Category: TaxJusticeBlog

Over Labor Day weekend Louisiana shoppers purchasing items like firearms, ammunition, hunting supplies, holsters, certain knives and archery items didn’t pay any sales tax.  Shoppers participating in the “Second Amendment Weekend Sales Tax Holiday” should be aware that holidays like this one don’t make their state’s tax structure any fairer and they cost Louisiana money.

Governor Jindal is a big proponent of the holiday, saying, “This is a great opportunity for all hunters and campers to save money on the equipment they need to enjoy Sportsman’s Paradise. The weekend-long event will also bring more customers to our local hunting and sporting stores which will further benefit our businesses and Louisiana’s economy.”

Second Amendment politics aside, sales tax holidays are ridiculous tax policy. Holidays like this one and those offered during back-to-school time are not at all targeted, and targeting is the key to smart policy.  They do nothing to meaningfully help low and middle-income families struggling to make ends meet because they can’t just shop when the state says so.  Only wealthier consumers can postpone or move up their shopping to take advantage of these holidays. What’s more, the more well-off will likely make their purchase regardless of a tax holiday; saving four percent on the price probably does not change their consumer behavior.

Sales tax holidays falsely lull legislators into thinking they are helping families in a real way, and make too many families think the state is doing them a favor.  Sportsman’s Paradise or not, Louisiana policymakers should implement smart tax policies that offer more than just window dressing.  The Pelican State can start by ending the deduction it gives for every federal income tax dollar its citizens pay: the richer you are the more you benefit and it’s costing the state about $643 million this fiscal year.  With those revenues, lawmakers could target some tax credits in the direction of low- and middle- income Louisianans who pay a larger portion of their incomes (10% on average) than their rich counterparts in state taxes under the current structure.

Our contempt for Grover Norquist’s no-new-taxes pledge is no secret, and it seems that at least one member of Congress is willing to come out and admit he shares the feeling. Nebraska Rep. Jeff Fortenberry signed the no-new-taxes pledge in 2004, but now says he regrets the move.

He says, “A while back, I had notified the organization that I had taken that pledge when I ran for office and upheld that my first term in office but realized that this type of pledge can constrain creative policy thinking, so I asked not to be associated with it any longer.”

Ouch.  Poor Grover!

Responding to Fortenberry’s snub, a spokesperson from Norquist’s group bristled, “One does not promise to be pro-life for two years, or pro-Second Amendment for one year. One is pro-life, pro-Second Amendment or pro-taxpayer as long as one is in office. Or not.”

This pathological inflexibility defines the pledge mentality and hurts our democracy. It’s chilling that even when legislators abandon the pledge after recognizing it for the ideological straightjacket it is, they are never fully released from it.  Isn’t that how cults work?

Completely taking tax increases off the table is no way to govern.  Pledges thwart the important debates and conversations that make our political system work, the current Washington gridlock offering a case in point. Rep. Fortenberry is setting an example for his GOP colleagues, going so far as to say Warren Buffett might even be right about taxing millionaires.  We’ll see if his stance helps open up our debates.

Pledging to spending cuts as the only budget balancing tool is like agreeing to eat a bowl of spaghetti with only a knife; it doesn’t work and it makes you look foolish.

Photos via Steve Rhodes & Republican Conference via Creative Commons Attribution License 2.0

President Barack Obama nominated Alan Krueger to chair the White House Council of Economic Advisors on Monday and he will likely be easily confirmed. Although as a labor economist Krueger has earned many accolades for his robust work, including a seminal article defending the minimum wage, his record on tax policy is a little more mixed.

For example, in recent months Krueger voiced support for a jobs tax credit that would give companies $5,000 for every additional employee they hire. As Citizens for Tax Justice explained when President Obama proposed a similar plan, such tax credits are a poor way to encourage job creation because they inevitably go to companies who would have hired additional employees even without the credits. In fact, those companies that are struggling the most, those shrinking or unable to expand because of weak consumer demand, would receive no help from the credit.

The most controversial position Krueger has taken on tax policy was in a 2009 guest blog post arguing that a national consumption tax (specifically a 5% rate that would raise $500 billion) should be considered as one solution to the long run budget deficit. Many conservatives exaggerated the seriousness of this blog post, failing to mention Krueger’s caveat that this was “only as a suggestion for serious discussion,” and that he was “not sure it is the best way to go.”

In any case, a broad-based national consumption tax is the wrong policy because it would inevitably be severely regressive.

To be sure, Krueger has frequently stood up for good progressive tax policy. For instance, he has laid out the strong case for eliminating billions in tax subsides for oil and gas companies, opposed the ridiculous tax subsidies cities offer to sports teams and is a long time critic of the regressive Bush tax cuts.

As House lawmakers signal their intention to move forward with tax reform this fall, let’s hope we see Krueger in his new position focus on measures that will make our tax system more progressive and better for the overall economy.

Photo via Center for American Progress Creative Commons Attribution License 2.0

Just a few months back, Michigan Governor Rick Snyder barely managed to push through a massive bill cutting the state’s largest business tax by over 80% — paid for by raising taxes on Michigan’s elderly and low-income families.  Now, Snyder’s administration is apparently readying for Round Two, as Lt. Gov. Brian Calley has declared that his new top priority is slashing business taxes even further.  Clearly there’s not a lot of original thinking going on in Lansing.

Calley is referring to the Snyder administration’s plan to repeal the tax businesses pay on industrial and commercial personal property (equipment, furniture and other items used for business purposes).  This change would cost somewhere in the neighborhood of $800 million in lost revenue each year – revenues that flow overwhelmingly to local governments in Michigan.  As a result, state lawmakers will be tempted to pass the buck to local officials when it comes time to make the many hard choices required by a tax cut of this size.

On average, Michigan municipalities receive about eleven percent of their property tax revenues from these business personal property taxes.  As The Detroit News points out, however, that average varies widely across jurisdictions.  While the tax usually amounts to just two percent of local property taxes in wealthy residential communities, it can account for 20 to 50 percent, or more, of property tax revenues in some industrial towns.

The most vocal critic of Snyder’s proposed tax cut right now is the Michigan Municipal League, whose main concern is ensuring that the state doesn’t leave local governments high and dry when it comes to paying for repeal.  This is a very real concern.  When Ohio repealed its personal property tax, the state offered to replace lost local funds on only a temporary basis, and withdrew support even more quickly once the state encountered its own budget difficulties.  Governor Snyder’s recent remarks to Gongwer News Service (subscription required) indicate that he’s aware of this concern, describing his plan to be “largely revenue-neutral.” But we can forgive local governments if they are dubious about the governor’s assurances their budgets won’t suffer.

The issue here goes beyond just ensuring that localities aren’t unduly harmed by repeal.  Even if the state does pick up the tab, that money is going to have to come from somewhere.  And with anti-tax lawmakers in control of both houses of the state legislature and the Governor’s mansion, any tax increase large enough to fully cover the cost of repealing the business personal property tax has a hard road ahead of it. In all likelihood, lawmakers will be tempted to raid existing revenue streams, thereby forcing even deeper cuts on top of those already enacted.

Before going that route, it would be a good idea for the anti-tax true believers in Lansing to take a step back, and ask whether the state will actually gain anything by granting businesses yet another tax cut.

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. This week, ITEP released four updated briefs that explore issues with state corporate income taxes and tax avoidance. The Briefs offer recommendations for leveling the playing field between small in-state businesses and multi-national corporations and ensuring all corporate profits are subject to state taxation.

Combined Reporting of State Corporate Income Taxes: A Primer

Corporate Income Tax Apportionment and the “Single Sales Factor”

“Nowhere Income” and the Throwback Rule

The “QPAI” Corporate Tax Break: How it Works and How States Can Respond

Republican House Majority Eric Cantor’s memo to his caucus laying out a new “jobs agenda” includes a tax break that would allow any “small business” to deduct 20 percent of its income for tax purposes. This idea is not new but was actually part of the House GOP’s proposal put forth during the debate over the economic recovery act in early 2009.

Here’s what CTJ said about this part of the House GOP plan in January 2009:

Provisions in the House GOP Plan to Help “Small Business”

The Republican plan proposes to allow a “small business” to take a tax deduction of 20 percent of its pretax income, whether the small business is a corporation or a sole proprietor. The plan defines a “small business” as one with 500 or fewer employees. It makes no distinction based on income. A “small business” making $100 million would get to deduct $20 million of its income right off the top. (Apparently, a company with slightly more than 500 employees would have an incentive to lay off staff to qualify for the tax break!)

The Republican leadership notes that “small businesses can pay up to 35% of their income in taxes to the federal government.” But for a sole proprietor to be in the 35% income tax bracket, she would need taxable income (after deducting all expenses) in excess of $372,950. And because of the graduated tax brackets, her effective rate would be much less. For a corporation to be in a 35% tax bracket, taxable income must exceed $10 million. The architects of this proposal have an expansive definition of the word “small” to say the very least.

The plan description also states that the United States corporate tax rate ranks the 29th highest (out of 30) among the major economies of the world. Corporations currently pay federal income taxes at a statutory rate of 35 percent. But the effective rate paid by corporations (the percentage of income paid in taxes after taking into account the deductions and credits and other breaks that lower their tax liability) is far lower than 35 percent. Comparing corporate taxes as a share of gross domestic product (as a share of the overall economy), the United States actually ranks low compared to other developed nations.

It’s also worth pointing out that a 20% deduction unnecessarily complicates the tax code. Congress could simply amend code sections that are already in the law (like the corporate or individual tax rates). Anti-tax lawmakers may be afraid that a simple corporate income tax rate cut might not go over too well with a public that believes large corporations got us into the current economic downturn.

Last, but not least, a business tax cut is just about the least effective stimulus measure Congress could possibly enact. The tax cuts put more money in the hands of business. But there is very little correlation between a corporation’s cash position and its plans for investment—whether expanding capacity or hiring new employees. Businesses invest in expansion when they believe there will be an increase in the demand for the goods and services they provide. If they don’t anticipate a sales increase, they won’t expand no matter how many tax breaks the federal government gives them.

Read CTJ’s full report on the 2009 House GOP economic plan here.

The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits “permanently reinvested” (i.e., parked) overseas as they did at the end of 2005. The figures call into question a recent report from the New Democrat Network (NDN) supporting a second repatriation amnesty.

Read the report

Last week, Republican New Jersey Governor Chris Christie and Democratic New York Governor Andrew Cuomo together approved a substantial increase in the toll rate paid to cross bridges and tunnels between New York and New Jersey.  The increase of $1.50 on EZ pass users (or $2 for cash payers) will go into effect next month.  This will be followed by four consecutive increases of 75 cents each annually from 2012 through 2015, for a total hike of at least $4.50 over five years.

Both governors supported the toll increases, saying that the dire fiscal situation facing the Port Authority, which is reliant on toll revenue, means that the “increase cannot be avoided.” The governors’ willingness to shore up revenue for the Port Authority through toll increases stands in sharp contrast to their reputations as “anti-tax” governors who have relentlessly refused to increase any taxes to deal with their states’ current fiscal disparities.

As the Institute on Taxation and Economic Policy explains, increases in tolls or other “user fees” are often used by politicians to increase revenue while avoiding having to enact anything that could be called a “tax increase.”

Josh McMahon, writing for the New Jersey News Room, argues that Christie is just playing “a game of semantics” so that he can continue the “charade that he’s not raising any taxes.”

The move by the governors is proving relatively unpopular with New Jersey voters, 54% of whom oppose the increases, according to a recent poll.

In contrast, 72% of New Jersey voters and 64% of New York voters support ‘millionaires tax’ proposals, which would help counterbalance some of the regressive features of both the New Jersey and New York tax systems. Both Cuomo and Christie went out of their way to torpedo these proposals in recent months.

Voters in both states can’t be blamed for wondering whose interests their governors are protecting.

Photos via Gisele 13 Creative Commons Attribution License 2.0

This week Colorado’s Secretary of State confirmed that Coloradans will be able to vote on a measure (Proposition 103) this November that would temporarily raise the state income and sales tax rates.  While the plan isn’t the most progressive option imaginable, it is a very reasonable and important step forward in helping the state repair its education system, which has been greatly damaged by the infamous Taxpayer Bill of Rights (TABOR).

If approved by voters, Prop 103 would raise the state’s flat income tax rate from 4.63% to 5%, and the state’s sales tax rate from 2.9% to 3%.  In effect, these increases would return the state’s tax system to where it stood in 2000, when the legislature cut both taxes just as the economic boom of the late 1990’s was winding down.  Unfortunately, this time around both changes would expire after five years – at the start of 2017.  But the increases would help protect the state’s education system until Colorado can come up with a more permanent way to remedy its ongoing funding woes.

While Republican opposition to the measure has been entirely predictable, there has also been a surprising amount of reluctance among some of those on the left.  Proposition 103 is less progressive, and would raise less revenue than a previously discussed ballot measure that would have established a graduated rate income tax in Colorado.  And to be sure, establishing a graduated rate income tax would be a much better path forward for Colorado in the long-term.  But with such a solution not on the immediate horizon, Prop 103 is an important second-best option that should not be ignored.

Moreover, worries that Prop 103 would disproportionately affect low-income families are incorrect, as Colorado’s flat rate income tax – the main component of the proposed tax package – is in fact moderately progressive overall.

A list of organizations that have endorsed Prop 103 can be found here.  And for more information on this and other Colorado tax policy issues, be sure to visit the Colorado Fiscal Policy Institute, one of the main architects of this initiative.

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