Author: tarek

Anti-tax lawmakers and activists in Kansas and Missouri continue to promote ideas to repeal their state income taxes and replace some of the revenue with a huge consumption tax. As ITEP’s Meg Wiehe explained in a recent Kansas City Star article, “A lot of education needs to happen around this issue. If you move to a consumption-based tax, the vast majority of taxpayers would likely pay more in taxes than they are under the income tax, except for the wealthiest.”

ITEP’s written testimony on one such proposal in Missouri  explains that only the richest 5 percent of Missourians would see a tax cut if the state’s personal income tax was replaced with a broad based sales tax, leaving the other 95 percent to pay higher taxes.

The corporate-controlled, anti-government American Legislative Exchange Council (ALEC) says approvingly that “Kansas and Missouri are at the top of the list” of states considering such proposals. To ALEC, ITEP’s estimates aren’t devastating at all. They recently claimed that “the downside of the tax swap appears to be minimal, if not non-existent.”

As a recent Kansas City Star editorial, warns, “The blessing of the council, known as ALEC, raises a red flag.”

In Kansas, Governor Sam Brownback has long been a proponent of eliminating, or at the very least, drastically reducing the state’s income tax. The Governor’s budget director anticipates that his budget for the new fiscal year will show “some significant (income tax) cuts”.

Missouri lawmakers have tried for the past couple of years to pass legislation that would eliminate the income tax entirely, but the legislation has not successfully passed both houses of the legislature.

Since cooler heads prevailed in the legislature, mega-rich troublemaker Rex Sinquefield has filed 11 ballot initiatives with the Secretary of State’s office that all do basically the same thing — eliminate state income taxes and replace the revenue with a broader sales tax. 

It’s expected that Sinquefield will eventually fund signature-collection for one of these ballot questions. If enough signatures are gathered, Missouri voters would likely be asked to decide about this radical shift in November 2012.

The proposals in Kansas and Missouri threaten those states’ ability to provide core and critical services because they would result in permanently lower revenue, while also tilting each state’s tax system even more heavily in favor of the well-off.

Photos via KDOTHQ Creative Commons Attribution License 2.0

Hot off of signing an expensive and unfair $400 million tax cut for Mainers in June, Maine Governor Paul LePage is now promoting a new regressive tax break targeted to older adults. 

He would like for state lawmakers to fully exempt all pension income from the state income tax, a move he thinks will help fixed-income older adults and bring wealthy retirees to the state. While most states with broad-based personal income taxes, including Maine, allow some sort of pension income exclusion, only Illinois, Mississippi and Pennsylvania fully exempt it from taxation. 

Maine currently allows retirees to deduct a maximum of $6,000 per spouse of their pension income less Social Security benefits received.  In other words, older Mainers with annual Social Security income over $6,000 ($12,000 if married) do not currently benefit from the pension deduction.

LePage’s proposal is a poorly-targeted and unnecessarily expensive tax break that will make Maine’s tax system less sustainable and less fair.

As a newly released ITEP brief points out, state income tax breaks for older adults, especially those that exempt all pension income, typically reserve the lion’s share of their benefits for better-off elderly taxpayers. Such poorly targeted tax breaks shift the cost of funding public services towards non-elderly taxpayers, many of whom are less well-off than the seniors benefiting from the tax breaks.

Also, long-term demographic changes threaten to make such a pension income tax break unaffordable in the long run. Older adults are the fastest growing age demographic in the country.  According to the US Census, between 2000 and 2010, the US population of adults 55 and older grew by more than 30 percent while the population of those under 55 grew only by 4 percent.  This change was even starker in Maine where the 55 and older population grew by 32 percent while the population under 55 actually shrank by 4.5 percent.  Over time, this demographic shift will mean that a shrinking pool of workers will be forced to fund tax breaks for an expanding pool of retirees — heightening the need to target these tax breaks appropriately in order to minimize their cost. 

Maine Revenue Services has estimated that this special tax break for older adults would cost the state $93 million.  Given that Maine is still climbing out of a budget hole ripped by the ongoing recession, services would have to be cut or other taxes would have to be increased to pay for LePage’s proposal.

Maine lawmakers would be wise to reject LePage’s proposal and should either stick to their current pension income deduction or consider a break which is better targeted to the state’s neediest older adults.

Photos via Maine Public Broadcasting Creative Commons Attribution License 2.0

Given the recent and unprecedented government shutdown, you’d like to think that lawmakers in Minnesota would want to make it easier, not harder, for the state to balance its budget. But some lawmakers haven’t learned their lesson and are, in fact, proposing to use the state constitution to ban any tax increase that does not receive a supermajority of votes in both chambers. 

Folks at the Minnesota Budget Project (MBP) argue, “The amendment would guarantee gridlock by creating extra hurdles for passing a responsible budget, leading to more budget gimmicks as policymakers seek to fund critical state services.” MBP also points out that surveys show that a majority of Minnesota residents want lawmakers to use both spending cuts and revenue increases to deal with deficits.

In these difficult economic times, lawmakers need more, rather than fewer, tools and options to address budget shortfalls and rising needs. In a state that just survived a horrific budget battle, it should be clear that the more options on the table, the better — for all Minnesotans.

By now everyone has heard about presidential candidate Mitt Romney’s statement that “corporations are people.” “Everything corporations earn ultimately goes to people,” Romney explained to hecklers in Iowa.

Of course, it’s true that corporate earnings eventually go to people and that taxes on corporate earnings are borne by people. Those people are primarily the shareholders, who receive smaller stock dividends and or capital gains because companies pay corporate income taxes. Corporate executive pay is also affected by corporate taxes because so much of it is in the form of stock options and similar vehicles.

The serious problem is that the shareholders who own these corporations are not paying enough, thanks to the loopholes that allow corporations like GE, Boeing, Verizon and others to avoid taxation entirely.

However, some corporate lobbyists and economists who sympathize with them now argue that the people who ultimately pay corporate income taxes are actually the workers. Up to 80 percent of corporate income taxes, they claim, actually fall on labor, rather than the owners of capital. This happens, they argue, because corporations will respond to U.S. taxes by lowering wages or moving operations and jobs to countries with lower taxes, which will also hurt American workers.

They’re wrong. As we have advocated reforms to raise revenue by closing corporate tax loopholes, some have cited these misguided economic models and asked us whether or not higher corporate taxes would ultimately harm the working people we want to help. The answer is absolutely not. 

Tax expert Lee Sheppard makes the obvious point that we’ve often made (subscription required): “if labor bore 80 percent of the burden of the corporate income tax, corporations wouldn’t care about it at all. They don’t fight high value added taxes in Europe, because the burden is clearly borne by consumers.”

Indeed, corporations lobby Congress furiously for reduced corporate income taxes, and they would not bother if they did not believe their shareholders were the ones affected by them.

Higher Taxes Won’t Drive U.S. Corporations Offshore

American corporations certainly have been moving operations and jobs overseas in the past decades. But low labor costs in many foreign countries appears to the main force driving this trend, not lower foreign income taxes.

A recent article explains that GE has shifted operations offshore, but it actually pays higher taxes in those foreign countries than it does in the U.S. (Of course, one feature of our tax system, “deferral,” probably does encourage companies to move jobs offshore and we have urged Congress to repeal it.)

The Debate among Economists

ITEP and other organizations that provide distributional analyses of tax policies, including the non-partisan Congressional Budget Office, assume that corporate income taxes are ultimately borne by the owners of capital (corporate shareholders and owners of other businesses indirectly affected).  Since capital is disproportionately owned by the wealthy, corporate income taxes are therefore very progressive taxes.

But in recent years some economists have claimed that corporate taxes simply push investment out of the country, meaning workers in the U.S. lose their jobs or settle for lower-paying jobs (meaning labor ultimately bears the burden of the tax). 

But other economists and analysts disagree. For example, a working paper from the Congressional Budget Office suggests that investment cannot move across international borders with perfect ease and that goods produced in one country are not always perfectly substitutable for those produced in another country.

The working paper further suggests a model that takes into account the corporate taxes of other countries, meaning corporations cannot escape taxation so easily because most places where they could reasonably operate will have some level of corporate taxation.

When the economic models take all this into account, they lead to the conclusion that most of the corporate income tax is borne by capital.

The People Who Own Corporations Are Not Paying Enough in Taxes

Once we establish that the owners of capital are ultimately paying the corporate income tax, the next question is whether or not they should be paying more than they do now. Mitt Romney seems to believe they pay more than enough already.

As middle-class Americans are told they must sacrifice some of their public services in order to help balance the federal budget, the obvious question is whether or not the owners of capital, who ultimately pay corporate income taxes, can afford to sacrifice as well. The answer is: absolutely.

Many corporations use loopholes to avoid paying the corporate income tax, as our recent report on 12 corporate tax dodgers demonstrates.

Corporate profits can accumulate tax-free before they are paid out as dividends, and two-thirds of those dividends will go to tax-exempt entities like pension funds or university endowments where they can continue to accumulate tax-free before they reach any individuals. The one-third of corporate stock dividends that do go directly to individuals are currently taxed at a low, top rate of 15 percent. (We have explained before that these are reasons why corporate profits are not double-taxed, as some believe they are.)

So the short answer to Mitt Romney is, yes, corporate taxes are ultimately paid by people, the shareholders, and Congress needs to close the loopholes that currently allow them to avoid these taxes.

Photos via Gage Skidmore and IMF Creative Commons Attribution License 2.0

Texas Governor and presidential candidate Rick Perry has endorsed both the concept of a flat income tax and the so-called “Fair Tax,” which is a national sales tax. A three-page report from CTJ explains that both of these proposals would result in substantial tax increases for the poor and middle-class and significant tax cuts for the rich.

Read the report.

Photos via Gage Skidmore Creative Commons Attribution License 2.0

We couldn’t help but laugh when we saw the title of last week’s Wall Street Journal editorial.  For those of you that have followed the “millionaire migration” debate, it should be a very familiar one.

First, a little background: Over the last couple years, the Wall Street Journal has run three editorials claiming that state income tax hikes in Maryland and Oregon were major factors in the shrinking of those states’ millionaire populations.  According to the Journal, while the recession did reduce the number of rich folks in those states, the tax hikes enacted by the “redistributionists” and “class warriors” (to use their words) just had to have something to do with it as well.  No self-respecting rich person would sit around and pay more in taxes when they could quit their job, pull their kids out of school, and move to a state with lower taxes on the rich – like South Dakota.

Our sister organization, ITEP, went to great lengths to point out the problems with the Journal’s migration theory, responding to those editorials in three separate reports, one letter to the editor, and a Huffington Post piece.  All of those publications analyzed official state data and reached the same conclusion: there’s no evidence to suggest that the shrinking of Maryland and Oregon’s millionaire populations was anything other than a predictable result of the recent recession.

That’s what makes last week’s Journal editorial so amusing.  It’s been a little over two years since the Journal first popularized the Maryland millionaire migration myth with a 2009 piece titled “Millionaires Go Missing.”  Apparently, members of the Journal’s editorial board have short memories, because they’ve recycled that same title, but used it to argue the opposite point (and the one ITEP insisted was the case all along): new federal tax data shows that the recession caused a huge decline in the number of millionaires all across the country.  “Told you so” just doesn’t seem sufficient.

Looking back, it’s really unfortunate how much influence the Journal’s made-up story about “Maryland’s fleeced taxpayers fighting back” (as the sub-title of their 2009 article read) actually had.  It resulted in countless misinformed debates about a “millionaire migration” phenomenon that never even existed, and played no small role in the eventual defeat of efforts to extend a very good tax policy in Maryland.

But even against that backdrop, perhaps we should all feel just a bit relieved right now.  At least the Journal opted not to use the new federal data to concoct a fiction about wealthy Americans migrating to low-tax Mexico.  Well, at least not yet.

Unless Congress acts, federal gas and diesel taxes will fall by about 80 percent on September 30.  If this is allowed to happen, spending on our nation’s already inadequate roads and transit systems will likely plummet, and Congress will face massive pressure to make up the difference through deficit spending or rerouting spending from other vital priorities.

Clearly, these outcomes are not ideal.  That’s why extending the gas tax – albeit at low rates – has always been a routine and bipartisan undertaking.  Today, however, the visceral opposition to taxes by many in Congress has led some observers to believe that the debate will be more hostile than usual, and that there is a real possibility – though small – that the gas tax will actually be allowed to expire.  Simply put, there is less and less that is “routine” in our nation’s capital anymore.

In a surprising and fortunate twist to this story, Grover Norquist stated flatly recently that a gas tax extension would not violate the no-tax pledge that 277 members of Congress have signed.  This should have already been obvious to anybody who’s taken the time to read Norquist’s 57-word pledge (it clearly applies only to income taxes), but his admission was nonetheless helpful in making that fact known.

Perhaps more surprising, though, was a confession by one of Norquist’s employees that allowing the gas tax to fall so quickly would be too disruptive.  You know the situation is serious when even Norquist’s group is cautioning against tax cuts.

Less encouraging was Norquist’s recent promise to push for a system in which states could opt-out of the federal Highway Trust Fund, and instead finance their roadways entirely with tax revenues generated inside their borders.  If allowed to happen, this would mark a major retreat from the federal government’s long-running role in helping to maintain our nation’s Interstate highways.

It should go without saying that the Interstate highway system is of immense importance to interstate commerce, and that there is an obvious federal role to be played in ensuring the smooth functioning of that system.  For example, the federal government has always seen to it that large, sparsely populated states are able maintain their expansive highway networks for the good of the national economy.

With this in mind, it should come as little surprise that the organization representing state transportation departments (AASHTO) believes that the federal government’s involvement must continue.  As AASHTO representative Jack Basso recently remarked to Stateline, “The real question is can you maintain a national system, given the diversity and the breadth of geography in the country and the population situation, without some kind of national program? I think the answer is ‘No.’”

Unfortunately, while there appears to be a growing consensus that the gas tax should be extended, there’s still a possibility that it will be “taken hostage” — just like the debt ceiling and most of the Bush tax cuts were within the last year.  If that happens, it’s very likely that the outcome of the current transportation debate will be much more skewed toward Norquist’s priorities than would otherwise be the case.

Photo via Gage Skidmore Creative Commons Attribution License 2.0

If you’ve ever bought something online, then most likely you’ve cheated on your taxes.  Not many realize it, but people making online purchases are required to pay sales taxes on those purchases directly to their state government.  Unfortunately, hardly anyone reports these taxes (either because of ignorance or a desire to save a buck), and the law is essentially unenforceable.

In an effort to remedy this situation, Senator Dick Durbin (D- IL) has once again introduced the Main Street Fairness Act.  The bill would require online retailers above a certain size to remit taxes on sales made in states that have taken steps to simplify their tax systems.  Essentially, this bill would relieve the buyer of their responsibility to calculate and pay the sales tax themselves.  It’s a bill that has been introduced before, but with online shopping (and state efforts to tax it) growing at an increasing rate, it’s now more relevant than ever.

Opponents of the bill have incorrectly labeled it as a tax hike.  The bill doesn’t actually create a new tax, nor does it raise an existing one.  Rather, it merely creates a mechanism to collect taxes that have always been owed.

Failing to collect these taxes creates two major problems:
1) States are losing out on badly needed revenue.
2) Traditional brick and mortar stores are at a competitive disadvantage when their customers have to pay a tax that online shoppers are able to evade.

As an extreme example of this second problem, in many instances customers will go so far as to examine and “try out” merchandise at stores, only to return home and purchase the same product online in order to evade their sales tax responsibility.

It’s no surprise then that numerous organizations representing retail owners, such as the Retail Industry Leaders Association (RILA), support the bill.  As one of their spokespeople said, “It is time to close this decades-old loophole and level the playing field for all retailers.”  And specific “brick and mortar” companies, ranging from Wal-Mart to independent book stores, have come out in support of the legislation as well.

Notably, the bill contains two important provisions meant to address concerns among online retailers about the difficulty of complying with state sales tax laws.  First, the bill would only allow states to require online sellers to collect sales taxes if they have first simplified their tax systems. Second, the bill would also exempt “small sellers” from the requirement, since small businesses are the least likely to have the resources necessary to comply with state sales tax laws.

Amazon has long opposed the small seller exemption, a position reiterated most recently in itsJuly 29 letter to Senator Durbin.  (Michael Mazerov of the Center on Budget and Policy Priorities suggests three reasons why Amazon opposes this exemption in the Appendix of his November 2010 report.)  And while Amazon thanked Durbin for introducing the newest version of this bill, it has stopped short of an outright endorsement.  It remains to be seen how seriously Amazon plans to push for eliminating the small seller exemption, and whether such a push could endanger the entire bill.

On the plus side, the increasing level of interest states are showing in solving this problem themselves has intensified the push for a comprehensive federal solution.  Battles over online sales taxes have been waged in over twenty states in just the last three years, and there are no signs that interest in the issue will wane any time soon.  But as ITEP explains in its recently updated policy brief, only a federal solution can solve this problem entirely.  As Durbin put it, “If you do it on a national basis, there’s hardly a complaint one state is being disadvantaged over another.”

The Main Street Fairness Act has had bipartisan support in the past, though this time around only Democrats have signed on so far.  In theory, conservatives should be very interested in the bill as it removes a longstanding economic distortion.  It’s a common sense solution to a longstanding problem and is a win-win in that it can generate revenue for cash-strapped states while also improving the competitiveness of Main Street businesses.

Photos via American Progress Action Fund & Soumit Creative Commons Attribution License 2.0

Texas Governor and presidential candidate Rick Perry said that he is “dismayed at the injustice that nearly half of all Americans don’t even pay any income tax.”

He should know that Americans pay other types of federal taxes besides just federal income taxes, and that they also pay state and local taxes. A two-page statement from CTJ explains that this is particularly true in Texas, which, despite its reputation, is actually a high-tax state for the poor.

The statement cites a recent ITEP finding that Texas imposes higher taxes on its poorest 20 percent of non-elderly residents than 45 other states. In other words, Texas has the fifth highest taxes for low-income families.  Texas also has the 17th highest taxes on the next 20 percent of non-elderly residents. These are the same families that Governor Perry believes should contribute more in taxes.

Photos via Gage Skidmore Creative Commons Attribution License 2.0

The Institute on Taxation and Economic Policy (ITEP) offers a series of Policy Briefs designed to provide a quick introduction to basic tax policy ideas that are important to understanding current debates at the state and federal level. Over the next two weeks, ITEP will release eight new and updated Briefs that explore various elements of the state Personal Income Tax and offer options for improving its adequacy, stability, and fairness. The new briefs this week are:

· Income Tax Simplification: How to Achieve It

· Indexing Income Taxes for Inflation: Why It Matters

· Why States That Offer the Deduction for Federal Income Taxes Paid Get it Wrong