Author: tarek

Good news: Wisconsin appears to be  gearing up for serious income tax reform. Bad news: the legislator heading up the effort is a flat tax proponent.

Illinois Governor Quinn began the legislative session in February proposing a variety of loopholes be closed, but the budget he signed on June 30 didn’t close those loopholes.

Think state budgets don’t have an impact on what services localities can provide? Read this article about eight South Carolina school districts facing cuts.

Millionaires don’t flee taxes. With help from ITEP, the millionaire migration myth takes a hit in this Baltimore Sun letter to the editor.

Illinois’ pension system is in crisis.  This insightful column by the Center for Tax and Budget Accountability’s Ralph Martire argues that the state’s tax policy is at least partially to blame:  “For decades, Illinois’ antiquated, poorly designed tax policy created an ongoing structural deficit.”

Seems New Jersey Governor Chris Christie will do or say just about anything to deliver on his reckless promise to cut personal income taxes.  His latest strategy is grandstanding in a very public spotlight (he’s enjoying all sorts of media appearances this week and more speculation of a VP nod) in an effort to get his way, and get it now, at the expense of the poorest New Jerseyans.

Here’s a sketch of how the New Jersey tax cut debate drama has played out in recent months:

Despite early and legitimate criticism from some lawmakers that Christie’s budget depends on overly optimistic revenue projections, and despite legitimate concerns that the state cannot afford any tax cut this year, the Assembly and Senate both got on board with the tax-cutting governor. Specifically, each chamber offered up plans to cut property taxes for households with incomes under $250,000, and the Assembly included a millionaire’s tax to help fund their more generous property tax credit program.

At first, Governor Christie dismissed these alternative proposals (particularly the common sense and highly popular millionaire’s tax component, saying he’d rather “rearrange his sock drawer” than talk about it).  But eventually he embraced the Senate version (which at this point had become his best chance to claim some victory on tax cuts) and struck a tentative compromise in May to deliver property tax cuts to households with incomes below $400,000.

Once again, though, revenue reality got in Christie’s way. Days later, the nonpartisan New Jersey Office of Legislative Services (OLS) estimated that New Jersey revenues would come in $1.3 billion behind the governor’s projections.  This revelation gave Senate and Assembly Democrats pause and left many unsure, again, about supporting any tax cuts. Stories in the New York Times and Wall Street Journal  explain Democrats’ concerns: Christie is banking on revenues to increase by 7.3 percent next year, yet average state revenue growth nationwide is only 4.1 percent, and, the Garden State’s current year revenues continue to lag.

Due to these concerns, the Senate and Assembly went around the Senate leader’s deal with the Governor and sent Christie a  budget with a $183 million earmark for a tax cut, contingent on the state meeting revenue projections later in the year.  The budget also includes restoring the state Earned Income Tax Credit (EITC), a tax break (PDF) for low- and moderate-income working families, from 20 back to 25 percent of the federal credit.

Governor Christie bristled at this (very sensible) plan. He vetoed the EITC increase and called lawmakers back to Trenton the week of July 4 and presented his so-called compromise – give him his expensive tax cut and he’ll give back a modest tax credit for the working poor.

In a smart and comprehensive editorial on Christie’s latest demands, the Newark Star-Ledger wrote:

He is holding the working poor families of this state hostage by refusing to restore the tax credit he took away from them two years ago unless Democrats yield.

The credit is worth about $50 million a year, a pittance in a budget of nearly $32 billion. But for a single mom with a few kids and a job working as a cashier, the state credit is worth about $500 a year. Combined with a federal credit five times that large, it makes a meaningful difference…

He will restore the credit, he says, only if Democrats agree to take the blind leap and commit to his larger tax cut now, before the revenue numbers come in. Be reckless, he says, or he will shoot the hostages.

His predictions for revenue growth are the most optimistic in the nation, despite the fact the state economy is lagging behind other states. No one but his own obedient Department of Treasury believes this nonsense, including the nonpartisan Office of Legislative Services and the Wall Street bond rating agencies.

So why not wait and see? If the tax cut isn’t scheduled to take effect until 2013 anyway, what does that simple prudence cost?

Just one thing: It would deny Christie a political win in advance of the party convention in August…. Christie scores a few political points. And the working poor absorbed one more of his blows.

The experts at New Jersey Policy Perspective also endorse patience and explain that the state is already moving money around and deficit-spending to make the already frayed ends meet.  They conclude that when the numbers are finally in, lawmakers should have a serious debate on the crucial question of whether any tax cuts should be enacted or whether the state should “invest the $1.5 billion to put New Jersey back on the path to good jobs, long-term economic growth, and middle-class tax relief.”

This is the kind of grown-up thinking New Jersey needs. But until and unless Chris Christie gets over his ideological commitment to slashing taxes and his personal commitment to climbing the political ladder, his constituents are in for a lot more theater and a lot less fiscal sanity.

Interested in knowing how much it costs to fund (or not) local firework shows this 4th of July? Read this.

Meantime, 46 states now allow sales of high powered consumer fireworks rather than lose the revenues to other states – but often turn around and ban their use because of the fire hazard in dry July.

On Sunday, Texas started collecting state and local sales taxes on items purchased from Amazon.com – and the sky didn’t fall. Read why (PDF) items purchased online should be taxed.

Forbes’ estate tax expert cited the Institute on Taxation and Economic Policy’s (ITEP) work discrediting claims that eliminating Tennessee’s gift and estate taxes (as Arthur Laffer advises) will lead to robust economic growth.

An exposé on Louisiana’s budget busting “alternative” fuels tax credit shows it (predictably) helped pay for plain old gasoline in flex fuel cars, too.

According to official estimates, once the Affordable Health Care Act takes effect, it will provide about $26 billion a year in tax credits to help middle-income families lacking health insurance to purchase it. At the same time, the act will impose about $7 billion a year in fees on middle-income families that choose not to purchase insurance.

Senate Minority Leader Mitch McConnell (R-KY) said this $19 billion-a-year net middle-class tax cut is “a middle class tax cut — tax increase.”

Well, that’s sort of correct. But when you combine the two tax provisions, they clearly add up to a middle-class tax cut.

Here’s another way of looking at the fees and the tax credits. The health law will make about 28.6 million people eligible for the tax credits. The number of people who will not be eligible for these credits or the newly expanded Medicaid and who will be subject to the mandate is 7.3 million, which is just two percent of the population (three percent of the non-senior population). Even fewer — just 1.2 percent of Americans — would actually choose to pay the fee rather than obtain health insurance, according to the Congressional Budget Office.

(Photo courtesy Fox News)

So the modest fee that the Affordable Health Care Act will impose on people who choose not to have health insurance is a “tax,” according to a majority of Supreme Court justices. Hooray! That characterization made the Act pass constitutional muster even in the opinion of this very conservative Supreme Court.

There’s more good news. It’s a tax that hardly anyone will pay.

That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.

For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.

Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.

For example, a family of four earning $50,000 that buys health insurance will get a government subsidy equal to 60-70 percent of the cost of the premiums.

Because of these large subsidies to buy insurance, it’s estimated that the new “tax” on those who fail to get health insurance will apply to less than 3 percent of all households. So don’t worry. You’re almost certainly not one of them.

Nonsensical Claim of Largest Tax Increase in History

Some opponents of the health care reform law have taken to calling it the largest tax increase in history. The fee for not having health insurance would be, of course, relatively small, raising around $7 billion a year (just 0.03 percent of GDP) and increasing federal revenue by 0.15 percent (one sixth of one percent).

Even if you count all the tax increases in the health law, that still amounts to less than the tax increases President Reagan enacted from 1982 through 1983. When you subtract the tax cuts (the refundable credits to help families obtain health insurance and the tax credits for small businesses) the net effect of the law is to increase taxes by $653 billion over the next decade, which is about 0.3 percent of GDP. By way of comparison, from 1982 through 1983, President Reagan raised taxes by 1.8 percent of GDP. (And of course, there were much larger tax increases in our history, like the tax increase during World War II that equaled 14.8 percent of GDP.)

It’s also important to note that about three-fourths of the tax increases in the health reform law apply to corporations (drug companies, medical device manufacturers, insurance companies) and married couples making over $250,000 and single people making over $200,000.

Health Reform Law Includes a Major Win for Tax Fairness

The tax increase on high-income individuals is particularly important because it reduces the bias in the tax code in favor of investment income and against income from work.

This provision, which was proposed in 2009 by Citizens for Tax Justice, reforms the Hospital Insurance (HI) tax that funds part of Medicare so that it’s more progressive and no longer exempts the income of people who live off their investments. The HI tax will effectively have a top rate of 3.8 percent that applies to both earnings and most investment income, and which only applies to taxpayers with incomes in excess of $250,000/$200,000.

This provision reduces, but does not eliminate, the ability of people who live off their investments to have a lower effective tax rate than people who live on earnings. It’s another reason why the health law is victory for middle-income working Americans.

Photo of Supreme Court via OZ in OH Creative Commons Attribution License 2.0

While Kansas recently repealed its only form of grocery tax relief (a credit for low-income families), West Virginia is moving in the opposite direction.  That state’s sales tax rate on groceries will drop by one percentage point starting on July 1 this year, and be repealed entirely midway through next year.

West Virginia revenue officials aren’t too enamored with any suggestion to increase the state’s already generous property tax breaks for senior citizens.  Using a $300,000 home as an example, the state’s deputy secretary of revenue explained how under today’s rules, a homeowner under 65 would pay $2,334 on that house while a homeowner over age 65 using the credit could pay as little as $764. Moreover, with the state’s eligible senior population expected to grow by 37 percent over the next decade, the cost of any tax breaks for older West Virginians is going to grow dramatically.

After much debate, South Carolina lawmakers appear to have come to an agreement on a regressive tax change that allows “pass-through” business income (which tends to go mainly to wealthy individuals rather than businesses) to be taxed at three percent instead of the five percent currently levied.

After the legislature overrode Governor John Lynch’s veto, New Hampshire became the latest state to adopt neo-vouchers: tax credits for corporations who contribute money to private school scholarship funds which end up diverting taxpayer dollars into corporate coffers.  In his veto message, the Governor wrote: “I believe that any tax credit program enacted by the Legislature must not weaken our public school system in New Hampshire, downshift additional costs on local communities or taxpayers, or allow private companies to determine where public school money will be spent.”

Tax experts asked by the Associated Press couldn’t find anything nice to say about Pennsylvania Governor Tom Corbett’s proposed $1.7 billion tax break for Shell Chemicals – the largest-ever financial incentive offered by the state – for the company to build an oil refinery. David Brunori from George Washington University said, “There’s absolutely nothing good about what the governor is proposing” and a libertarian policy expert pointed out that government shouldn’t be covering the cost of risk for businesses through tax subsidies.

Politifact highlights an increasingly common complication for those who sign Grover Norquist’s “no tax” pledge.  On July 31, Georgia voters will decide on a referendum to increase the sales tax to fund transportation, a measure that’s backed by Republican Governor Nathan Deal.  But having signed Norquist’s no-new-taxes pledge, the Governor is struggling to justify supporting a “new tax” that he believes will benefit his state’s economy.

More evidence that Wisconsin’s tax structure is unfair: two of the state’s billionaires paid no state income taxes in 2010.

Here’s a compelling read by former Congressman Berkley Bedell of Iowa, championing the “ability to pay” principle of taxation that he says accounts for the Great Prosperity period in post-war America.

An investigative series in the Toledo Blade reveals the Ohio Finance Agency isn’t properly overseeing the state’s low-income housing tax credit program.  Many of the beneficiaries of the credits are “large corporations such as banks, insurance companies, and tech firms [that] receive tax breaks even as the low-income rental homes for which they received the credits fall apart.”

Iowa Governor Terry Branstad recently joined with a dozen other Republican governors in calling for Congress to pass a measure that would allow states to require the largest online retailers to collect sales taxes. In pushing for the measure, however, Republican governors are finding that their biggest roadblock is opposition from their own party in Congress, who perceive the measure as being a “tax increase.”

In addition to getting in trouble with their own party, Republican governors are getting pushback from the anti-tax enforcer Grover Norquist, who argues that legislation allowing states to require online retailers to collect sales taxes is a tax increase because consumers will ultimately pay more in taxes. Republican Pennsylvania Governor Tom Corbett’s office defied Norquist, however, correctly arguing (subscription required) that collecting online sales taxes is “just enforcing existing laws” and not adding a new tax.  

The fact is that only retailers can collect sales taxes, but the Supreme Court ruled in the 1992 catalog sales case of Quill v. North Dakota that states can only require remote retailers – which includes online sellers – to collect the tax if they have a so-called physical presence in the state. This has left many states scrambling to cut piecemeal deals with major online retailers (notably Amazon.com) who may not have a physical presence in their state in order to collect at least some of those sales taxes.

The messiness of these deals has made Republican and Democratic governors realize that for practical purposes what is really needed is a federal solution, such as the Main Street Fairness act, to clear a path for states to enforce sales tax collection.

The growth in online shopping is staggering and it is costing states tens of millions a year in lost sales tax revenues.  Asking online retailers to do what brick and mortar stores do and collect sales tax (PDF) is just common sense. This new push by Republican governors to make it happen might just be the thing that makes the Quill ruling history, and brings sales tax law into the 21st Century.

Months after cutting the state income tax for wealthy taxpayers, Idaho’s budget situation isn’t looking good.  The Associated Press reports that “earlier this year it looked like the state had sufficient revenue to provide a $36 million tax cut, as well as give state employees a 2 percent raise” but that surplus has already evaporated. In fact, there was never real consensus about the state’s revenue projections in the first place.

Kansas Governor Sam Brownback admits his radical tax cut package is a “real live experiment.”

The South Carolina House approved a measure to keep the state running if it doesn’t have a budget by July 1 when the new fiscal year begins.  The Senate and House are currently bickering over how to implement a (regressive) tax cut for so-called “small” business owners.

It’s back! New Jersey Assembly Democrats are once again planning to introduce a millionaire’s tax into the budget debate.  Proponents of the tax on the wealthiest New Jerseyans want to use the $800 million in revenue it would raise to boost funding to the state’s current property tax credit program for low and middle-income homeowners and renters.  Governor Chris Christie has already vetoed a millionaire’s tax twice. 

The clever folks at Together NC, a coalition of more than 120 organizations in North Carolina, held a Backwards Budget 5K race this week to “to shine a spotlight on the legislature’s backwards approach to the state budget.” 

California Governor Jerry Brown’s revenue raising initiative (which temporarily raises income taxes on the state’s wealthiest residents and increases the sales tax ¼ cent) has officially qualified for the state’s November ballot. Two additional tax measures will join Brown’s plan on the ballot: a rival income tax measure pushed by a billionaire lawyer to fund education and early childhood programs; and an initiative to increase business income tax revenues by implementing a mandatory single-sales factor (PDF backgrounder) formula.

The Pittsburgh Post-Gazette editorializes in favor of capping Pennsylvania’s “vendor discount,” a program (PDF) that allows retailers to legally pocket a portion of the sales taxes they collect in order to offset the costs associated with collecting the tax.  The Gazette explains that a handful of big companies are taking in over $1 million per year thanks to this “antiquated” giveaway.  Computerized bookkeeping takes the effort out of tax collecting and a cap would only impact the national chain stores who disproportionately benefit from the program.