Month: June 2016

In the Tax Justice Digest we recap the latest reports, blog posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Here’s a rundown of what we’ve been working on lately. 

Good News from Washington State

The Washington State Supreme Court last week unanimously ruled unconstitutional an initiative designed to force lawmakers to pass a constitutional amendment requiring supermajority support for all future revenue increases. ITEP Senior Analyst Lisa Christensen Gee writes about why this ruling is so important.  

Comedy or Tragedy in Illinois?

White Sox and Cubs fans are likely to agree on one thing; the lack of a state budget is a disgrace. Here’s ITEP’s resident White Sox fan, Lisa Christensen Gee, on the comedy and tragedy that is Illinois fiscal policy.

Tennessee and Oklahoma Wrap Up

Lawmakers in Oklahoma failed to rise to the challenge of dealing with a $1.3 billion shortfall. Instead, legislators balanced the state’s budget with one-time funds and by reducing the state’s Earned Income Tax Credit (a move called “deplorable” by the New York Times). Read Aidan Russell Davis’s full piece here.   

Tennessee’s legislative session is over and Gov. Bill Haslam signed into law Senate Bill 47, which eliminates the state’s Hall Tax, a tax on dividend and interest income. ITEP Senior Policy Analyst Dylan Grundman describes the impact of eliminating this progressive revenue source.

Member Day Wrap Up: The Good and the Bad

Over the past few weeks, the Tax Policy and Health subcommittees of the House Ways and Means Committee held Member Day hearings, in which Representatives pitched their favorite pet tax reform proposals to their colleagues in hopes of moving some of the measures forward. Here’s CTJ’s take on proposals that members brought forward.  

State Rundown: Austerity Budgets by Choice

For an update on state tax happenings in Alaska, Louisiana, Minnesota, Oklahoma, and West Virginia, check out this edition of ITEP’s State Rundown.

New Brief: State Treatment of Itemized Deductions

ITEP’s newly updated policy brief on State Treatment of Itemized Deductions offers a menu of options available to states interested in reforming these regressive income tax breaks. Read this blog post to learn how itemized deduction reform can address both issues of tax fairness and revenue adequacy. 

Shareable Tax Analysis:

ICYMI: ITEP’s State Tax Policy Director Meg Wiehe is now on Twitter. You can follow her here: @MegWiehe

If you have any feedback on the Digest, please email me  kelly@itep.org

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In our newly updated policy brief on State Treatment of Itemized Deductions, we review a menu of options available to states interested in reforming these regressive income tax breaks. We also show that while several states have recently taken action on this issue, most states still have room to improve their itemized deduction policies. Every state has an upside down tax system that leans more heavily on low- and middle-income families than high-income residents. And many states have serious revenue needs created by underperforming economies or tax cuts passed in prior years. The itemized deduction reforms outlined in our brief can help address both the issues of tax fairness and revenue adequacy at the same time.

Itemized deductions are tax breaks intended to help defray a wide variety of personal expenditures that affect a taxpayer’s ability to pay taxes, including charitable contributions, extraordinary medical expenses, mortgage interest payments, and state and local taxes. But the breaks reduce state funding for public services by billions of dollars each year while primarily benefiting high-income households that generally don’t need such generous tax benefits. Most states with income taxes can therefore find something in the menu of itemized deduction reforms to add a healthy boost of progressivity to their revenue structures, cut unneeded fat from their tax codes, and/or generate new revenue for vital public services. Our brief catalogs 10 states that do not allow itemized deductions and 11 others (and DC) that have implemented reforms paring back itemized deductions for at least some taxpayers.

The most popular item currently on the menu is to build upon existing federal rules that phase down the value of itemized deductions for people with very high incomes ($311,300 and above for married couples in 2016). States can add their own flavor to these rules by beginning the phase-down at a somewhat lower income level, phasing down the deductions at a faster rate, and/or completely phasing them out once income reaches a certain point.

States with big appetites for reform can opt for even larger overhauls of itemized deductions, such as eliminating them entirely. Others may opt to selectively eliminate some deductions while retaining a few staple deductions like those for medical expenses or charitable contributions. Portion control can also be effective, in the form of a simple cap on the total amount each filer can deduct. Still other options remain, and ordering off the menu is encouraged as well.

Because low- and middle-income families benefit very little, if at all, from itemized deductions, most of these reform options have little effect on those groups. But they do pair well with measures like increasing the standard deduction available to all families, enhancing state Earned Income Tax Credits (EITC), or taking other more targeted measures to promote tax fairness beyond itemized deduction policy.

And itemized deduction reform is growing in popularity, as many states have taken this information to heart and taken steps to moderate their exposure to the more harmful aspects of these deductions.  Rhode Island took a comprehensive approach in 2010, eliminating all itemized deductions while increasing the standard deduction that is available to taxpayers of all income levels, along with multiple other changes to its tax code. Another similar example is Maine, which in 2015 became the first state to fully phase out itemized deductions for the very wealthy. That same year, Vermont enacted a cap on total deductions set at 2.5 times the standard deduction. Just last week, Oklahoma eliminated its nonsensical state income tax deduction for state income taxes. And Louisiana Gov. Bel Edwards has asked lawmakers to consider itemized deduction reforms in the special session that convenes there next week.

All states considering such reforms should do so carefully and avoid the temptation to fall into other bad tax habits that could leave their tax codes even more unbalanced and starve them of needed revenue. North Carolina and Kansas, for example, enacted packages that included some positive itemized deduction reforms but proved destructive on net, leaving behind a revenue structure that was less progressive and less capable of bringing in revenue than the system that preceded it, necessitating major cuts to public services in those states. If not handled carefully, reform packages like these can be a bit like cutting Ho Hos out of your diet and replacing them with Twinkies — the net effect is a wash at best and might be much worse.

State policymakers looking to the menu of itemized deductions reforms we compile in our brief should resist the temptation to combine them with fiscal fad diets like flat income taxes and large unaffordable rate cuts. But if implemented with care, these options have promising potential to improve the balance, adequacy, and long-term health of their state tax structures.

Read the policy brief here.

The Washington State Supreme Court last week unanimously declared unconstitutional an initiative designed to force lawmakers to pass a constitutional amendment requiring supermajority support for all future revenue increases.

The initiative, I-1366, is the latest of Tim Eyman’s efforts to enact a supermajority requirement for tax increases in the state. (Eyman is an anti-tax activist who has spearheaded numerous initiatives in Washington state.) The measure essentially would have held revenue from the state’s sales tax hostage by requiring lawmakers to propose a constitutional amendment requiring supermajority approval for any future tax increase or face an automatic cut in the sales tax from 6.5 to 5.5 percent. 

I-1366’s supermajority requirement effectively granted veto power to a minority of lawmakers (17 out of1 147 state legislators in this case) and restricted legislators’ ability to raise needed state revenues. This would have left the state with losses of $2.8 billion each budget cycle, depriving the state of needed resources at a time it is already struggling to fund essential human services and meet constitutional requirements for public education.

The court ruled I-1366 unconstitutional on the basis of the “single-subject rule,” which seeks to prevent logrolling or pairing together unrelated proposals that independently wouldn’t receive majority support. Under this standard, the joint proposals of I-1366 to reduce the sales tax, require the legislature to propose a constitutional amendment, and change the way future taxes and fees are approved, didn’t pass constitutional muster. The court also spelled out very clearly that initiatives that give an ultimatum of a drastic or undesirable outcome if a specific constitutional amendment isn’t proposed by the legislature run afoul of the process for amending the constitution.

This is not the first time a supermajority requirement by initiative in Washington has been declared unconstitutional, and whether it will be the last remains to be seen. The Seattle Times editorial board recently expressed, “[i]nstead of continually outsourcing tax-policy changes to Eyman, which are struck down again and again, the Legislature needs to address the laws in the tax code head-on.”

We couldn’t agree more. With this ruling, lawmakers can and should act to fulfill their responsibilities of raising equitable and sustainable revenue for the state.

A month ago we wrote about the hope of positive tax reform developments in Illinois in the midst of continuous budgetary chaos. Unfortunately, no such end is in sight.

Here’s an update:

While the campaign to adopt a graduated income tax made significant progress, lawmakers failed to call the bill to amend the constitution before the deadline due to lost support needed to satisfy the three-fifths supermajority requirement. Certainly not aiding the effort was a flawed impact analysis released last-minute by the Illinois Department of Revenue, which failed to account for the positive effect new tax revenues have on public investments. (Read ITEP’s critique of the study.) The earliest Illinois can reconsider this effort is in another two years.

Further, the legislative session just ended May 31st and no appropriations bills were passed, meaning the state is going into its second year without a budget. Any budget agreement that could be reached now has to meet a supermajority hurdle, making passage all the more difficult.

End-of-session reports read like an ancient Greek comedy, complete with ongoing debate among the primary actors, outlandish costuming, and increasingly fantastical plot elements as this unprecedented standoff drags out. The House, Senate, and governor have each presented their own budget proposals, none of which (to date) has received the necessary support from the others. The back and forth among the principal actors is scheduled to continue into June and may not see an end until after the elections in November. It’s difficult to envision a compromise on the horizon amid all the political costuming.

In the meantime, the state continues to face a growing backlog of unpaid bills, needing to rely on emergency procurements to keep basic operations open. Public universities prepare for further budget cuts, human service providers face difficult decisions, and public schools may not open on time or at all this fall. As the Sun-Times Editorial Board writes, absurdity reigns, leading to outcomes that are increasingly damaging to Illinois residents now and for years to come.

Illinois could move past these comedic storylines and tragic outcomes by reaching agreement on revenue solutions. While adopting a graduated personal income tax is a critical piece of real reform, there are many other options lawmakers can consider right now to end the madness and move toward fiscal stability.  

Thanks for reading the State Rundown! Here’s a sneak peek: West Virginia lawmakers reject cigarette tax increase but still negotiating. Alaska legislature passes compromise budget, punts on oil and gas credits. Louisiana legislature will enter second special session to discuss tax reform. Oklahoma lawmakers gut EITC, use budget cuts, and one-time gimmicks to close budget gap. Progressive policy advocates win expansion of working family tax credit in Minnesota.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

West Virginia lawmakers resumed budget talks this week after a failure to reach a deal before Memorial Day weekend. Previous efforts to pass a budget stalled when House lawmakers rejected Gov. Earl Ray Tomblin’s proposed increase of the cigarette tax. The 45-cent-per-pack increase, along with similar percentage increases on other tobacco products, would have raised $76 million in new revenue. The House instead passed a budget bill with no new tax increases but $143 million taken from the state’s rainy day fund, an amount that Gov. Tomblin is unlikely to approve. The Senate will now take up the House measure in addition to a proposal to increase the sales tax. Lawmakers need to close a $270 million budget gap, the result of ill-advised tax cuts and low energy prices. If they do not pass a budget by July 1, the state government will shut down. Some political observers believe the cigarette tax hike is not yet dead, and business groups lent their support in a letter to lawmakers.

Oklahoma lawmakers finalized a budget last week, closing a $1.3 billion gap also caused by plummeting energy prices and big tax cuts enacted in better times. The legislature managed to pass a budget with limited tax increases by slashing spending on core programs and instituting a number of one-time revenue-raising gimmicks. Lawmakers made up a small portion of the budget deficit by eliminating the refundabability of the state’s EITC, saving just $29 million but reducing aid to 200,000 working families. This move has rightly been described as an “empathy gap” and a move that “makes the poor poorer.” Efforts to increase the gas tax for transportation spending, the sales tax for teacher salaries, and the cigarette tax for healthcare expansion all failed. Legislative leaders acknowledged that the state’s structural budget gap will remain next year. One positive outcome was the state’s elimination of its nonsensical “double deduction,” a law that primarily benefits wealthy taxpayers who itemize their deductions. For more details on tax and budget policy in Oklahoma, check out Aidan’s recent blog post.

The Alaska Legislature passed a compromise budget this week in an attempt to prevent layoffs for state government workers. Lawmakers broke an impasse by postponing decisions to cut tax credits for oil and gas producers and a range of revenue raising options. Instead, they agreed to restore budget cuts to senior benefits and K-12 and higher education, and to draw $3 billion (more than 40 percent of the fund) from the state’s Constitutional Budget Reserve to cover FY 2017 expenditures. The $8.8 billion compromise budget is still significantly below last year’s spending levels of $9.3 billion, largely due to overhauls of criminal justice and Medicaid spending. It is unclear how Gov. Bill Walker will respond to the spending plan. The legislature will remain in session to continue to address the state’s structural deficit.

Legislators in Louisiana will begin a second special session next week to address tax reform and the remaining budget deficit. Gov. John Bel Edwards issued the call for an extraordinary session from June 6th to June 23rd  to close a $600 million shortfall for FY 2017 and to resolve the state’s structural deficit. The governor also issued a plan for the session that includes possible changes in corporate and personal income tax rates, taxes on healthcare entities and reforming tax credits.

Progressive advocates in Minnesota won a big victory last week when legislators passed a significant expansion of the Working Family Credit, Minnesota’s version of the EITC. Under the changes, the size of the credit will grow for most eligible families and individuals, and the income cutoff for eligibility will be raised for some families and individuals. Moreover, the age requirement for childless workers to qualify for the credit will be lowered from 25 years old to 21 years old. Minnesota is the first state (after Washington, DC) to expand the portion of the state EITC granted to childless workers. About 386,000 Minnesota families and individuals will benefit from the credit expansion, which will reduce taxes by $49 million. The Minnesota Budget Project, which led the effort to expand the Working Family Credit, notes that the credit promotes work, helps kids succeed, and reduces racial income disparities.

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email.

Oklahoma’s legislative session came to a disappointing end late last week. Legislators now await Gov. Mary Fallin’s signature on a $6.8 billion budget that harms the state’s poorest residents and sets the Sooner State on an unsustainable fiscal path. Rather than delaying or canceling unaffordable cuts to the state’s income tax, lawmakers opted to rely heavily on one-time funds to fill a $1.3 billion shortfall. And despite the painful cuts being made to vital state programs, lawmakers still only managed to postpone, not solve, the state’s fiscal problems.

Over the past decade, Oklahoma lawmakers have repeatedly cut the state’s income tax – now resulting in more than $1 billion in lost revenue every year. The most recent reduction took place this January when the top tax rate was cut from 5.25 to 5 percent despite an official “revenue failure”. Attempts to roll back this tax cut were met with defeat—a fate that many other revenue raising options faced as well. Ultimately, proposals to increase taxes on cigarettes, alcohol, motor fuel, and purchases of services were all rejected.

Worse still, in a move that the Oklahoma Policy Institute rightly described as “deplorable,” the legislature changed the state portion of the Earned Income Tax Credit (EITC) from refundable to non-refundable, meaning that poor families earning too little to owe state income taxes will now be ineligible for the credit. This blow to Oklahomans who struggle to make ends meet on low wages has been referred to as a result of an “empathy gap” and as move that “makes the poor poorer.” This damaging policy change comes despite the EITC’s proven effectiveness and traditional enjoyment of bipartisan support, and despite the fact that it frees up only one fifth of what could have been raised by rolling back recent cuts to the personal income tax.

But what’s bad could have been worse. Thankfully, cuts to the state’s sales tax relief credit and the child tax credit were prevented, and full elimination of the state EITC was avoided. Another ray of light was repeal of the state’s “double deduction.” The bill, signed by Gov. Fallin, eliminates a nonsensical law that allowed Oklahomans to deduct their state income taxes from their state income taxes, primarily benefiting wealthy taxpayers who itemize their deductions.

Nonetheless, the overall budget – expected to be signed by Gov. Fallin this week – is a major step backward for Oklahomans. Rather than taking steps to avoid deep budget cuts, lawmakers refused to soften the blow by rolling back recent tax cuts, raising significant new revenue, or drawing on the full amount available from the Rainy Day Fund. No structural reforms were made to prepare the state for the long-term. There is no question that additional challenges still loom in Oklahoma.

Over the past few weeks the Tax Policy and Health subcommittees of the House Ways and Means Committee held Member Day hearings, in which Representatives pitched their favorite pet tax reform proposals to their colleagues in hopes of moving some of the measures forward.

A few things stand out: 1) many of our Representatives have great ideas on how to reform our tax code that makes it fairer, more equitable, and raises revenues, but; 2) the good proposals are overshadowed by a litany of horrible bills that would make our tax system less adequate and fair.

Here is a list of some of the best and worst bills covered during the Member Days:

The Good

Earned Income Tax Credit Improvement and Simplification Act (H.R. 902):  The Earned Income Tax Credit (EITC) is one of the most popular and effective anti-poverty tax credits. Awarded to low-income workers age 25 and older, the EITC and the Child Tax Credit (CTC), another tax credit for working families, lifted 9.8 million people out of poverty in 2014. In their current form, these credits fail to adequately meet the financial needs of childless workers and non-custodial parents. In 2012, the flaws in the EITC regarding childless workers resulted in 7 million workers being taxed into or deeper into poverty.

H.R. 902, introduced by Rep. Richard Neal (D-MA), seeks to rectify this oversight. In addition to directly increasing the overall tax credit available to single and married low-income workers with or without qualifying children, H.R. 902 also allows unmarried 21 year-olds with no qualifying children to claim the credit as long as they are not full-time students. Rep. Neal’s bill would provide10.6 million workers with an average tax benefit of $604.

Fairness in Taxation Act (H.R. 389):  Introduced by Rep. Jan Schakowsky (D-IL), the Fairness in Taxation Act aims to curtail the accumulation of wealth that the “super-duper rich” of the country have been enjoying for over a decade. The bill uses two mechanisms to accomplish this goal. The first is introducing five new income tax brackets between taxable incomes of $1 million and $1 billion (the top federal tax bracket currently starts at $373,000).

The second, and more important, policy in H.R. 389 would end the special preferential tax rate for capital gains and dividend income. Both capital gains and dividend income are currently taxed at much lower rates than ordinary income and are predominantly held by the richest among us. Citizens for Tax Justice (CTJ) projects that 94 percent of capital gains and 82 percent of qualified dividend income go to the richest 20 percent of the country, with 67 percent of capital gains and 38 percent of qualified dividend income going to the richest one percent alone. CTJ also estimates that Rep. Schakowsky’s bill would raise $849 billion in revenue over the next decade, helping to raise the revenue our country desperately needs to make more public investments.

Common Sense Housing Investment Act (H.R. 1662):  Introduced by Rep. Keith Ellison (D-MN), this bill would boost federal support for low-income housing. H.R. 1662 would cap the amount of a home mortgage eligible for a tax break at $500,000, down from the current cap of $1 million (only 4.5 percent of mortgages from 2011 to 2013 were above $500,000). The bill would also convert the regressive Mortgage Interest Deduction to a flat, 15 percent non-refundable mortgage interest tax credit.

These proposed changes would enable 16 million more homeowners with a mortgage to receive a bigger tax break. It would also make a significant contribution to the gap of 7 million affordable rental homes needed for extremely low-income families. Nearly half of renters spend more than 30 percent of their income on rent. The bill would raise $200 billion in revenue over the next decade, which would be invested into expanding the Low-Income Housing Credit and provide a source of permanent funding for the National Affordable Housing Trust Fund, supplying low-income homebuyers with even more support and financial security. These reforms would go a long way toward reversing the current upside down nature of the deduction, in which the wealthiest families get tens of thousands of dollars in housing support from these tax programs, while low- and middle-income families get next to nothing.

The Bad

Fair Tax Act (H.R. 25):  Introduced as H.R. 25 in every Congress since 2003 (and yet to make it out of Committee), the current iteration was introduced by Rep. Rob Woodall (R-GA). The Fair Tax Act would replace the entirety of the federal tax code (including corporate and income taxes) with a so-called 23 percent national sales tax (though in reality it’s more like 30 percent) on all purchases in the U.S.

An ITEP analysis of the Fair Tax  found that the bottom 80 percent of Americans would pay 51 percent more in sales taxes than they now pay in all federal taxes. In contrast, the best-off one percent of all taxpayers nationwide would get average tax reductions of about $225,000 per year.

Under the “Fair Tax,” revenues would likely fall dismally short of what the bill’s proponents claim; the Brookings Institute, CTJ, and the congressional Joint Committee on Taxation have each estimated that the national sales tax rate would have to be closer to 60 percent for the government to break even. Political leaders throughout history have shown a fondness for promoting simple solutions for complex problems that are very appealing on the surface, but overlook the intricacies of reality. The Fair Tax is no exception to this trend.

Create Jobs Act (H.R. 4518):  Introduced by Rep. Tom Emmer (R-MN), H.R. 4518 seeks to “allow the U.S. to better compete in the global economy.” The bill purports to accomplish this goal by cutting the federal corporate income tax rate from 35 percent to five percent below the average corporate tax rate for Organization for Economic Co-operation and Development (OECD) countries, or 10 percent if that reformed rate is still too high. The bill also requires a congressional joint resolution to approve a tax rate increase.

Rep. Emmer’s bill is based on the false premise that U.S. corporations are paying high corporate taxes, when in reality they are paying relatively low tax rates. While it is true that the U.S. statutory rate is 35 percent, most companies pay far less than that full rate. Thanks to the numerous subsidies and tax breaks afforded to big business, CTJ found 288 consistently profitable Fortune 500 corporations paid a federal income tax rate averaging just 19.4 percent over five years, with a third of the companies paying less than 10 percent and 26 corporations paying no federal income taxes at all. This explains why the United States corporate tax level is below the OECD average, even though our statutory rate is the highest. In other words, U.S. corporations already routinely pay below the OECD average, so all this bill would do is cut rates even lower and lose hundreds of billions in critical revenue.

Bad Exchange Prevention Act (H.R. 4297):  Introduced by Rep. Charles Boustany (R-LA) in response to guidelines issued by the U.S. Treasury Department regarding the OECD’s Base Erosion and Profit Sharing (BEPS) Action Plan, H.R. 4297 seeks to limit the sharing of corporate income and tax information between the U.S. and other countries. Also known as country-by-country reporting (CbCR), BEPS allows the U.S. and countries around the world to track international tax avoidance and evasion. H.R. 4297 would delay CbCR until 2017, and would instruct the Treasury to blacklist any foreign jurisdiction that “abuses” the confidential information in CbCR.

While safeguarding confidential information sounds like a reasonable requirement, it’s not. H.R. 4297 would effectively transform America into the world’s largest secrecy jurisdiction, in which corporations could hide behind their political friends in order to avoid disclosing financial information that provides evidence of tax fraud and evasion. Rather than joining the rest of the world in curbing the offshore tax avoidance, Rep. Boustany is complicit in the professional tax avoiders’ extortion of countries’ tax laws in the race to the bottom.