Month: September 2016

It’s been about three weeks since the Rio Summer Olympics ended, but the finals for the political gymnastics around the mother of all sports competitions are just now beginning. The clear favorite in the competition is a bill proposed by Senators John Thune (R-SD) and Chuck Schumer’s (D-NY), the United States Appreciation for Olympics and Paralympians Act, which would designate the income athletes receive from their medals’ cash prizes tax-exempt. The bill made a strong showing in the qualifiers of the competition, passing by unanimous consent in the Senate on July 12, 2016.

This leaves the House to judge the bill’s performance, and the House Ways and Means Committee passed the bill out of committee with little debate. It looks like the bill is set to coast through the remainder of the legislative floor routine, as President Obama has already voiced his support of a failed, identical bill with similar bipartisan support which was the Congressional response to the Sochi Winter Olympics. Unlike the previous bills, Thune and Schumer’s bill is poised to bring home the gold—while politicians come in dead last on tax reform.

Spurred on by dubious claims that Olympians face onerous tax bills for their athletic success, the crux of the bill’s argument rests on the notion that we should not financially punish medal-winning athletes “for representing our country and reaching the pinnacle of their sport,” but this argument is a weak one at best. To start, the U.S. tax code does not financially punish athletes for pursuing their Olympic dreams, in fact it encourages them to strive to do better.

The IRS allows Olympic athletes to deduct their training as a business expense from their taxes, disproportionately helping the large number of athletes with Olympic ambitions that do not win medals, but train just as hard—often while also working a part- or full-time job in addition to their intense training. This tax proposal would only help the small percentage of Olympic athletes that win medals at the competition, and would disproportionately help the even smaller percentage of athletes who win multiple medals. The only reasonable measure of the bill is that, thanks to an amendment introduced by Rep. Pascrell (D-NJ), this tax break would not apply to medal winners with an annual income over $1 million, which means it avoids giving an exorbitant tax break to athletes who also have lucrative endorsements from sources ranging from sporting goods companies to cereal brands.

None of this is to say that Olympians do not deserve to profit from excelling in their fields of expertise or that Olympians do not do a great job at representing our country (though some do it better than others). The point made here is that the U.S. tax code must be impartial in terms of how individuals earn their income and that the hardest working Olympic athlete is no more deserving of a tax break than the hardest working nurse, teacher, or firefighter.

For almost a decade now, the mantra of tax reform has been to broaden the tax base by cleaning out the various special interest breaks that have made the tax code so complex. This bill moves in the exact opposite direction by providing an extremely small subset of people a new special tax break. If members of Congress are truly committed to reforming the tax code, the first thing they should do is to stop making the code more complicated with bills like this one. 

Poverty, income-inequality, and stagnant wages have been a major part of the political discourse this election cycle. And for good reason. Although new Census data reveal a substantial drop in poverty and a significant increase in income, median household income is still less than it was in real dollars 17 years ago, and 43 million (or nearly one in seven) people in this country live in poverty.

Fortunately, state lawmakers have a range of policy options to mitigate poverty and improve the quality of life of families across the country. ITEP today updated its annual report, State Tax Codes as Poverty Fighting Tools. The report, incorporates the U.S. Census Bureau’s ACS data and makes the case for four key anti-poverty tax policies: state Earned Income Tax Credits (EITCs), property tax circuit breaker programs, targeted low-income credits, and childcare related tax credits. These policies, when well-structured, can provide families with additional income, putting that money back in their pockets to help pay for food, housing, transportation, and other necessities.

Reforming state tax systems should be a priority for state lawmakers across the country. ITEP’s bi-annual report, Who Pays? reveals that when all taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than the richest 1 percent of taxpayers. Across the country the effective tax rate for the poorest 20 percent of taxpayers is 10.9 percent, more than double the 5.4 percent average effective tax rate for the top 1 percent.

For better or worse, our priorities are reflected in our tax codes. Reforming tax systems in a way that ensures the lowest-income families are not paying a greater share of their income to fund services on which we all rely should be a top priority for state lawmakers.

We recommend that states enact, or strengthen, one or more of four proven and effective tax strategies to reduce the share of taxes paid by low- and middle-income families and increase their ability to make ends meet.

Misha Hill contributed to this report

New national data on poverty and income released this week by the U.S. Census Bureau reveals that from 2014 to 2015, median household income increased by 5.2 percent and poverty declined by 1.2 percent — good news by any measure. But these statistics don’t tell the full story.

Despite positive growth in incomes from 2014-2015, low-income earners were worse off in 2015 than they were 15 years ago because income growth has not been sufficient to keep up with inflation. Once the impact of rising prices is taken into account, incomes among the bottom 20 percent of earners in 2015 were actually 8 percent lower than they were in 2001, and incomes among the next 20 percent of earners were 4 percent lower than they were in 2001.

While low- and moderate-income taxpayers have less buying power today than they did 15 years ago, many are paying more in state taxes because too many state tax codes do not take the nuances of inflation into consideration. This phenomenon, dubbed ‘bracket creep,’ is the subject of a recent ITEP policy brief, “Indexing Income Taxes for Inflation: Why It Matters.”

State tax systems have many features that are defined as fixed dollar amounts, including the income levels at which various tax rates start to apply. If these fixed income levels aren’t adjusted periodically, taxes can go up substantially simply because of inflation. For example, in 1969 Illinois enacted a personal exemption of $1,000. If this amount had been adjusted for inflation since its enactment, taxpayers could exempt $6,550 per filer and dependent instead of the current $2,175.

Consider a hypothetical state that taxes the first $20,000 of income at 2 percent and all income above $20,000 at 4 percent. A person who earns $19,500 will only pay tax at the 2 percent tax rate (Figure 1). But over time, if this person’s salary grows at the rate of inflation, she will find herself paying at a higher rate—even though, in terms of the cost of living and ability to pay, her income hasn’t gone up at all. In this example, suppose the rate of inflation is 5 percent per year and the person gets salary raises that are exactly enough to keep up with inflation. After four years, that means a raise to $23,702. Whereas before all of this person’s income was taxed at the 2 percent rate, part of this person’s income ($3,702) will now be taxed at the higher 4 percent rate because the tax brackets haven’t also increased with inflation.  

In this way, as the ITEP report Who Pays? notes, unfair state tax systems exacerbate widening income inequality. To learn more about “bracket creep” and the importance of indexing tax policy provisions, check out the brief!

This week we are bringing you news about potential sales tax changes (and vetoes) in California, New Jersey, and Iowa, voter disapproval of income tax elimination in Arizona, and other state tax policy developments from across the country. Thanks for reading the Rundown!

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• The campaign to enact an Earned Income Tax Credit (EITC) in West Virginia continues, as supporters gain more endorsements and work towards building bipartisan support for a bill in 2017.

• A recent poll shows that a majority of Arizona voters oppose (40%) or are uncertain (24%) about the idea of eliminating the state income tax in exchange for a higher sales tax. 

• Alabama legislators last week sent a plan to Gov. Bentley (which he has promised to sign) to spend the state’s $1 billion BP oil spill settlement. Most of the money will be used to pay down state debt, fund road projects, and free up money to plug the state’s $85 million Medicaid shortfall. The state also recently rejected a regressive lottery proposal and established a budget reform task force that will begin looking at some of Alabama’s revenue and spending processes later this month.

• Sales taxes and water quality will be in the news in Iowa again next year, as a coalition has announced a new initiative to increase the sales tax by 3/8 of a cent and devote the $180 million raised to cleaning up waterways, increasing soil conservation efforts, and improving programs for wildlife and outdoor recreation.

• Sales tax cuts are being discussed in New Jersey again as part of a package including a much-needed gas tax increase to bring the state’s roads department – currently operating on an emergency shoe-string budget – back to life.

• New Mexico Gov. Martinez’s refusal to entertain revenue solutions in the face of a $650 million budget gap and empty reserve funds won’t stop some from attempting to get tax increases on the agenda for the upcoming special session anyway, as groups are currently working to promote both alcohol and tobacco tax increases.

• California Gov. Brown vetoed legislation this week that would have exempted feminine hygiene products and diapers from the state sales tax, citing these tax breaks as new spending that must be considered during the upcoming budget session.

What We’re Reading…  

• New Census data from the Current Population Survey shows the first increase in real terms of median income since 2007 and a decrease in Americans living in poverty (though the poverty rate still exceeds 2007 levels).

• The OK Policy Institute summarizes State Question 779—the ballot question to increase the sales tax to fund education.

• CNBC reports on the federal and possibly state tax treatment of federal loans forgiven through the Income Based Repayment Plan.

• A new paper by the Federal Reserve Bank of Boston studying income mobility in the US from 1977-2012 shows lower family income mobility in more recent decades, especially for those in the bottom 20% of earners.

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 Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

For the past five years, U.S. Census has released the Supplemental Poverty Measure (SPM) along with the traditional statistics measuring poverty and income. The supplemental measure provides valuable insight into how government programs and the tax code impact poverty.

What we know and what the SPM confirms is tax policy, as well as social service programs, makes a difference. Two of the most important anti-poverty credits for working families, the federal Earned Income Tax Credit (EITC) and the refundable portion of the Child Tax Credit (CTC) are considered under this comprehensive measure of poverty. At 14.3 percent the supplemental poverty rate is higher than the 13.5 percent official poverty rate; however, it is lower than it would have been in the absence of these highly effective anti-poverty programs. In 2015, the combined impact of the EITC and CTC decreased the supplemental poverty rate from 17.2 to 14.3 percent, lifting 9.2 million people, 4.8 million of which are children, out of poverty. Thanks in part to these credits, the supplemental poverty rate for children is even lower than the official poverty rate (16.1 percent compared to 20.1 percent).  

Experts from multiple government agencies worked together to develop the supplemental poverty measure in part to address concerns that the official measure does not produce an adequate nor accurate picture of those living in poverty. By factoring in expenses such as child care, out-of-pocket medical costs, payroll and income taxes, and policies such as the EITC, the Supplemental Nutritional Assistance Program (SNAP), housing assistance, and other key anti-poverty programs, it provides a broader picture and more accurate measure of the true cost of making ends meet.

Both the EITC and CTC make a compelling case for the use of tax policy as a tool to mitigate poverty. Just last year, Congress reconfirmed its commitment to supporting and improving these proven anti-poverty programs by making permanent vital enhancements. This move was a big step forward for low-wage workers across the country. It will prevent 16.4 million Americans from being pushed into or deeper into poverty. For more on that impact by state click here for an interactive map.

A Good Policy with Room for Improvement

Lawmakers should take steps not only to maintain but to strengthen and preserve effective anti-poverty programs such as the EITC and CTC.

For instance, the EITC could be improved to reduce poverty rates among workers without children. Currently, this group is only eligible for a fraction of the credit that families with children can receive–a $506 maximum credit in 2016 as compared to a $3,373 maximum for families with one child. Additionally, to claim the credit, individuals without children must be 25 years old. As a result, vulnerable young adults who are trying to gain a foothold in the workforce are excluded from the EITC’s work-promoting, poverty-reducing benefits.

Fortunately, discussion of this inadequacy and options for improvement are taking place. Since their inception, both the EITC and CTC have enjoyed bipartisan support. Congress should continue to hold up and improve these proven anti-poverty provisions, expanding their impact to benefit hard working American families who continue to struggle to make ends meet. 

How State Tax Policy Can Mitigate Poverty/Income Inequality
The U.S. Census next week will release new data on poverty and household income. ITEP staff has produced recent policy briefs that make the connection between state tax policy and poverty. Read more

Should the Public Pay a Few Thousand or $658,000 to Create One Job?
In a guest blog for taxjusticeblog.org, Good Jobs First Executive Director Greg LeRoy discusses his organization’s recent report, which finds that public investments in workforce development programs provide a bigger bang for taxpayers’ bucks than corporate subsidies and tax credits. Read more

A Growing Number of States Face Revenue Challenges
In this week’s ITEP State Rundown, analysts outline how a growing number of states are struggling to make ends meet and notes what, if anything, they are proposing to do about it. Read more

ICYMI

Apple Inc. Doesn’t Fall Too Far from the Tree
The late August news that the European Commission ordered Apple to pay $14.5 billion in back taxes to the Irish government once again brought the tech giant’s tax avoidance to the forefront. ITEP’s Matt Gardner, who spends a lot of time examining at Fortune 500 corporations’ financial disclosures, says the $14.5 billion in back taxes are a fraction of the story. He also took umbrage with Apple CEO Tim Cook’s corporate spin that attempted to portray Apple as a victim. Read his piece, How Apple CEO Tim Cook Makes Data Crunchers Appreciate the Power of Words. And, finally, writing for The Guardian, Gardner stated that the United States should take a page from the EC’s book and crack down on corporate tax avoidance.

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The U.S. Census Bureau is slated to release its annual national data on poverty this Tuesday and on Thursday will release state-specific data on poverty. While Census doesn’t leak data ahead of time, many economists are predicting that median income increased between 2014 and 2015 and the poverty rate will see a slight decline. While a downward trend in poverty and upward trend in real income would undoubtedly be good news, it is important to note that the poverty rate will more than likely remain substantially higher than its 2000 level and income gains likely will not be substantial enough to recoup the erosion that happened throughout the early aughts.  

The analysts at the Institute on Taxation and Economic Policy (ITEP) have produced multiple recent briefs and reports that provide important context and offer tax policy suggestions that would both make state tax codes more progressive but also help mitigate poverty and widening income inequality.

ITEP’s signature report, Who Pays?, is a distributional analysis of average effective tax rates in each of the 50 states. This in-depth analysis explains how state and local tax systems exacerbate poverty by overly relying on regressive taxes to raise revenue. In fact, when all the taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than the richest 1 percent of taxpayers. Across the country, the effective tax rate for the poorest 20 percent of taxpayers is 10.9 percent, more than double the 5.4 percent average effective tax rate for the top 1 percent.

State Tax Codes as Poverty Fighting Tools is a 2015 report that examines four specific tax policies in each of the 50 states and Washington, DC. ITEP will release an update to this report by 11 a.m. on Thursday, Sept. 15 and will also include 2016 legislative updates. The new ITEP report suggests states should enact or improve refundable Earned Income Tax Credits (EITC), offer refundable property tax credits for low-income homeowners and renters, create refundable, targeted low-income credits to help offset regressive sales and excise taxes, and increase the value of existing child-related tax credits. In addition to the report, ITEP will release four updated briefs on each of these key anti-poverty tax policies: Rewarding Work Through State Earned Income Tax Credits, Reducing the Cost of Child Care Through State Tax Codes, Property Tax Circuit Breakers, and Options for A Less Regressive Sales Tax.

In Indexing Income Taxes for Inflation, Why It Matters, ITEP analysts note that low- and moderate-income families may be subject to higher state taxes over time due to “bracket creep.” This simply means since state tax brackets aren’t adjusted for inflation, a hypothetical family whose household income was at the poverty level in 2007 but whose income increased only at the rate of inflation (meaning they are still living in poverty) may be subject to a higher tax rate in states whose tax codes don’t adjust for inflation.

The bottom line is that no matter what the 2015 Census data on poverty and income find, the nation can do more to address and alleviate poverty. Ensuring state tax policies are progressive is one effective, proven tool in a very diverse arsenal.

This week we are bringing you news from a growing number of states with current and projected revenue shortfalls including Mississippi, Virginia, New Mexico, Oklahoma, Wyoming and Tennessee.  Thanks for reading the Rundown!

— Meg Wiehe, ITEP State Policy Director, @megwiehe

New Jersey Gov. Christie, one of the nation’s most hard-line anti-tax governors, has ended a four-decades-old tax reciprocity agreement with Pennsylvania and in the process has shown he is in fact willing to raise taxes – just so long as high-income New Jerseyans are protected. Nixing the deal will raise taxes on upper-income Pennsylvanians and lower- and middle-income New Jerseyans who cross the border to go to work.

Mississippi revenues are already running behind for the new fiscal year, a particularly disconcerting sign considering lawmakers budgeted $130 million more than they expected to receive in tax revenues under normal circumstances. Meanwhile, state transportation commissioners estimate they need nearly $1 billion per year in additional funds to keep the state’s infrastructure in good shape.

It appears fiscal issues will be front and center in Virginia in 2017, with Gov. McAuliffe announcing a projected $1.2 to $1.5 billion revenue shortfall this week that could be the largest in state history. The good people at The Commonwealth Institute have offered thoughtful solutions to the shortfall.

New Mexico Gov. Martinez will call a special session to deal with the state’s $485 million current-year revenue shortfall sometime in September. Tensions may be high in that session, with some legislators insisting on further funding cuts and refusing to consider revenue solutions, and others arguing “We’re not cutting anymore; we’re amputating.” 

Oklahoma‘s Governor, Mary Fallin, decided against calling a special session to discuss teacher pay increases. Instead, the state’s budget surplus will be divvied out amongst state agencies who felt the brunt of recent state spending cuts.

Wyoming lawmakers look to the sales tax as revenue from energy reliance continues to take a hit. Specifically, lawmakers are looking to end certain exemptions. The Equality State relies heavily on the sales tax, a tax that disproportionately falls on low- and middle-income families.

Tennessee’s decision this year to cut taxes for its wealthiest residents by beginning a phase-out of the state’s “Hall Tax” on certain dividend and interest income is already leading directly to calls for 2 percent budget cuts throughout state departments that all Tennesseans rely on.

What We’re Reading…  

• A study on state pension funding from Pew shows that when looking at long-term returns and contribution practices, only 15 states are contributing enough to improve the standing of their funds over time.
• Just in time for Labor Day, check out new reports on the state of working Connecticut and Pennsylvania in 2016, and Vermont’s Framework for Progress.

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 Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

This week we are bringing you news from a growing number

of states with current and projected revenue shortfalls including Mississippi, Virginia, New Mexico, Oklahoma, Wyoming and Tennessee.  Thanks for reading the Rundown!

— Meg Wiehe, ITEP State Policy Director, @megwiehe

New Jersey Gov. Christie, one of the nation’s most hard-line anti-tax governors, has ended a four-decades-old tax reciprocity agreement with Pennsylvania and in the process has shown he is in fact willing to raise taxes – just so long as high-income New Jerseyans are protected. Nixing the deal will raise taxes on upper-income Pennsylvanians and lower- and middle-income New Jerseyans who cross the border to go to work.

Mississippi revenues are already running behind for the new fiscal year, a particularly disconcerting sign considering lawmakers budgeted $130 million more than they expected to receive in tax revenues under normal circumstances. Meanwhile, state transportation commissioners estimate they need nearly $1 billion per year in additional funds to keep the state’s infrastructure in good shape.

It appears fiscal issues will be front and center in Virginia in 2017, with Gov. McAuliffe announcing a projected $1.2 to $1.5 billion revenue shortfall this week that could be the largest in state history. The good people at The Commonwealth Institute have offered thoughtful solutions to the shortfall.

New Mexico Gov. Martinez will call a special session to deal with the state’s $485 million currenty-year revenue shortfall sometime in September. Tensions may be high in that session, with reserves completely exhausted, some in the legislature insisting on further funding cuts and refusing to consider revenue solutions, and others arguing “We’re not cutting anymore; we’re amputating.”  Oklahoma‘s Governor, Mary Fallin, decided against calling a special session to discuss teacher pay increases. Instead, the state’s budget surplus will be divvied out amongst state agencies who felt the brunt of recent state spending cuts.

Wyoming lawmakers look to the sales tax as revenue from energy reliance continues to take a hit. Specifically, lawmakers are looking to end certain exemptions. The Equality State relies heavily on the sales tax, a tax that disproportionately falls on low- and middle-income families.

Tennessee’s decision this year to cut taxes for its wealthiest residents by beginning a phase-out of the state’s “Hall Tax” on certain dividend and interest income is already leading directly to calls for 2 percent budget cuts throughout state departments that all Tennesseans rely on.

What We’re Reading…  

• A study on state pension funding from Pew shows that when looking at long-term returns and contribution practices, only 15 states are contributing enough to improve the standing of their funds over time.
• Just in time for Labor Day, check out new reports on the state of working Connecticut and Pennsylvania in 2016, and Vermont’s Framework for Progress.

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 Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

By Greg Leroy

States and localities spend tens of billions of dollars annually in the name of creating jobs, but not all economic development deals are created equal.  Some are clearly cost-effective and others are obviously taxpayer gifts to large companies.

A new report, Smart Skills and Mindless Megadeals, from Good Jobs First finds that workforce training programs provide taxpayers a solid return on their investments. But 20 or 30 times a year, states and localities award huge tax-break “megadeals” costing an average of more than $658,000 per job—compared with a few thousand dollars per job for most training programs.

The study draws heavily from Good Jobs First’s unique Subsidy Tracker database, which names 14 megadeals that each cost more than $2 million per job. By contrast, 25 of 33 workforce development programs cost less than $2,000 per job.

This is an important issue to highlight because most of these megadeals’ costs are in foregone taxes, and at that astronomical price, taxpayers can never break even. That is, the workers getting those jobs will never pay $658,000 more in taxes than public services they and their dependents will consume. Who makes up the difference? You guessed it: this is one cause of the long-term tax burden shift onto working families.

It’s the Corporate One Percent taking it to the bank, with companies like Boeing, Tesla and General Electric pitting states against each other for nine- and 10-figure subsidy packages. Highly automated facilities like data centers, oil and gas refineries, micro-chip fabrication plants and steel mills have the highest costs per job.

By contrast, studies find that most job-training programs pay off well. And even if the job for which the worker originally trained doesn’t pan out, chances are she will stay put and take her skills to another employer, so taxpayers’ investment still pays off.

Given these sharp differences in taxpayer costs and risks, Good Jobs First recommends that public officials should quit “buffalo hunting” for those big, risky megadeals and instead invest in skills, infrastructure, emerging business “clusters” and in local entrepreneurs.

It doesn’t have to be this way: at least 19 state programs and two long standing federal programs cap the amount of subsidy per job. And in the European Union, “aid intensity” rules reduce costs far below the levels of some U.S. deals.

The bottom line: states and localities should put their buffalo muskets in a museum where they belong. We can spend less and get more.

Greg LeRoy is the executive director of Good Jobs First.