Author: tarek

Governor Nikki Haley of South Carolina has a fix for the state’s sorry highway finances, but she can’t let us in on the secret until after Election Day. 

Haley’s state has more than 66,000 miles of public roads, “one of the highest per capita totals in the nation,” according to The Herald, and 40 percent of them are in poor or mediocre condition. More than a fifth of the state’s bridges are structurally deficient or functionally obsolete. South Carolina leads the nation in fatalities on rural roads, due in part to their appalling maintenance. State officials estimate that an additional $1.5 billion is needed each year for the next 20 years just to make the roads adequate. 

Infrastructure funding is a pressing topic, with the federal Highway Trust Fund set to run out and states struggling to keep up with road repairs. You don’t have to be a motorist to realize that our infrastructure is crumbling around us, even as gas prices continue to rise – conjuring images of Mad Max dystopia and collapsing bridges.

Come to think of it, replacing elections with Thunderdome-style cage matches might not be a bad idea.

Enter Governor Haley, stage far-right, with a scheme to save the roads (and perhaps some motorists’ lives). The catch is she won’t reveal the plan until January, two months after the end of her reelection campaign. This, of course, is the opposite of how campaigns usually go, where candidates make their proposals public so that voters can judge them on their merits.

Unsurprisingly, South Carolinians have been slow to praise the governor’s political courage. For one, Haley has insisted she will veto any increase in the state’s gas tax – even though it’s one of the lowest in the country (half of what’s charged in neighboring states Georgia and North Carolina).

Furthermore, South Carolina’s gas tax hasn’t been raised since Ronald Reagan was in the White House. As ITEP has reported, inflation has eroded the purchasing power of many state gas taxes over time; in fact, South Carolina would have to more than triple its current gas tax to have the same purchasing power it did in 1968. Put simply, sixteen cents doesn’t go nearly as far as it used to.

In a reversal, Haley has also ruled out shaking the state’s “money tree,” a budgetary accounting scheme which is as ridiculous as it sounds.

 “Thanks for the fruit! Also, do you have a billion dollars for necessary road repairs?”

In the absence of any concrete proposals, there has been wild speculation. Some think the governor’s plan will involve new casinos in Myrtle Beach; others think she’ll revive a plan to divert some sales tax revenue to highway maintenance. Whatever the truth is, ruling out any increase in the gas tax makes little sense. South Carolina motorists pay an extra $811 million every year in vehicle repairs and operating costs; surely they would be willing to pay a little more at the pump for better roads.

So far, the only gubernatorial candidate willing to endorse a hike in the gas tax is independent candidate Tom Ervin, an attorney and former judge.* “Nobody likes a tax increase,” notes Ervin. “But we want our highways to be safe. And we also want to continue to attract quality industry to our state, and you can’t get products to market when the highways are falling apart.” It’s always refreshing, if all too rare, when a candidate tells the truth before the election.

*Haley’s Democratic challenger Vincent Sheheen declined to endorse a gas tax increase, but said all options should be on the table.

In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, “It’s like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low-income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap – a proposal that Christie already has vetoed several times but is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax. But, Gov. Brewer has made it clear she does not support such extreme ideas. From the Arizona Daily Star: “I think that you need a balance,” she said in an interview with Capitol Media Services. Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”

Somehow, arguments that conservative lawmakers usually make about not interfering with the economy and respecting states’ rights have fallen silent as Congress rushes to pass a bill that provides special treatment for an industry that has grown very profitable and powerful.

The infant of 1998 now has the keys to the American economy.

On Tuesday the House of Representatives voted to make permanent a law banning state and local governments from taxing Internet access just as they tax other goods and services. First enacted as a temporary ban in 1998 (the Internet Tax Freedom Act) under the argument that the Internet was an “infant industry” needing special protection, the ban has been extended several times and is now scheduled to expire on Nov. 1.

As we have argued previously, the infant of 1998 now has the keys to the American economy, and yet Congress is still coddling it by shielding it from taxes that apply to other comparable services, such as cable television and cell phone service.

The pending bill is going one step further than previous extensions by stripping out the grandfather provision that allowed seven states that had enacted Internet taxes prior to 1998 to keep those laws in place. This move would cost those states half a billion dollars in revenue each year. And the remaining states would collectively forgo billions in revenue that they could otherwise raise each year if they chose to tax Internet access.

Members of Congress will take credit for shielding the Internet from taxes but the cost will be borne entirely by state and local governments. In other words, continuing the ban on taxing Internet access introduces distortions in the economy by favoring some industries over others and it interferes with state governments’ ability to raise revenue in the ways they find most sensible.

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the Wisconsin race.

During his first term in office,  Wisconsin Gov. Scott Walker passed three rounds of property and personal income tax cuts, and now he is on the campaign trail touting the so-called benefits.

But the truth is that Gov. Walker’s tax cuts disproportionately benefited the wealthiest Wisconsinites while lower-income people received little to no benefit. The Wisconsin Budget Project (WBP), using ITEP data, concluded that Gov. Walker’s tax cuts will give the bottom 20 percent – those earning an average of $14,000 a year – an average tax break of just $48 in 2014. In contrast, the top 1 percent of earners, or those whose average income is $1.1 million, will receive an average tax cut of $2,518.

If Gov. Walker is re-elected, tax cuts will likely remain a priority. He’s already pledged that property taxes won’t increase through 2018.  Even more worrisome, Gov. Walker has said he wants to discuss income tax elimination. While telling voters that he’d like to eliminate their state income tax bills may sound good on the campaign trail, Wisconsinites should know that most taxpayers, especially middle- and low-income households, will pay more under his plan. An ITEP analysis found that if all revenue lost from income tax repeal were replaced with sales tax revenue the state’s sales tax rate would have to increase from 5 to 13.5 percent.  ITEP also found that the bottom 80 percent of state taxpayers would likely see a net tax hike if the sales tax were raised to offset the huge revenue loss associated with income tax elimination.

Challenger Mary Burke, a Trek Bicycle Corporation executive and former state Commerce Department secretary, has yet to put out her own tax plan, but she recently told the Milwaukee Journal Sentinel that she would not take a pledge to not increase taxes, saying, “I’d want to look at the totality. We collect revenue in a lot of different ways. I certainly wouldn’t look at raising (taxes), but I’d also want to look at it in the context of our finances, our budgets ….”

When asked specifically about her tax plan she remained vague, “My focus would be tax cuts targeted to the middle class and working families instead of breaks to businesses and those at the top that don’t create jobs….I’m particularly concerned about the very high property taxes across the state.”

As with every election, there’s a lot at stake in the upcoming Wisconsin governor’s race. Tax revenue funds every level of government not to mention vital programs and services. Low- and middle-income Wisconsinites pay a disproportionately higher percentage of their income in state taxes than the rich. Voters deserve to know details about each candidate’s plan for the state. In the coming months, let’s hope Burke provides more details about her tax plan, especially since the direction Gov. Walker wants to take the state seems particularly clear.  

On Friday, the House of Representatives is scheduled to vote on a $276 billion bill that would make permanent “bonus depreciation.” This huge tax break for business investment was first enacted to try to address the recession early in the Bush administration. Since then, it has been repeatedly re-enacted to try to stimulate the economy during the much more severe recession starting at the end of the Bush administration. It finally expired at the end of 2013.

Here are some reasons why Congress should allow bonus depreciation to remain expired rather than making it a permanent part of the tax code.

1. “Bonus depreciation” has not helped the economy in the past and is unlikely to help the economy in the future.

A July 7 report from the non-partisan Congressional Research Service (CRS) reviews research on bonus depreciation and finds that it has little positive impact on the economy as a temporary measure and is likely to have even less impact as a permanent measure. The report cites surveys of firms that “showed that between two-thirds and more than 90 percent of respondents indicated bonus depreciation had no effect on the timing of investment spending.”

Businesses will invest more only if they expect to have more sales. In a recession, when consumer demand falls, companies won’t invest more even with extra tax breaks. In a growing economy, business investment will naturally go up, with or without extra tax breaks. That’s why firms that take advantage of bonus depreciation are getting a break for investments they would have made anyway.

This is one reason why bonus depreciation provides far less stimulative effect for the economy than many other measures. The CRS report cites estimates that each dollar the government gives up for bonus depreciation increases economic output by just 20 cents, whereas each dollar the government spends on unemployment insurance increases economic output by more than a dollar.

2. Enacting the permanent “bonus” depreciation measure is hugely hypocritical when lawmakers refuse to approve much smaller, but more effective measures.

The House is set to approve this bill, which would reduce revenue by $276 billion over a decade to help businesses, after refusing for months to take up a $10 billion extension of emergency unemployment insurance, which would provide a greater impact for each dollar spent.

Many of the lawmakers who champion this bill, including Ways and Means Committee chairman Dave Camp, refuse to support other changes to the tax code unless they are part of a sweeping, comprehensive tax reform. In fact, Camp and others have even used this argument to oppose a bill that would raise $19.5 billion over a decade by preventing the “inversions” that more and more American corporations are seeking so that they can claim to be foreign companies to avoid U.S. taxes. Camp claims that Congress should not close the loopholes these companies use to pretend to be “foreign” unless it is done as part of a comprehensive tax reform. And yet, he supports a permanent change in the depreciation rules that would reduce revenue by $276 billion over a decade.

3. Bonus depreciation provides many business investments with a negative effective tax rate. In other words, these investments are more profitable after taxes than before taxes!

Companies are allowed to deduct from their taxable income the expenses of running their businesses, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time

Of course, firms would rather deduct capital expenses right away rather than delaying those deductions, because of the time value of money, i.e., the fact that a given amount of money is worth more today than the same amount of money will be worth if it is received later. For example, $100 invested now at a 7 percent return will grow to $200 in ten years.

Bonus depreciation is an expansion of the existing tax breaks that allow businesses to deduct their capital expenditures more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

The problem this presents is not confined to abstract ideas about the tax code. For example, because the tax code generally taxes the income (profits) of a business, it allows deductions for expenses like interest payments. This means that businesses can invest in equipment with borrowed money and the combination of accelerated depreciation and deductions for interest payments often results in these investments having a negative effective tax rate. This problem exists to some degree with the depreciation breaks that are already a permanent part of the tax code. Bonus depreciation makes the problem considerably worse.

The CRS report explains that for debt-financed investments, the effective tax “rate on equipment without bonus depreciation is minus 19 percent; with bonus depreciation it is minus 37 percent.”

Taxes are supposed to raise the money we need to pay for public programs. But bonus depreciation turns business taxes upside-down, allowing companies to make more money on their investments after taxes than they’d earn if there were no tax system at all.

He’s like the monorail man,  except, he’s totally opposed to public infrastructure spending

It is a truism in Washington that being wrong does not preclude one from wielding influence. There are, however, some pundits who are so egregiously wrong that it boggles the mind to find policymakers taking their advice.

Art Laffer is one of these pundits.

Laffer, an economist most famous for developing consequential fiscal policy on the back of cocktail napkins, is the father of supply-side economics. If you’re unfamiliar with the term, it basically means that cutting taxes for the wealthy will create a rising economic tide that lifts all boats. Three decades of empirical research says this notion is false.

And yet here is Art Laffer, barnstorming the country to spread the gospel of tax cuts to red-state governors, with predictably disastrous results. Not content to have started a bender of deficit spending and ill-advised tax cuts during the Reagan years, Laffer and his associates have turned their sights on state budgets. Recent news from the states that have fallen for their shenanigans tell the tale.

First up is Kansas, where Governor Sam Brownback and the legislature pushed through what is widely acknowledged to be the worst tax “reform” measure in recent years. No only did state officials follow Laffer’s advice and slash marginal tax rates, they also put Kansas on a glide path to eliminating its personal income tax altogether. And while most Kansans will pay less in taxes (though the poorest will pay considerably more), budget shortfalls have been so great that the legislature was forced to dip into reserve funds, causing a downgrade of the state’s credit rating. Ominously, the reserves are expected to run dry by the middle of next year.

Middle-class families in Kansas after the Brownback tax cut.

Next, North Carolina. Following Laffer’s advice and promises of economic nirvana, Republican lawmakers slashed taxes for the rich and hiked them on many poor and middle-class families. The result, unsurprisingly, was a hole in the budget you could drive a semi truck through. Worse, the promised jobs and economic growth have yet to materialize, and lawmakers are left with little cash to fund much-needed priorities like teacher pay raises and healthcare for low-income families. Lawmakers have responded to the revenue shortage with a variety of gimmicks. One proposal would pay teachers’ salaries by enticing more people to play the state lottery; another idea is just hoping North Carolinians opt to pay higher income taxes voluntarily. Maybe next they can just replace all high school economics classes with Intro to Panhandling, and have the kids pay their own way.

And finally, we come to Indiana, where Governor Mike Pence recently convened a conference of “leading tax reform thinkers” to simplify Indiana’s tax code and make the state more competitive. The luminaries included Grover Norquist and Art Laffer, who delivered the keynote. Not present at the conference were members of the general public, who will bear the brunt of the draconian cuts Laffer no doubt suggested.

It remains to be seen if Indiana will follow in the footsteps of Kansas and North Carolina – in many cases, state officials are wise enough to know gutting their revenues is foolhardy public policy. A sense of self-preservation (if not public duty) is enough to prevent many governors and legislatures from adopting Laffer’s proposals. But when dealing with hardliners, you just never know.

Until his reemergence in Indiana last month, Laffer had been noticeably absent from the public stage. But lest you think a profound sense of shame had begun to weigh on him, think again! Apparently he was busy writing a book to squeeze a few more pennies from a bankrupt ideology. Old habits do indeed die hard. 

Less than a month after Ohio Governor John Kasich signed his most recent round of tax cuts into law the reviews are less than glowing. This week Zach Schiller with Policy Matters Ohio wrote a piece very much worth reading in the Cleveland Plain Dealer. Schiller makes the important point (and one backed up by ITEP data) that most of the recent tax cuts signed into law by Kasich overwhelmingly benefit wealthy Ohioans. He rightly concludes, “Instead of reinforcing inequality with tax cuts that favor the affluent, we should use this revenue to restore funding to local governments, which have cut tens of thousands of workers.”

Kasich’s tax plan did include an increase in the state’s very limited  Earned Income Tax Credit (EITC), but the Cleveland Plain Dealer gets it right in this editorial when they argue that the expansion from five to ten percent of the federal credit wasn’t enough. This is because Ohio’s current credit is nonrefundable, meaning that families with no income tax liability but who pay a large share of their incomes in sales and property taxes do not get the credit. For those with taxable income exceeding $20,000 the already paltry credit is further limited. For more on ways that Ohio and other states can improve their EITCs read ITEP’s comprehensive report on options for expanding these vital credits. 

This shouldn’t be news to anyone, but undocumented immigrants do pay taxes. This week the Iowa Policy Project (IPP) released a report detailing their contributions to Iowa revenues using ITEP data. IPP found that undocumented immigrants pay an estimated $64 million in state and local taxes. Read IPP’s full findings here.

A News & Observer editorial last week lamented the revenue boom North Carolina might have enjoyed this year but for the package of steep income and corporate tax cuts passed in 2013. While numerous other states, including California, are beginning the fiscal year with healthy reserves, the N.C. Budget and Tax Center, using ITEP data, estimates that the cost of their state’s tax cuts could balloon to over $1 billion this year (almost double the reported amount of the tax cuts).

Rhode Island lawmakers recently enacted a budget for the new fiscal year which received a lot of attention for changes made to the corporate income tax (rate cut and adopting combined reporting) and cutting the state’s estate tax for a few wealthy households.  But, as Kate Brewster of the Economic Progress Institute helps to explain in this op-ed, the budget deal also quietly hiked taxes on many low- and moderate-income families by eliminating a refundable credit used to offset regressive property taxes for non-elderly homeowners and renters.  Brewster opines: “Given the struggles facing middle class Rhode Islanders — enduring unemployment, stagnant wages and a lack of affordable housing — it is hard to believe the state’s new budget includes huge giveaways for a handful of heirs while quietly taking money directly out of the pockets of low- and middle-income Rhode Islanders.

Next month Missouri voters will be asked to decide whether the state’s sales tax rate should be increased to pay for transportation improvements. The debate is raging, though no one seems to dispute Missouri has huge transportation needs. Tax justice groups like the Missouri Association for Social Welfare and even Governor Jay Nixon have argued that hiking the sales tax in the wake of income tax reductions would make the state’s tax system even more unfair. In a statement Nixon said, “This tax hike is neither a fair nor fiscally responsible solution to our transportation infrastructure needs.” It’s worth noting that the state has gone 18 years without an increase in their gas tax.

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Kansas.

This Kansas gubernatorial election is shaping up to be a referendum on Governor Sam Brownback’s tax cuts and supply-side economics generally. Governor Brownback’s record on taxes has made national headlines. Two years ago, Brownback declared that his plan to gradually repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two consecutive income tax cuts that disproportionately benefited the richest Kansans (while actually hiking taxes on the state’s poorest residents), assuring the public these cuts would pay for themselves. Yet, the state ended this fiscal year $338 million short of total projected revenue amid concerns that Brownback’s income tax cut package is causing more bleeding than initially anticipated.

House Minority Leader Paul Davis is the Democrat who will most likely be challenging Brownback in November (the primary is in early August). Davis recently unveiled an economic plan which includes postponing the last round of Governor Brownback’s income tax cuts thus keeping income tax rates at their January 1, 2015 levels (though Davis has stopped short of calling to undo all of the Brownback tax cuts). He is also proposing a bipartisan tax commission to study “accountability measures within the tax code and targeted incentives for job growth” and “proposals aimed at reversing the $400 million property tax increase that has occurred during the Brownback administration.”

Perhaps no gubernatorial election this year will be as intensely focused on taxes as the contest in Kansas. Stay tuned. 

A new report from Citizens for Tax Justice explains why Congress should raise revenue and describes several options to do so.

Read the report.

Part I of the report explains why Congress needs to raise the overall amount of federal revenue collected. Contrary to many politicians’ claims, the United States is much less taxed than other countries, and wealthy individuals and corporations are particularly undertaxed. This means that lawmakers should eschew enacting laws that reduce revenue (including the temporary tax breaks that Congress extends every couple of years), and they should proactively enact new legislation that increases revenue available for public investments.

Parts II, III, and IV of this report describe several policy options that would accomplish this. This information is summarized in the table to the right.

Even when lawmakers agree that the tax code should be changed, they often disagree about how much change is necessary. Some lawmakers oppose altering one or two provisions in the tax code, advocating instead for Congress to enact such changes as part of a sweeping reform that overhauls the entire tax system. Others regard sweeping reform as too politically difficult and want Congress to instead look for small reforms that raise whatever revenue is necessary to fund given initiatives.

The table to the right illustrates options that are compatible with both approaches. Under each of the three categories of reforms, some provisions are significant, meaning they are likely to happen only as part of a comprehensive tax reform or another major piece of legislation. Others are less significant, would raise a relatively small amount of revenue, and could be enacted in isolation to offset the costs of increased investment in (for example) infrastructure, nutrition, health or education.

For example, in the category of reforms affecting high-income individuals, Congress could raise $613 billion over 10 years by eliminating an enormous break in the personal income tax for capital gains income. This tax break allows wealthy investors like Warren Buffett to pay taxes at lower effective rates than many middle-class people. Or Congress could raise just $17 billion by addressing a loophole that allows wealthy fund managers like Mitt Romney to characterize the “carried interest” they earn as “capital gains.” Or Congress could raise $25 billion over ten years by closing a loophole used by Newt Gingrich and John Edwards to characterize some of their earned income as unearned income to avoid payroll taxes.

Read the report.