State Rundown 10/30: Spooky Appointments, Phantom Tax Increases

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New Jersey Gov. Chris Christie, clearly not a regular reader of this blog, nominated Art Laffer acolyte Ford Scudder to be state treasurer. Scudder is chief operating officer of Laffer Associates and an analyst at Laffer Investments. If appointed to the position, Scudder would be responsible for crafting the state budget and overseeing state investments, pensions and benefits, state debts and lottery revenue. Senate President Stephen Sweeney was not impressed by the governor’s move: “The so-called Laffer curve came to embody the trickle-down economic policies that were discredited because they favored the wealthy at the expense of everyone else. New Jersey is not the place to reintroduce the policies that caused so much lasting damage to the economy.” This is not the first time a Laffer associate has served in state government. Donna Arduin, a partner in Laffer’s consulting firm, recently left a high-profile position in Illinois (which remains mired in a budget standoff) and Laffer himself was a prominent architect of Sam Brownback’s failed tax experiment.

Louisiana voters decided on four constitutional amendments with implications for the state’s fiscal health this past weekend. Voters rejected Amendment 1, a proposal to weaken the state’s rainy day fund to benefit transportation projects, and Amendment 3, which would have loosened the rules around which bills could be offered during the fiscal legislative sessions held in odd-numbered years. Voters approved Amendment 2, a proposal that gives the state treasurer the option of investing funds in the state infrastructure bank, by a slim margin. The infrastructure bank allows local governments to borrow money at favorable rates for infrastructure projects. Voters also approved Amendment 4, which allows local governments to collect property taxes on properties owned by state and local governments outside of Louisiana.

A Maryland environmental group is challenging one jurisdiction’s plan to phase out a stormwater fee – also derided as a “rain tax” – without first spelling out an alternative way of paying for required environmental projects. The Chesapeake Bay Foundation argues that Baltimore County, which plans to eliminate the stormwater fee over two years, must first specify how it will pay for state-mandated projects designed to reduce water pollution. In 2012, the state legislature required urban and suburban districts to collect the stormwater fees to reduce runoff; under newly-elected Gov. Larry Hogan, the law was revised to allow jurisdictions to drop the fee if they dedicate another source of money to the required projects.

A bill that will fix an unintended feature of a recently-enacted tax cut passed the Ohio legislature this week and will now go to Gov. Kasich for his signature. In June, lawmakers passed a tax cut that allows business owners to deduct up to 75 percent of their first $250,000 in business income this tax year, and 100 percent of that amount in 2016. Any income in excess of $250,000 would then be subject to a flat tax of 3 percent in both years. However, as the law was originally enacted, the 2015 exemption only covered 75 percent of the first $250,000 and the other 25 percent (as well as any income over $250,000) would have been subject to a 3 percent flat tax.  For some taxpayers, this would have resulted in a tax increase since the state’s current graduated income tax system includes rates as low as 0.528% on low levels of income. Essentially, the tax cut included an accidental tax increase. The recently passed measure fixes the oversight, though it’s worth noting Ohio would have avoided $81 million in revenue losses next fiscal year if no correction was made. 

Paul Ryan Wants to Cut Taxes for the Rich and Make Life Harder for Low-Income People

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Anti-tax champion Grover Norquist recently said Paul Ryan is a ‘prophet” who “points the way to the Promise Land.” Coming from Norquist, that statement alone is reason enough for pause. But the newly elected Speaker of the House’s record on tax and budget policy also raises serious alarm regarding the direction of the nation’s fiscal policy.

For years, Rep. Ryan has been one of the leading champions of regressive tax policies. Now, as Speaker of the House, he will have a bigger microphone and a more powerful platform to push his pro-corporate, anti-worker vision for the nation’s tax code.

As chairman of the House Budget Committee in 2014, Ryan called for consolidating the existing income tax brackets down to two (10 and 25 percent), eliminating an unspecified number of tax expenditures, repealing the alternative minimum tax, reducing the corporate tax rate to 25 percent, and instituting a territorial tax system for multinational corporations. Even under the most generous assumptions, a CTJ analysis found that his plan would give millionaires an average tax break of at least $200,000 each year. Under less generous assumptions, this tax cut for the rich would balloon to nearly $330,000.

“Ryan’s colleagues in the House have said he would unite the party. Based on his record on economic policy, that unfortunately means he and his colleagues would like to unite behind regressive tax policies that ask the least of those most able to pay,” said Bob McIntyre, director of CTJ.

Beyond supporting regressive tax changes, Ryan also staunchly opposes any tax increases. He signed Grover Norquist’s no-tax pledge and said he would not support any budget deal that included an increase in revenue. Not surprisingly, given his desire to reduce the deficit without increasing revenue, Ryan’s budgets require draconian cuts to critical public services. For example, Ryan’s 2014 budget includes $3.3 trillion in cuts to programs for low- and moderate-income families, such as SNAP, Medicaid and Pell Grants. In other words, Ryan’s budget simultaneously calls for massive tax cuts for the wealthy and devastating cuts to critical safety net programs.

One of the ways that Ryan has attempted to paper over the harsh reality behind these is to embrace the world of fuzzy math. During his brief tenure as chairman of the Ways and Means Committee, Ryan ushered in a new rule requiring that the non-partisan scorekeepers at the Congressional Budget Office and the Joint Committee on Taxation (JCT) use dynamic scoring in their official cost estimates on proposed tax changes. While it has not been used extensively up to this point, dynamic scoring could have the magical effect of making costly tax cuts appear to have little effect on revenue collection due to economic growth that supposedly would result.

The nation is already struggling to fund basic priorities that Americans widely support. Federal spending today as a percent of GDP is less than it was during Ronald Reagan’s entire tenure.

“The nation cannot tax cut its way to prosperity,” McIntyre said. “Unfortunately, House members have just elected a speaker who will unite the party behind ideological, status quo policy ideas that would benefit the elite few at the expense of the rest of us.” 

Louisiana Voters Protect State Rainy Day Fund

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Good news out of Louisiana this week. Voters defeated Amendment 1, one of four constitutional amendments on the Oct. 24 statewide primary ballot. The proposal would have put a $500 million dollar cap on the state’s Rainy Day Fund, the savings account the state relies on in the event of an unexpected drop in revenues. The amendment would have also created a transportation fund to capture any mineral revenue coming in above the new cap.

Steve Spires of the Louisiana Budget Project sums up the situation in his recent post:

“The goal of this amendment is laudable: to address Louisiana’s chronic backlog of transportation needs. Unfortunately, it would do so by weakening the state’s rainy-day savings account, which would hurt the state’s ability to react to future financial downturns and put vital state services at risk for damaging cuts.”

Even without the amendment, the fund is already subject to strict rules such as the condition that the legislature can only use one-third of its contents in any given year. A $500 million dollar cap would have limited rainy day fund infusions to just $167 million per year. In the context of Louisiana’s roughly $8 billion budget, Amendment 1 would have rendered the fund unable to cover anything beyond a 2.1 percent decline in revenues. This would have been an inadequate cushion to protect Louisiana residents from cuts to critical public services during the next economic downturn.

Size restrictions on rainy day funds limit states’ ability to grow reserves in line with their budgets. In our Primer on State Rainy Day Funds, ITEP warns against such overly restrictive caps. Louisiana voters made the right call this week by forcing lawmakers to have a real discussion about road funding, rather than weakening the state’s rainy day fund as part of a deficient package that wouldn’t have solved the problem.

Jeb Bush’s Tax Plan Gives Top 1% Average Tax Cut of Nearly $180,000

October 28, 2015 02:03 PM | | Bookmark and Share

Bush’s Tax Plan Turns Populism on Its Head

Read Report as a PDF.

A Citizens for Tax Justice analysis of Jeb Bush’s tax plan reveals that it would cut taxes by $7.1 trillion[i] over a decade, and it would give almost half of its tax cuts to the wealthiest 1 percent of Americans.

What the Bush Plan Would Do

Bush’s tax plan includes major changes to both the personal and corporate income taxes. This analysis is an update of a previous analysis that focused only on Bush’s proposed changes to personal income taxes.[ii]

Under Bush’s plan, every income group would see a tax cut. But the plan’s tax changes would reserve the biggest benefit for the very best-off Americans. As a share of income, the top 1 percent would collectively see a tax cut equal to 10.2 percent of their income, more than two and a half times the tax changes enjoyed by any other income group, and nearly five times the size of the tax cuts that would go to the poorest 20 percent of Americans.

  • The poorest 20 percent of Americans would receive a tax cut averaging $316.
  • Middle-income Americans would receive an average tax cut of $1,572.
  • The best-off 1 percent of taxpayers would enjoy an average tax cut of $177,246.
  • Almost half of the tax cuts (46 percent) would go to the top one percent.

How the Bush Plan Would Cut Personal Income Taxes:

  • Reduces the top personal income tax rate from 39.6 percent to 28 percent, and reduces the number of tax brackets from 7 to 3.
  • Eliminates the 3.8 percent high-income surtax on unearned income that was enacted as part of President Barack Obama’s health care reforms.
  • Eliminates the Alternative Minimum Tax, which was designed to ensure that the wealthiest Americans pay at least a minimal amount of tax.
  • Cuts the maximum tax rate on interest income to 20 percent, mirroring the plan’s special treatment of capital gains and dividends.
  • Increases the standard deduction by $5,000 for single filers and $10,000 for married couples.
  • Doubles the size of the Earned Income Tax Credit for childless filers.
  • Eliminates rules that limit the benefit of certain exemptions and deductions for high-income filers.
  • Eliminates the estate tax.

The plan also includes some revenue offsets:

  • Eliminates the itemized deduction for state and local income, property and sales taxes.
  • Creates a new cap on the value of itemized deductions (other than charitable contributions) so that the tax benefit from these deductions cannot exceed 2 percent of a taxpayer’s Adjusted Gross Income (AGI).
  • Ends the special tax break for the “carried interest” income enjoyed by hedge fund managers (although the tax rate on carried interest would be only slightly higher than now, due to Bush’s reduction in the top regular income tax rate).

How the Bush Plan Would Cut Corporate Income Taxes:

  • Cuts the corporate tax rate from 35 percent to 20 percent.
  • Allows for full expensing on new investments, including buildings.
  • Eliminates the corporate alternative minimum tax.
  • Enacts a territorial tax system with a 100 percent exemption on dividends.

The plan also includes some revenue offsets:

  • Eliminates the deductibility of interest expense (except for financial businesses).
  • Phases out special corporate deductions and credits, with the exception of the research and experimentation credit.



[i] Our 10-year revenue estimate differs substantially from the one offered by the Bush campaign largely due to the fact that the Bush campaign substantially underestimates the cost of its proposed corporate tax cut provisions and overestimates the amount it raises with its corporate tax offsets.

[ii] Citizens for Tax Justice, “More Than Half of Jeb Bush’s Tax Cuts Would Go To the Top 1%,” September 11, 2015.

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New CTJ Report: Guiding Principles for Tax Reform

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With campaign season in full swing, presidential candidates of both major parties are now releasing details on their views of “tax reform.”  Not surprisingly, everyone’s for it– but that’s because the candidates have very different views on what reform should accomplish. A new CTJ report helps to separate the wheat from the chaff, outlining three broad goals that should be accomplished by any meaningful tax reform plan.

Read it here.

Guiding Principles for Tax Reform

October 27, 2015 02:27 PM | | Bookmark and Share

Raise Revenue, Enhance Fairness, Stop Corporate Tax Avoidance

(Read the updated 2016 version of this report here.)

Read the report as a PDF.

There is widespread agreement in the halls of Congress and among the American people that the U.S. tax system desperately needs reform. Yet some proposed federal tax changes defy what most Americans would consider reform. This policy brief outlines three sensible, broad objectives for meaningful federal tax reform and discusses specific policies that can help achieve these objectives.

1. Tax Reform Should Raise Revenue

The most basic task of any tax system is to raise enough revenue to fund needed public investment, but the federal tax system has consistently failed to achieve this minimal goal. In 35 of the past 40 years, the federal government has failed to collect enough tax revenue to pay for all of federal spending, so in each of these years the nation has run a budget deficit. Anti-tax advocates would have the public believe that these persistent deficits are due to federal spending growth. But in fiscal year 2014, federal spending was lower as a percentage of the nation’s Gross Domestic Product than it was in any year of Ronald Reagan’s presidency. And in the past five years alone, discretionary spending has fallen by almost a third as a share of the economy.[1]

The nation’s federal deficits are primarily the product of our historically low federal tax revenues. In each of the past four years, federal revenues have been lower as a share of the economy than at any time since the early 1970s.[2] As a result, U.S. taxes are well below those of most other nations. In 2013, the most recent year for which complete data are available, the U.S. collected less tax revenue as a percentage of its economy than did any other economically developed country besides Chile and Mexico.[3]

Budget deficits can, of course, be balanced through a mix of revenue increases and spending cuts. But the main driver in the nation’s ongoing budget deficits is the decline in federal tax revenues, driven by sweeping tax cuts enacted more than a decade ago. This suggests that a sensible goal of comprehensive tax reform should be to raise federal revenues substantially above their current depressed level.

Revenue-raising reforms must be designed in a way that strengthens our tax system in both the short run and the long term, but some current congressional proposals emphasize raising revenue in the short run at the expense of sustainable long-term tax revenue. For example, proposals to enact a “tax holiday” for trillions of dollars in cash that American corporations are currently holding offshore would provide a small short-term revenue boost, but it would mean forgoing a much larger long-term revenue stream if these companies paid their fair share of the corporate tax when they eventually repatriate these profits. [4]

A sensible question to ask about any proposed revenue-raising plan is whether it would help provide sustainable long-term tax revenue or whether it would undercut this goal in the name of short-term expediency.

2. Tax reform should not exacerbate income inequality

Fairness is in the eye of the beholder, but Americans generally agree that a fair tax system should not tax poor people further into poverty. Contrary to the “skin in the game” rhetoric used by some presidential candidates, Americans at all income levels pay a substantial share of their income to support public services.

In fact, the poorest 20 percent of Americans will pay, on average, 19.2 percent of their income in federal, state and local taxes in 2015. The average annual income in this group is about $15,000, so families living below the federal poverty threshold still pay a significant percentage of their income in taxes.

Mitigating poverty and creating conditions in which more citizens can participate and contribute to our nation’s economy is a necessary social policy goal. Requiring the poorest Americans to spend a fifth of their income on taxes is tantamount to making the poor poorer. For this reason, a minimal goal of revenue-raising federal tax reform should be to avoid increasing taxes on the most vulnerable Americans beyond their current level.

At the other end of the spectrum, our tax code contains special carve outs for the very best-off Americans that allow the wealthiest Americans to avoid paying their fair share. For example, the tax code treats income derived from wealth more favorably than income derived from work. The top tax rate on capital gains income is 23.8 percent, well below the 39.6 percent top tax rate on salaries and wages. Two-thirds of all capital gains are enjoyed by the top 1 percent of Americans.[5] More so than virtually any other feature of the tax code, the capital gains tax break exacerbates widening economic inequality in our nation.

In spite of these inequities, the federal tax system helps offset the regressive nature of state tax systems, all of which take a greater share of income from their lowest-income residents than from their wealthiest residents. The share of total taxes paid by each income group is roughly equal to the share of total income received by that group. For example, the poorest fifth of taxpayers will pay only 2 percent of total taxes this year, which is not surprising given that this group will receive only 3.2 percent of total income this year. Meanwhile, the richest 1 percent of Americans will pay 23.8 percent of total taxes and receive 22.2 percent of total income in 2013.[6] In other words, the nation’s collective tax system is relatively flat or proportional rather than progressive.

Tax reform should avoid pushing low-income working families further into poverty and make the very wealthiest Americans pay their fair share. Fortunately, there are straightforward policy solutions to help achieve each of these goals. Preserving and expanding targeted tax credits such as the Earned Income Tax Credit and the Child Tax Credit would reward work and help low-income families make ends meet. And taxing capital gains and dividends in the same way that salaries and wages are taxed would raise some revenue, add fairness and progressivity to the tax code as well as ease widening income inequality.

3. Tax reform should close corporate tax loopholes and ensure corporations pay their fair share

Fortune 500 corporations are aggressively seeking to avoid all income tax liability, lobbying intensively for new tax breaks while simultaneously engaging in an aggressive effort to shift their U.S. profits into low-rate foreign tax havens.

Further, some of the biggest Fortune 500 corporations are finding ways to shelter their U.S. income from taxes altogether. A 2014 CTJ/ITEP report found that 111 Fortune 500 companies were able to avoid all federal income taxes in at least one profitable year between 2008 and 2012,[7] and a companion report found a similar pattern at the state level.[8] In many cases, these zero-tax corporations are simply claiming generous tax breaks that have been enacted by Congress (at the behest of corporate lobbyists) over the years. All too often, these tax provisions lavish huge tax cuts on the most profitable corporations while offering little to smaller businesses with less lobbying clout.

Paring back tax breaks for accelerated depreciation, research and development and manufacturers could help achieve a level playing field for businesses of all sizes.

Many of the same big multinational corporations are aggressively seeking to avoid taxes by claiming, for tax purposes, that their U.S. profits are actually being earned in offshore tax havens.

This widespread income-shifting stems largely from an arcane feature of the U.S. corporate tax law: American multinational corporations are allowed to “defer” paying whatever U.S. taxes are owed on the profits of their offshore subsidiary companies until those profits are officially brought to the U.S.

Deferral encourages American corporations to use accounting gimmicks to make their domestic profits appear to be generated by subsidiary companies in countries with a very low tax or no corporate tax.

The most straightforward policy option to end this sham is to end deferral. This would mean that all the profits of American corporations are subject to the U.S. corporate income tax whether they are domestic profits or foreign profits generated by offshore subsidiaries. This change would eliminate the incentive for an American corporation to move its operations offshore or to make its U.S. profits appear to be generated in an offshore tax haven.

Putting it All Together

Our tax system chronically underfunds the public investments the American public demands—and does so in a way that pushes low-income families further into poverty while allowing huge corporations and the best-off Americans to avoid paying their fair share. True tax reform should raise revenue in the short run, to help meet the country’s pressing budgetary needs, while simultaneously creating a sustainable long-term revenue stream to meet tomorrow’s needs. Tax reform should also avoid making inequality and poverty greater problems than they already are. Each of these goals can be achieved by closing unwarranted loopholes for capital gains and offshore corporate profits, while preserving and expanding valuable low-income tax credits.

[1] Office of Management and Budget, Historical Tables, October 20, 2015.

[2] Ibid.

[3] Citizens for Tax Justice, The U.S. Is One of the Least Taxed Developed Countries, April 9, 2015.

[4] Citizens for Tax Justice, $2.1 Trillion in Corporate Profits Held Offshore: A Comparison of International Tax Proposals, July 14, 2015

[5] Citizens for Tax Justice, Ending the Capital Gains Tax Preference would Improve Fairness, Raise Revenue and Simplify the Tax Code, September 20, 2012.

[6] Citizens for Tax Justice, Who Pays Taxes in America in 2015?, April 9, 2015.

[7] Citizens for Tax Justice, The Sorry State of Corporate Taxes, February, 25, 2014.

[8] Citizens for Tax Justice, 90 Reasons We Need State Corporate Tax Reform, March 19, 2014.

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Tax Ballot Measures Ask Voters to Decide

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The fall harvest season has brought a bumper crop of tax ballot measures in states across the nation(though sadly, no tax-themed seasonal lattes.) We’ve already covered a ballot proposal in Washington, a potential ballot proposal in North Carolina, and a 2016 proposal in Maine – check out the links to get the scoop. Today, we’re looking at measures in Texas and Utah, and providing an update on Washington.

Texas: Texas voters will consider two proposals with significant ramifications for roads and schools. Proposition 1 would increase the homestead exemption for public school property taxes from $15,000 to $25,000. The average savings for Texan households would be about $126, but schools systems across the state would lost $1.2 billion per biennium – money that the state would have to replace from the general fund. A state judge has already ruled that the state’s low level of school funding is unconstitutional, and Proposition 1 will make it harder to even maintain the status quo – all at a time when the needs of Texas’s schoolchildren are growing. Compounding the budgetary pressure is Proposition 7, which would divert sales tax revenue from the general fund to the Texas Department of Transportation for highway maintenance and construction, but would not raise any new revenue. This could have the unintended effect of weakening spending in other important areas that are paid for out of the general fund (including schools), particularly since low oil and gas prices are hurting the state’s bottom line. A better approach would be raising the state’s gasoline tax, which has remained unchanged for 24 years and has failed to keep pace with inflation.

Utah: Utah voters in 17 counties will decide whether or not to raise their sales taxes by 0.25 percentage points in order to fund the Utah Transit Authority. Legislative analysts say the plan will cost affected Utahans $50 a year on average. The legislature voted to allow counties to decide if they wanted to include the measure, Proposition 1, on the ballot and 17 of Utah’s 29 counties followed through. If passed by a county’s residents, the sales tax increase will only apply to that county. If approved, 40 percent of the revenue raised will support the transit authority. Another 40 percent would go to cities for local roads and other transportation projects. The final 20 percent will go regional transportation projects.

Washington: Tim Eyman, the author of Initiative 1366 and previous supermajority requirements, is a lightning rod in Washington state politics. I-1366 would force the legislature to amend the state constitution to require a supermajority vote for tax increases. If legislators refuse to amend the constitution, the ballot initiative would automatically cut the sales tax rate by a penny, leaving the state $8 billion poorer at a time when the Washington Supreme Court says the state is not meeting its constitutional obligation to K-12 students. Already, a mix of uncertainty over funding and questions swirling around Eyeman have caused many supporters of previous anti-tax measures to withhold their support from I-366. The Association of Washington Business and the state’s grocery store association are both keeping out of the debate over the proposal over concerns about how their donations were used in past efforts. If the initiative passes anyway, opponents hope that the courts will eventually rule I-1366 an unconstitutional abrogation of legislative authority. 

State Rundown 10/23: Cuts, Roads and Student Kickbacks

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A coalition of Iowa student leaders is calling for a tax incentive to keep graduate and professional students in the state. Student government leaders from the University of Iowa, Iowa State University and the University of Northern Iowa want lawmakers to implement a 50 percent income tax break for graduate and professional students who reside in Iowa for up to five years after graduation. For students who choose to reside in rural areas, the tax break would increase to 75 percent. Student leaders say the measure would address a shortage of healthcare and legal professionals in the state. However, a recent survey of Iowa graduate and professional students found that employment opportunities were the biggest factor in choosing to remain in the state, not tax incentives.

The battle over road funding in Michigan continues. House Republicans managed to pass a road funding plan despite objections by chamber Democrats, though some say the measure is unlikely to pass. The measure would increase the state’s gasoline excise tax by 3.3 cents per gallon, increase the state’s diesel tax by 7.3 cents per gallon over two years, and increase vehicle registration fees by 40 percent. It would also shift hundreds of millions of dollars from the general fund to the roads budget. In a bizarre twist, House Republicans decided to tie these revenue-raising measures to a triggered personal income tax rate cut that would overwhelmingly benefit the wealthy and could ultimately repeal the state’s income tax entirely. Critics say the proposal would fail to raise enough revenue and that the income tax cut and general fund transfer could cause major budget problems down the road. They generally favor a larger increase in the gas excise tax. The bill is the latest salvo in transportation talks between the legislature and Gov. Rick Snyder that have collapsed into impasse. Voters rejected a sales tax increase to pay for road construction in May.

Nebraska Gov. Pete Ricketts will push a package of income and property tax cuts next legislative session, according to a recent address the governor delivered to Lincoln Chamber of Commerce. Ricketts claimed that cutting taxes would be the key to economic growth and would be his “No. 1 issue.” Similar efforts to cut income and property taxes failed in Nebraska during the last legislative session. An ITEP analysis of one of these plans found that wealthier Nebraskans would benefit disproportionately, while revenue losses would be drastic. 

Fiscal Time Bomb Quietly Advances in Michigan

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Years of debate over how to boost funding for Michigan’s roads may be nearing an end.  But somewhere along the way, that debate was hijacked in a way that few people seem to have fully noticed.

Earlier this week, the Michigan House passed a road funding package that would raise the gasoline tax by 3.3 cents per gallon, raise the diesel tax by 7.3 cents, boost vehicle registration fees by roughly 40 percent, and offset some of these regressive tax increases with an expansion of the state’s circuit breaker tax credit for low- and moderate-income homeowners and renters.

So far, so good.  But these changes aren’t the real story.

Buried beneath talk of those 3.3 extra pennies that motorists would pay for a gallon of gasoline is a provision that could eventually eliminate the state’s single largest, and fairest, source of revenue: the personal income tax.  Under SB 414, which has passed both the House and Senate in slightly different forms, income tax rate cuts would be triggered whenever general fund revenues grow faster than inflation.  Unlike recent triggers enacted in states such as Oklahoma, SB 414 does not specify a target income tax rate and thus rate cuts would continue until the tax vanishes entirely.  In the House version of the bill the first cuts could begin as early as 2019, while the Senate’s version would start the process in 2018.

There are a multitude of problems with this approach.  Among them:

  • The cost of these triggered cuts would be enormous.  The Michigan League for Public Policy (MLPP) explains that the state’s most recent budget “falls short in key areas related to economic growth and opportunity, and many investments are not on a scale that will make Michigan a comeback state for all of its residents.”  And yet, the Michigan House Fiscal Agency (HFA) explains (PDF) that if SB 414 were in effect right now, the result in 2016 would have been roughly $700 million less to invest in public services (caused by a drop in the income tax rate from 4.25 to 3.92 percent).  That revenue loss would compound as additional rate cuts are triggered.
  • Michigan already has a regressive tax system where low- and middle-income families pay 9 percent, or more, of what they earn in state and local taxes.  High-income families, meanwhile, pay just 5 percent of their incomes in tax.  As ITEP’s Who Pays? analysis shows, the state’s personal income tax is the only major tax on the books running counter to this unfairness.  Cutting or repealing the income tax would primarily benefit those wealthy individuals who already face the lowest state and local tax rates.  According to Who Pays?, four of the five states with the most regressive tax systems in the country do not to have an income tax—hardly a group that Michiganders should be eager to join.
  • SB 414 is designed to appear fiscally responsible by allowing income tax rate cuts to take effect only when overall revenue growth exceeds the rate of inflation.  In this case, inflation is measured for the cost of products typically purchased by household consumers—known as the Consumer Price Index (CPI).  But the CPI is not a reliable measure of the costs that Michigan’s state government will incur in the years ahead.  As we explain in our brief outlining Colorado’s disastrous history with a somewhat similar inflation-based formula, growth in the cost of services such as medical care, education, and infrastructure has routinely outpaced growth in the CPI.  This suggests that SB 414’s inflation measure is a poor gauge of the state’s fiscal trajectory.
  • Even if the CPI were a relevant measure of inflation for these purposes, the Michigan proposal’s vulnerability to the “ratchet effect” would still guarantee its fiscal irresponsibility.  If revenues plummet in one year because of an economic downturn and then partially recover in the following year, that modest recovery could trigger an income tax rate cut even if the state’s revenues remained far below their pre-recession levels.  In other words, every recession would lower the bar needed to trigger an income tax rate cut to the point that even an anemic recovery could be enough set it off. 
  • While an economic recovery may be the most frequent scenario in which an unaffordable income tax rate cut would take effect, it is by no means the only scenario.  The Michigan HFA, for example, explained in its analysis (PDF) of the bill that a “one-time revenue increase” caused by unusual economic events or federal tax changes could also result “in a permanent reduction in the income tax rate.”  If that happens, Michigan will find itself trying to provide the same level of services, with a lower income tax rate, even after the temporary tax windfall that triggered the rate cut is no more than a distant memory.

Michigan Rep. Jim Townsend recently called this income tax trigger proposal “the ugly conclusion to what term limits have brought us.”  This is in reference to the fact that Michigan’s fairly strict cap on the number of years that lawmakers can hold office will mean that many—if not most—of the lawmakers voting for this trigger law will no longer be in the legislature when it comes time to deal with its full budgetary consequences.

Enacting tax cuts that will not take effect for years, and even decades, in the future under the mistaken impression that SB 414 will be able to accurately gauge their affordability is a major gamble that is unlikely to pay off.  Michigan residents would be better served if their lawmakers refocused their efforts on the issue that is supposed to be at the core of their work: finding a way to fund the state’s deteriorating transportation infrastructure.

Hope Springs Eternal in Georgia

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In recent years, Georgia has been a hotbed for regressive proposals to eliminate or lower the state’sreliance on income taxes and replace that revenue with higher sales taxes.  So far each of these proposals has been rejected, though late last year voters did cap the state’s top personal income tax rate—a change that could lead to financial problems down the road and may prevent future Georgians from making needed investments.

But hope springs eternal as there are indications that during the upcoming legislative session lawmakers are interested in tax reform yet again. While one of the most serious proposals on table is a familiar sort of regressive tax shift, the Georgia Budget and Policy Institute (GBPI) has released a new report explaining that the state has a variety of tax reform options at hand that would actually improve the fairness of the state’s tax code. In “A Tax Blueprint to Strengthen Georgia,” GBPI prescribes a tax plan that provides:

“a targeted tax cut to Georgians climbing the ladder toward the middle class, while protecting the state’s most critical investments. The plan consists of three core tenets: cut income taxes from the bottom up; modernize the sales tax to fit today’s online commerce and make special tax deductions less generous.”  

An Institute on Taxation and Economic Policy (ITEP) analysis of the GBPI plan found that the overall fairness of Georgia’s tax structure would be improved under the proposal and the middle 20 percent of Georgians would see an average tax cut of $206. This blueprint for Georgia tax reform should be required reading for Georgia lawmakers.  Once the debate heats up let’s hope they also heed the words of Wesley Tharpe from GBPI who opined in the Atlanta Journal Constitution, “One thing is for sure: A drastic shift from income to sales taxes is a flawed approach to reform. Georgia can do better.”