Author: tarek

A new report from the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) explains that an uptick in revenues from modest economic growth is not enough to undo the damage from years of cuts to state governments during the recent economic downturn when revenues were underperforming.  According to NASBO, while state revenues are returning to pre-recession levels, spending is not, largely because lawmakers are being conservative – replenishing rainy day funds, for example – rather than restoring revenues to agencies that have been under-serving citizens for years.

Warnings of structural deficits at the state level predate the Great Recession. (See this PDF from the Center on Budget and Policy Priorities for an excellent overview.) They result from states failing to change their tax systems in a changing world – new kinds of economic activity, shifting demographics and a virtual epidemic of corporate and personal income tax cutting has left states congenitally unable to maintain the revenues they need when they need them.

And right now, with the cost of education and health care (the two biggest chunks of total state spending) growing faster than the economy and taking an ever growing bite out of budgets, states are facing a genuine crisis. In fact, the NGA/NASBO report notes that state spending on Medicaid continues to outpace all other spending and is projected to increase annually by 8.1 percent over the next 10 years.

As NGA Executive Director Dan Crippen explained to the Washington Post, this growth in expenditures without an injection of sufficient revenues means government leaders will have to choose which public services (schools, roads, police, etc.) get adequately funded, and which don’t. Again. And not only state programs: locally provided services that rely on state aid that have already seen devastating cuts in the past few years because of squeezed state budgets will continue to atrophy, too.

If state governments are to continue providing even just the same level of services to their citizens, they must modernize their revenue systems—and soon. As the Institute on Taxation and Economic Policy (ITEP) detailed in a 2011 report, state governments can and should make systemic changes such as expanding the state sales tax base to include services, eliminating tax loopholes (like those for capital gains) and ending corporate tax breaks that allow corporations to dodge taxes with accounting tricks.

States that continue to duck the issue and craft tax policy with short-term tweaks, political games and downright backward fixes will soon find that they are unable to fully fund basic services—even if an economic recovery improves revenues — and will be forced to cut more deeply into basic services, like keeping water clean and the courthouse staffed.

So the real news in this fiscal survey is actually an old story: without serious, substantial and responsible tax reform, revenues cannot keep pace with the needs of modern government.

Image from NGA report charts.

New Analysis Finds GOP Approach to Bush Tax Cuts would Give Richest One Percent of Americans $50,660 Per Year More and Give Poorest 20 Percent $150 Less on Average than Obama’s Approach

Citizens for Tax Justice Compares the Two Approaches to Extending Some or All of the Bush Tax Cuts, Nationally and State-by-State

Washington, DC – Middle-income and low-income Americans would pay somewhat more in taxes under the Congressional Republicans’ approach to extending the Bush tax cuts than they would under President Obama’s approach, while high-income Americans would pay far less under the Republican approach, according to a new analysis from the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice (CTJ).

Under the President’s approach, in 2013, the poorest 20 percent of Americans would receive an average tax cut of $270 while the richest one percent would get an average tax cut of $20,130.  Under the Congressional Republicans’ approach, the poorest 20 percent of Americans would receive an average tax cut of $120 while the richest one percent would receive an average cut of $70,790.

The Bush tax cuts extension outlined by the President would cost one trillion dollars less over 10 years than would making all the Bush tax cuts permanent, as the GOP proposes.

“Both President Obama and Congressional Republicans have proposed to extend far too many of these unaffordable tax cuts,” said Robert S. McIntyre, director of Citizens for Tax Justice.  “But if we have to choose between the Congressional Republicans’ and President Obama’s approach, the President’s proposal is fairer and more responsible.”

The national and state reports are all available at: www.ctj.org/bushtaxcuts2012.php.

The term “Bush tax cuts” refers to income tax cuts and estate tax cuts enacted in 2001 and 2003 and extended several times since then.  In 2009, President Obama expanded some parts of these tax cuts that benefit low income and working families.  In December of 2010, the President and Congress agreed to extend all of these tax cuts through the end of 2012.

Republicans in Congress have indicated that they would extend all of the tax cuts first enacted in 2001 and 2003, but not the 2009 expansions for lower income families. President Obama wants to extend the 2001 and 2003 tax cuts only for the first $250,000 a married couple makes annually, or the first $200,000 a single person makes. Obama also wants to extend the 2009 expansions.

The findings from CTJ and ITEP also show:

• Of the tax cuts going to Americans, under Obama’s approach, three percent would go to the poorest 20 percent of Americans, 9.9 percent would go to the middle 20 percent and 11.4 percent would go to the richest one percent.

• Of the tax cuts going to Americans, under the Congressional Republicans’ approach, one percent would go to the poorest 20 percent of Americans, 7.4 percent would go to the middle 20 percent of Americans and 31.8 percent would go to the richest one percent of Americans.

CTJ and ITEP are also releasing state-specific versions of this report showing the specific distribution of the benefits, and amounts of tax cuts, from each approach in each of the fifty states and the District of Columbia.  All the reports are at www.ctj.org/bushtaxcuts2012.php.

The report also addresses the economic effects of tax cuts versus direct government spending and cites Moody Analytics research concluding that government spending is more stimulative by a factor of five or more than tax cuts.

#####

 Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation ( www.ctj.org).

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP’s mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (www.itepnet.org).

• The Detroit News’ editorial board recently criticized a plan to cut Michigan’s personal income tax rates which, despite its hefty $800 million price tag, managed to pass the state’s House.  The editors called it risky election year pandering.

• Oregon is launching a pilot program to figure out how road and bridge repairs will be funded when cars no longer run on gasoline and drivers no longer pay the gas tax.  One possible solution is a tax directly on miles traveled rather than gallons consumed, but the last time the state tested that out, it “didn’t sit well with the public” because the GPS-like technology made people worry the government would be spying on them.

• Rhode Island Governor Lincoln Chafee signed a state budget that includes a small foray into sales tax base expansion.  Starting July 1, taxi and limo rides and pet grooming services will be subject to the state’s seven percent sales tax rate, as will clothing and shoes costing more than $250.

• The Associated Press offers a smart analysis of tensions within state Republican parties and their impact on a variety of state legislative activities, including tax policy debates. Written by a senior AP reporter in Missouri, it reveals (among other things) that moderate Republicans played a role in thwarting some of the more conservative members’ plans.

New Jersey and Ohio don’t have much in common when it comes to their gambling industries.  New Jersey’s Atlantic City is home to a dozen different casinos, the oldest of which has been in operation for over three decades.  Ohio, on the other hand, only legalized casino gambling in 2009, and its first two casinos opened barely a month ago.

But despite their differing backgrounds, all signs from both states are pointing to the same thing: legalized gambling isn’t the revenue miracle that lawmakers often promise.

In New Jersey, a brand new mega-casino called Revel is already a disappointment.  Even with the opening of Revel’s 2,500 slot machines, 120 table games, 1,800 rooms, and 14 restaurants, Atlantic City’s gambling revenues are down nearly 10 percent overall compared to a year ago.

And the explanation from gambling industry analysts (and anyone else who’s been paying attention)? Market saturation. With casinos popping up across the country, gamblers no longer need to travel to distant gambling destinations, and states that rely on casino revenue are increasingly raising that money from their own residents rather than pulling in the coveted out-of-state dollar.

In Ohio, meanwhile, recent reports indicate that the state’s new casinos will cut deeply into the casino revenues in Indiana, Michigan, Pennsylvania, and West Virginia.  Even so, a recent survey by the Cincinnati Enquirer found little optimism among Ohio’s local governments when it comes to the gambling revenues they expect to collect. “Everybody thinks it’s going to fix the world, and it isn’t … I have a hard time believing we have so many people around there that have this kind of money to throw into casinos,” says one county official. According to another, “This is all a big shell game … We’re not really getting anything. All the new money we’re getting is going to be offset by cuts in [state aid].” And in Ohio, the state cuts to cities and counties continue to mount.

For more on the empty promise of gambling revenue, read this policy brief (PDF) from the Institute on Taxation and Economic Policy (ITEP).

• Last night’s Washington Gubernatorial debate did not answer the call  to shift their focus to the state’s broken revenue system.  Instead, the Republican candidate, Attorney General Rob McKenna said that the Democrats “just keep insisting we need higher taxes.”  Whoever wins, they will have to contend with the fact that Washington State has the most regressive tax structure in the nation.

• Last week we reported on public scrutiny of a $336 million “small business” tax break in North Carolina that is, in fact, going to benefit some of the state’s wealthiest individuals. Yesterday, Senate Republicans – torn between public outrage and affluent constituents – successfully wiggled out from under having to vote on a measure to modify it so it targets truly small businesses, as intended.  

• New Hampshire voters will go to the polls in November to decide whether the state’s lack of a personal income tax should be enshrined in the constitution. In better news, the state’s lawmakers heeded the advice of the New Hampshire Fiscal Policy Institute and defeated a constitutional amendment requiring a supermajority to pass any tax or fee increase.

• Here’s an interesting read on the economic development impact of the arts. A new study contends that not only do the arts make Nebraska (for example) a better place to live, but they also contribute to state and local coffers to the tune of $18 million. For more on the impact of the arts in other states check out the study, Arts & Economic Prosperity IV.

 

School vouchers are always controversial, but a front-page story in the New York Times describes how at least eight states have embarked on a quiet strategy of back-door vouchers which divert taxpayer money through tax rebates to private donors. While two states allow individuals to exploit this tax break, most are structured as corporate tax breaks.  So they are like conventional vouchers, except minus the accountability, and offering a special tax shelter for corporate profits.

You’d think you can’t make this stuff up, but somebody did.  

Sometimes called “neo-vouchers,” (PDF) the system involves corporate tax credits being doled out to businesses that contribute money to private-school scholarship funds. At their worst, they allow profitable corporations to actually make money from these contributions (they also get a write-off for charitable contributions on top of the dollar-for-dollar tax break match), reducing their income taxes by more than they actually contributed to schools.  And of course, this funnels needed public school funds (and those are taxpayer dollars) to private schools that often aren’t even subject to the same educational standards as a state’s public schools.

This trend is especially troubling now because elementary and secondary school funding already faces a perfect storm: the bursting of the home-value bubble is depressing property tax collections nationwide, and the end of stimulus-related federal aid to states has further constrained education funding. And as the Times documents, these tax credits cum vouchers are often poorly designed and subject to little oversight: some states don’t require the private schools receiving these scholarships to administer the same achievement tests as public schools, while others have no mechanism for directing scholarships to needy families. In fact, there is anecdotal evidence that some students benefitting from the scholarships would have attended these private schools anyway—which means their parents are being paid, by other taxpayers in their state, to do what they were planning to do anyway. 

Why, at a time when adequately funding K-12 education has been so difficult for states, are lawmakers in these states so cheerful about directly siphoning tax revenue away from cash-starved public schools through these “neo-vouchers?” Maybe because they think that tax breaks aren’t the same thing as direct government spending? One source tells the Times, “there are private dollars coming from a private individual and going to a private foundation. It drives the N.E.A. completely off the wall because they can’t say this is government funding.”  Another piece similarly argues that “[v]ouchers and tax-credits vary in important ways. Both programs enable students to attend public or private schools of their parents’ choice, but unlike tax-credit scholarships, vouchers are publicly funded, paid for with government appropriations.”

But these statements are both ludicrous.  When a state government provides tax breaks for corporate contributions to private schools, the effect on state budgets is exactly the same as if the government had spent the money directly. It’s “government funding” either way. The critical difference is that tax breaks typically involve less oversight and public debate than dilrect spending, even as they divert public resources away from families still enrolled in underfunded public schools.

Some advocates of these tax giveaways have argued that this approach actually saves money, because the per-pupil cost of educating children in the private schools receiving the scholarships is lower than the per-pupil cost of public schools. Yet as a helpful new analysis from the National Education Policy Center shows, this claim assumes that the credit allows parents to move their children from public schools to private schools—and there is no evidence that it is having that effect.

And on top of all this, neo-vouchers are an actual money-maker for corporations. Remember, the system offers not only dollar-for-dollar state tax credits for contributions, but the ability of corporations to write off charitable contributions on their federal tax forms.  Companies can actually make a profit from these tax giveaways, collecting more in federal and state tax breaks than they actually spent on the contribution! And Florida’s credit, which was expanded by lawmakers earlier this year, is now the single most expensive (PDF) corporate tax credit allowed by the state, at $72 million a year.

So far, despite growing scrutiny of these perverse tax breaks in Georgia (PDF) and other states, lawmakers in New Jersey and North Carolina (details) appear undeterred and are poised to enact similar plans.

Photo of North Carolina Private School Students via  Harris Walker Creative Commons Attribution License 2.0

North Dakota voters hit the polls yesterday and overwhelmingly (76 percent) said No to Measure 2, a proposal to eliminate — and constitutionally ban into perpetuity — their property taxes.

Among those against the measure, the state’s tax commissioner opposed it on the grounds it was fiscally unsustainable, and the state’s League of Cities opposed it for undermining local control over revenues and budgets.

Spearheading the measure was a group called Empower the Taxpayer, ET for short.  Proponents regularly cited North Dakota’s recent energy boom and the surplus of oil revenue it has created as one reason the state could afford to get rid of such a reliable revenue source – which constitutes roughly a quarter of all state revenues.  We note, however, that ET’s director said, “We started this movement before the oil boom…. This isn’t about being flush with oil money.”  

It is true that, thanks in large part to the state’s energy boom, North Dakota was the only state to weather the economic recession without taking a hit to its revenues.  But the oil and gas making the state rich today will run out one day, and banning property taxes would have undoubtedly made North Dakota more vulnerable when that happens, leaving the state unable to fund even the most basic level of services in future “bust” years.  In the end, voters recognized it was unwise to permanently eliminate a relatively stable revenue source in favor of a highly volatile and unsustainable one.

The North Dakota property tax repeal failure is the latest in a line of unsuccessful attempts this year to repeal, reduce or phase out major state taxes.  Its advocates have vowed to fight another day but for now, it goes to show that just as Americans want federal taxes to support government services, they also value strong schools, safe communities, accessible health care, and well maintained roads over tax cuts in the states they call home.

Photo of North Dakota Oil Field via Porchlife Creative Commons Attribution License 2.0

• North Dakotans go to the ballot box today to decide the fate of their state’s property tax.  If it passes, it won’t be good news. Stay tuned.

• It looks like New Jersey Governor Chris Christie has agreed to abandon his tax cut plan (which cut income taxes and favored the wealthy) in support of a Senate alternative (which limits property tax credits to homeowners and renters with incomes under $250,000).  Still, some Senators are saying any tax cut at this time is “insanity” and will attempt to stop the compromise.

• Voodoo economics is alive and well in Tennessee.  Gov. Haslam continues to insist  that the state’s recent phase out of the inheritance tax is actually going to increase tax revenue for the state, citing  research from Arthur Laffer – that has been thoroughly debunked by the Institute on Taxation and Economic Policy (ITEP) and seriously questioned by other researchers.

• ITEP responds to an unusually biased opinion piece and sets the record straight about the Illinois and California tax systems . See ITEP’s letter in the Chicago Tribune.

• Cutting taxes has consequences.  When Ohio’s estate tax expires, local governments will be forced to make up the $6.1 million annual difference.  One local government official said, “Losing the estate tax is basically a police car” for his town.

Political gamesmanship is on full display in the tax policy debates happening in Michigan.  Last Wednesday, the state House passed a tiny, temporary income tax cut that would kick in a month before voters head to the polls in November.  This after paying for a $1.6 billion business tax cut last year with a $1.4 billion individual tax hike which falls most heavily (PDF) on Michigan’s poorest taxpayers.

Do Lansing politicians really think that temporarily cutting the state’s flat tax rate a fraction, from 4.35 to 4.32 percent, is going to make voters forget their recklessness? Here’s how the Associated Press is reporting on the plan:

A few dollars in savings doesn’t make a big difference for Mark Lankin, a machine operator who lives in the Detroit suburb of Ferndale. He said he’d rather see more money go to fixing roads.  “I don’t think a lot of normal people would miss $10 … if that money could go to something more useful,’’ said Lankin, 53, who described himself as politically independent. “If you didn’t have it in your hands, it really wouldn’t matter.’’

The token tax cut was also panned in a Detroit Free Press editorial:

“Some people have more money under their couch cushions than the amount the Legislature intends to give back to Michigan taxpayers this year…. The point is that a $103-million tax cut, which might allow an individual taxpayer to buy an extra can of name-brand soup every other week, is a decent chunk of change when it’s aggregated and put to work for everyone in Michigan.

They’re right. An analysis by the Institute on Taxation and Economic Policy (ITEP) showed that a family of four earning $25,000, for example, would see just three percent of last year’s tax hike offset by this election year stunt.  But if used in a more thoughtful way, that money could do a lot of good, as the Detroit Free Press’ impressive list of alternatives showed.

All this criticism apparently got to House lawmakers, but rather than drop the tax cutting charade, they decided to up the ante.  On Thursday, they proposed a much more expensive proposal that would drop the state’s flat income tax rate to 3.9 percent.  Unlike their previous plan, it certainly can’t be accused of being “token” relief, but that doesn’t make it good policy.  And lest anyone think they were serious policy makers, these legislators even designed the cut to phase in slowly, so they wouldn’t face any tough decisions about what public services to eviscerate in order to pay for it.

ITEP will soon complete a full analysis of this newest plan, but two things are already clear.  First, Michigan can’t afford to pile a personal income tax cut on top of the massive business tax cuts enacted last year unless the corporate income tax is increased.  And second, if lawmakers do insist on providing individual tax relief, there are much fairer and more affordable options for doing so, like boosting the Earned Income Tax Credit (EITC), as recommended by the Michigan League for Human Services.

Massachusetts taxpayers now have a better idea of where $171 million of their tax dollars are going.  Thanks to legislation enacted in 2010, the state’s Department of Revenue just issued its first-ever report identifying recipients of so-called economic development tax credits.  The biggest winner in 2011 was Columbia Pictures, which received $11.6 million Bay State tax dollars for a movie that, ironically, depicts a teacher trying to raise money for his under-funded public school.

Then there’s the fraudulent use of film tax credits, which is a whole other thing!

Revenue to fund bridge repairs is falling short in Oklahoma, so Governor Mary Fallin signed a bill this week that takes money away from education and other general fund services to cover the costs.  The move follows similar actions taken last year in Nebraska, Utah and Wisconsin (and almost in Virginia).  Oklahoma has gone 25 years without raising its gas tax—the state’s traditional source of transportation revenue.  That’s longer than any state except Alaska.

Calling all Kentuckians! Here’s a chance to make your pitch for tax fairness to the Blue Ribbon Tax Commission, which holds public hearings through the summer.