant differences in tax rates between households with and without children that are otherwise “equivalent” (i.e. have the same income adjusted by household size). This disparity is due to the fact that the EITC is much more generous for households with children. While the 2015 maximum credit for a childless worker is $503, the maximum credit for a worker with one child is more than six times greater at $3,359.

These inequities provide a strong case for increasing the EITC for childless workers. Lawmakers have introduced bills in both the Senate (S.1012) and House of Representatives (H.R.902) that would increase the maximum credit for childless workers to $1,400 and lower the eligibility age for these workers from 25 to 21. CTJ estimates that this expansion would provide 10.6 million working individuals and couples without children with an average tax benefit of $604. President Obama and Rep. Paul Ryan have also both proposed increased benefits for childless workers, but would provide a maximum credit of only $1,000.

4. High EITC Error Rates May Be Due to Excessive Complexity

The EITC has been criticized for its high error rates relative to traditional spending programs and other benefits provided through the tax code, though there is evidence that a significant amount of error is due to complexity in eligibility rules and credit formulas. The report suggests that the concern about high error rates may be overblown, but a simplification of the credit has the potential to decrease error rates and confusion among taxpayers.

On the whole, evidence shows that the EITC is an important antipoverty program that has positive effects on employment. Policymakers should make permanent the ARRA improvements benefitting larger families and married couples, and can further improve on this program by increasing the credit for workers without children and simplifying the rules to increase the accuracy of claims.

There’s no doubt that Michigan needs to find additional funds to repair its rapidly deteriorating transportation network.  But the package of bills just approved by the Michigan House of Representatives represent some of the worst ideas for doing so.

The most problematic change would repeal the state’s Earned Income Tax Credit (EITC).  The EITC is a vital pro-work and anti-poverty tax credit that benefits roughly 800,000 Michigan families every year.  Just four years ago, Michigan lawmakers voted to scale back the state’s EITC by 70 percent to help fund large business tax cuts.  Rather than revisiting whether such dramatic tax cuts were prudent, the House wants to double down and repeal the modest EITC that remains.

Judging by the statements being made by some lawmakers, this decision seems to be based in part on a fundamental misunderstanding of how Michigan’s tax system works.  State Rep. Aric Nesbitt, for example, justified his vote by saying that EITC repeal “helps ensure a flat and fair system.”  In reality, repealing the EITC would only exacerbate the unfairness of a tax system already tilted against low- and moderate-income taxpayers. 

Under current law, Michigan’s wealthiest residents pay 5.1 percent of their income in state and local taxes while the state’s poorest residents pay a significantly higher 9.2 percent rate.  Repealing the EITC would have no impact on the taxes paid by the state’s more affluent taxpayers, but an ITEP analysis showed that it would raise the rate paid by the state’s low-income residents to 9.7 percent.  The result would be an even more steeply regressive tax system, and one even further from the “flat” ideal that Rep. Nesbitt says he supports.

While EITC repeal is the most troubling aspect of the House package, the lion’s share (more than $900 million out of a $1.1 billion package) of the road funding would come from simply diverting money away from other vital services such as health care, education, corrections, and economic development.  This reshuffling of funds toward roads and bridges is nothing more than a Band-Aid tactic—and one that we’ve seen create real budgetary problems in states such as Oklahoma and Utah.

The one bright spot in this plan would raise the diesel tax by four cents and would index both gasoline and diesel tax rates to inflation.  If these changes are enacted into law, Michigan would become the 17th state to raise or reform its fuel taxes since 2013.  Such reforms are vital to ensuring the long-run sustainability of gas taxes—the single most important source of transportation funding available to Michigan lawmakers. 

But despite their merits, these incremental gas tax reforms will hardly be worth celebrating if they’re accompanied by an elimination of the EITC and cuts to non-transportation areas of public investment.  Hopefully the Michigan Senate will be able to come up with some better ideas as it crafts its own transportation funding package.

Connecticut’s legislature approved a two-year $40 billion budget last week with wide-ranging tax increases to help close a $1 billion budget gap. 

The changes include fully applying the sales tax to all clothes purchases and reducing a targeted property tax credit. But the two provisions that have received widespread attention are corporate tax reforms and increasing the personal income tax rate on the richest 5 percent of taxpayers.

Lawmakers included corporate tax reforms in the final budget despite objections from some of the largest corporations in the state, such as GE and Aetna.  In addition to higher taxes on computer and data processing services, the plan limits tax credits and specifies how business income can be reported.  Most significantly, Connecticut will join the majority of states in requiring corporations to file a combined report that treats subsidiaries of multistate corporations as one entity so they are taxed in aggregate.

General Electric (GE) threatened to relocate its headquarters and established an exploratory committee the day after lawmakers passed the final budget, and other major business interests have issued press releases conveying their discontent for the corporate- and personal income tax changes in the budget.  Gov. Dan Malloy has yet to sign the budget and has agreed to a sit-down meeting this week with the president of the Connecticut Business and Industry Association to discuss the corporate tax changes

GE and other corporations’ complaints have misrepresented the budget as a plan that only raises needed revenue by solely increasing taxes for the wealthy and profitable businesses. This is far from reality.  An ITEP analysis found that all income groups will pay more under this plan, and the lowest-income taxpayers in the state will experience the largest tax increase as a share of income.  Connecticut’s tax system is already upside down, and the tax changes included in the contentious budget deal would further exacerbate the gap between low-income and wealthy Connecticut taxpayers. 

Complaints about ‘combined reporting’ are also suspect considering that GE and other major corporations in Connecticut comply with the measure in almost every other state in which they currently operates.

GE is not exactly the best poster child for so-called high taxes. The company is notorious for paying low to zero corporate income taxes.  In 2014, an ITEP analysis found that GE paid an average state corporate income tax rate of negative 1.2 percent on its $5.75 billion in profits in the United States. Looking over the past five years, GE only paid a state corporate income tax rate of 1.6 percent, just about a quarter of the average weighted state corporate income tax rate of 6.25 percent.

Big business will undoubtedly continue to pressure Gov. Malloy into forgoing the good corporate tax changes included in the budget deal awaiting his signature.  The state is certainly in need of new revenue to protect critical public investments, yet if any part of the plan should give him pause it should be the tax increases on low- and moderate-income families rather than the small ask for wealthy taxpayers and profitable corporations to pay a little more.