Tag: TaxJusticeBlog

The question from a Tea Party voter was this: “Out of every dollar I earn, how much do you think that I deserve to keep?”

It came during the Fox News and Google Republican presidential candidates debate last Thursday, and was directed at Minnesota Rep. Michele Bachmann.  It was her second crack at the question, so she’d had plenty of time to think it through. And her reply was this: “I think you earned every dollar. You should get to keep every dollar you earn.”

A few sentences later, however, the Congresswoman added, “Obviously, we have to give money back to the government so that we can run the government….”

The anti-tax orthodoxy has become so rigid that candidates like Bachmann, who also chairs the House Tea Party Caucus, must try to reconcile the position that no American should have to pay taxes even when they work for the government who collects those taxes and know perfectly that taxes are required to “run the government.”

Bachmann may have had the most telling (and head-exploding) tax policy moment during the last weekend’s three day series of major Republican presidential candidate events, but she was not alone among the candidates in stumbling over tax issues.

Former Utah Governor Jon Huntsman faced a tough question from the debate moderator Megyn Kelly who asked, “Is there any scenario under which you could side with the 66 percent of people who believe that it is a good idea to raise taxes on millionaires?” Despite his status as most moderate Republican candidate this season, Huntsman delivered the prefabricated anti-tax response: “This is the worst time to be raising taxes, and everybody knows that.”

Clearly, not “everybody” knows that. As Kelly’s question suggested, 66% of American’s support increasing taxes on the wealthy. Hewing to their anti-tax orthodoxy, Huntsman and the rest of the GOP field find themselves at odds with two thirds of the American public.

Former New Mexico Gov. Gary Johnson made his first major GOP debate appearance memorable by using his limited speaking time to call twice for replacing our current income tax system with the, so-called, Fair Tax, which is essentially a 30% national sales tax. As the Institute on Taxation and Economic Policy showed in its report on the Fair Tax, the plan is both unworkable and extremely regressive.

Although Gary Johnson is probably the most forthright in his support of the Fair Tax, at least half of the Republican field (and most notably current front-runner Texas Governor Rick Perry) have come out in favor of it. The one exception is former Massachusetts Governor Mitt Romney, who came out against the Fair Tax in the last debate, noting, quite sensibly and correctly, that it would cut taxes for the rich while increasing them on middle income families.

Former CEO of Godfather’s Pizza Herman Cain had a strong weekend, winning the Florida Straw poll with a surprising 37 percent of the vote. ABC News notes that his success was partially due to his ability to ‘strike a chord’ with his “9-9-9” tax plan, which he also touted proudly during the debate. His plan would replace the entire federal tax system with a 9 percent national sales tax, 9 percent income tax, and 9 percent business flax tax. As we’ve pointed out before, every aspect of this gimmicky and regressive plan would mean higher taxes on lower and middle income families and much lower taxes on the wealthy.

Former House Speaker Newt Gingrich took the debate as an opportunity to – and not for the first time – rewrite fiscal history by claiming that his ‘leadership’ led to four consecutive years of balanced budgets. We’ve said it once, we’ve said it twice, and we’ll say it again: sorry Newt, you never balanced the budget.

Watch this space for reviews of all things tax as the political campaign season kicks into high gear.

Oklahoma, like most states, has many hundreds of tax expenditures, a.k.a. “spending in the tax code.”  Actually the state offers about 450 special tax credits, deductions or exemptions designed to benefit a specific activity or purchase and, in most cases, the interest group behind it – usually in the name of economic development. There is a growing awareness that these tax expenditures, despite their high costs to the state, aren’t monitored very well.  In fact, no one seems to even know how much the state spends on them. In an attempt to rectify the situation, Oklahoma legislators have formed the Task Force for the Study of State Tax Credits and Economic Incentives. The Task Force is taking a hard look at the breaks, deductions and exemptions Oklahoma offers and asking whether the state really benefits from each of these costly expenditures in terms of economic development and the general public good.

The task force met over the summer and will continue to meet until they present their recommendations around the end of the year. After its first meeting, the Oklahoma Policy Institute reported some good news: “The meeting made clear that it will be a long and sometimes contentious process, but that this Task Force is serious about meeting the challenge. “ Legislators appear to be coming to terms with the difficult political reality that every tax credit or tax expenditure has supporters. State Rep. David Dank was recently quoted saying, “It never ends. The simple truth is that we could exempt almost everything from taxation. And then I suppose we could apply for a historic preservation tax credit to turn this state Capitol building into a casino or something because state government would be broke and out of business.”

The Oklahoma Policy Institute offers a superb report on tax expenditures in the state and recommendations for change. The Institute has long called on lawmakers to ensure that “the state is allocating public resources in the best possible fashion” and the Task Force, if successful, will bring Oklahoma closer to a smart, public interest tax code.  (As long as the chairs fail in their efforts to abolish the personal income tax, but that’s another topic.)

For more on tax expenditures and other games legislators play in the name of economic development read this ITEP brief. To read about the tax expenditure problem on the federal level take a look at this CTJ report.  And if you’re really into tax policy, you can follow the Task Force meetings here, where a local news consortium is live blogging every session! The next meeting is October 20th.

Photo of Oklahoma Capitol Dome via BJ McCray Creative Commons Attribution License 2.0

The DC Council voted on Tuesday to temporarily increase the marginal income tax rate on those making over $350 thousand a year from 8.5% to 8.95%, in a move that will raise an estimated $106 million in revenue over the next 4 years (when the measure will sunset).

Due to harsh economic times, the DC Council has faced a difficult task in balancing the District’s budget, causing it to make $108 million in cuts to critical human services support and other low income programs in the fiscal 2012 budget.

A modest tax increase on high income taxpayers may seem like a relatively straightforward step for the Council to take in a time of such austerity, yet the vote was highly contentious, with the measure just barely passed, seven to six

As part of the deal, supporters of raising taxes on high income earners agreed to undo a recently added tax code provision that progressive tax advocates liked.  Just this summer, the Council voted to start taxing the interest that individuals earn on non-DC municipal bonds they own, no matter how long ago the bond was purchased. The deal eliminates the retroactivity and means that only out of state bonds purchased after this year will no longer prove their District owners a tax break.  Although it also means a decrease in the amount of revenue generated, the elimination of the tax exemption on bond interest going forward will enhance the progressivity of DC’s tax system (just like it has for every other state).

DC’s tax increase on high income taxpayers is still only a small step toward making DC’s upside down tax system fairer. According the Institute on Taxation and Economic Policy’s Who Pays report, the middle 20% of taxpayers (those making between $33 and $57 thousand) pay on average 10.5% of their income in District income and other taxes, while the top 1% of taxpayers (those making over $1.5 million) pay an average of only 6.4%.

This small but positive step toward more progressive taxation builds on other smart revenue increases enacted by the DC Council in June, such as the implementation of combined reporting for businesses and setting budget limits on the value of itemized deductions.

For Immediate Release: September 22, 2011
Contact: Anne Singer, anne@ctj.org, 202-299-1066 x27

How 47 Governors Can Mitigate the Worsening Poverty in Their States:
Four Tax Reforms That Help the Working Poor

Washington, DC – With today’s Census data showing that 47 states now have more citizens living in poverty than a year ago, it is remarkable that four states (ME, MI, MN, WI) have recently raised taxes on the working poor by reducing targeted tax credits, and seven states (AK, AL, FL, MS, NV, TN, TX) offer no anti-poverty tax credits at all. Coinciding with the Census Bureau release of 2010 state level data on poverty, today ITEP releases its comprehensive state-by-state review of tax policies that can make the difference between falling behind and getting ahead for 46.3 million low income Americans.  The report, “State Tax Codes As Poverty Fighting Tools: 2011 Update on Four Key Policies in All 50 States,” is online at http://www.itepnet.org/poverty2011.php.

“Lawmakers try to leverage the tax code to do all kinds of things – lure business, reduce health costs – but too few use it to ease the effects of poverty,” said Matthew Gardner, ITEP’s Executive Director. “Our report shows each state what they’re getting wrong and how they can make it right.”

Among the resources state legislators and governors have at their disposal to improve the lives of their constituents, state tax codes offer four key policy tools lawmakers can easily implement to help lift families out of poverty: Earned Income Tax Credits; property tax “circuit breakers;” targeted low income tax credits; child-related tax credits.

A 2009 ITEP analysis shows that the lowest earning 20 percent of taxpayers paid 10.9 percent of their income in combined state and local taxes (income, property, sales, etc.). By contrast, the wealthiest one percent spent less than half that, just 5.2 percent of their income, on state and local taxes.  Even in states with graduated income taxes, heavy reliance on sales and excise taxes means than most states’ overall tax systems are more expensive for low income than for high income citizens.

“Targeted tax credits are like economic life lines for people who are struggling,” said Gardner. “The new Census report shows that now is the worst possible time for states to pare back these credits and makes it all the more urgent to implement them.”

“State Tax Codes As Poverty Fighting Tools” reviews four simple tax fixes and how they can be smartly designed and quickly implemented to reduce the proportion of income spent on taxes for those families and individuals state lawmakers choose to target. 

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 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. ITEP’s full body of research is available at www.itepnet.org.

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, with the unveiling of grim figures from the Census Bureau describing how poverty has increased in 47 states compared to last year, we are featuring updated policy briefs describing two critical anti-poverty tax policies. Both are immediately available to lawmakers at the state level seeking to mitigate the effects of poverty for their constituents.

• Reducing the Cost of Child Care Through Income Tax Credits
• Property Tax Circuit Breakers

In the past year, Missouri lawmakers have grown increasingly skeptical about the effectiveness of business tax breaks in encouraging economic development. But the bad news is that during an ongoing special legislative session, some lawmakers have been eager to enact massive new tax breaks for a proposed cargo hub, optimistically dubbed “Aerotropolis,” to be located at the St. Louis airport, which is meant to lure overseas cargo shippers to Missouri.

With no apparent irony, some lawmakers want to use the revenues from repealing existing ineffective tax subsidies to pay for the proposed new “Aerotropolis” package. Fortunately, the same lawmakers who have voiced their opposition to existing subsidies are building a critical mass of skepticism about the new proposal. As Senator Jason Crowell put it, “We’ve come to a pretty firm conclusion, I believe, that the Missouri Senate will partner with you to create jobs. It will not partner with you to subsidize activity that may or may not create jobs.”

It’s looking like some scaled down version of the original package is what will pass this month’s special session.

One other promising development: so far, the circuit breaker that protects low income and senior renters has survived, and efforts to repurpose that modest program’s costs for more business tax breaks have so far failed.

Photo via AFL CIO Creative Commons Attribution License 2.0

Obama’s Plan a Massive Tax CUT Despite GOP Claims of “Largest Tax Hike in Modern History”

While House Republican Leader Eric Cantor’s staff and others have called President Obama’s jobs and deficit plan the “largest tax hike in modern history,” the unfortunate truth is that it actually cuts taxes overall and increases the deficit.

There is much to like about the plan, as explained below. Citizens for Tax Justice applauds President Obama’s vow yesterday to, in his words, “veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or biggest corporations to pay their fair share.”

Unfortunately, however, President Obama’s proposals would ultimately reduce taxes far more than raise them, compared to current law.

The tables in the back of the President’s 80-page plan quietly remind us that the total cost of making permanent the Bush tax cuts would be $3.867 trillion over the next ten years, but the President says he will “raise revenue” by making permanent “only” $3.001 trillion of these tax cuts. We certainly applaud the President for refusing to extend the $866 billion of these tax cuts that would go exclusively to those with adjusted gross incomes in excess of $250,000, but it’s difficult to call this deficit reduction.

The President’s claims that he is raising revenue are based on the common, but misleading, practice of comparing a given proposal to an alternative “baseline” that assumes Congress has already increased the deficit enormously by making permanent the Bush tax cuts. By this logic, we do not see what stops the President from comparing his plan to a baseline that assumes Congress repealed the federal income tax, in which case his plan would “raise revenue” even more successfully.

Setting aside the $866 billion that the President proposes to “raise” by not extending that part of the Bush tax cuts, the net effect of the other tax provisions in the plan (excluding the parts used to help pay for his proposed new jobs provisions) is to raise only $259 billion over the next decade. That means that, overall, the President is proposing more than $2.7 trillion in deficit-increasing tax cuts through fiscal 2021!

The cost of these tax cuts is even greater when accounting for the additional interest payments on the national debt that will result.

Revenue could be raised by closing corporate tax loopholes, but unfortunately the President’s plan calls for a reform of the corporate income tax that is “deficit-neutral.” We believe that most, if not all, of the revenue-savings resulting from closing corporate tax loopholes should go towards deficit-reduction or job creation and public investments, rather than paying for more breaks for corporations. (See one-page fact sheet on why corporate tax reform can be “revenue-positive.”)

There are some good ideas in the President’s tax proposals that would raise revenue compared to current law and that would ask those whose incomes have grown the most in recent years to pay something closer to their fair share. This includes his proposal to limit deductions and exclusions for the wealthy, which we estimate would affect only 2.3 percent of taxpayers. (See related report.) Certainly Congress should pursue these types of tax provisions and loophole-closing measures.

But ultimately, our nation is going to need significantly increased revenues to pay for essential public programs and services. Starting off with a gigantic tax cut that makes 80 percent of the Bush tax cuts permanent, as Obama proposes, only digs our deficit hole deeper — and makes big reductions in Social Security and Medicare even more likely.

On Monday, September 19, President Obama may offer a corporate tax reform plan along with his deficit reduction proposals. Previous statements from the administration indicate that the corporate tax reform plan would be “revenue-neutral,” meaning it would raise no new revenue to reduce the budget deficit or meet the growing needs of the nation.

In May, U.S. Senators and Representatives received a letter from 250 organizations, including non-profits, consumer groups, labor unions and faith-based groups from every state, rejecting this “revenue-neutral” approach to corporate tax reform. These organizations call on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments.

Read the letter.

As the letter explains, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”

Citizens for Tax Justice has called for revenue-positive tax reform in a recent op-ed in USA Today, a report explaining why Congress can raise more revenue from corporations, and in CTJ director Bob McIntyre’s recent testimony before the Senate Budget Committee.

CTJ also released a report in June focusing on 12 major profitable corporations that collectively paid an effective U.S. tax rate of negative 1.5 percent on their U.S. profits over the past three years.  

When House Speaker John Boehner said on Thursday that “tax increases destroy jobs” and are not a “viable option” for the Joint Select Committee tasked with reducing the budget deficit, he was probably unaware that a major business lobbyist and a high-profile conservative economist had admitted a day earlier that the last significant tax increases did not hurt the economy.

Bill Rys of the National Federation of Independent Businesses (NFIB) tried to explain to the Senate Finance Committee on Wednesday his view that tax increases today would hurt the economy even though the economy thrived after the 1993 tax hikes enacted under President Clinton.

“In the 1990s,” he said, “we had a dot.com boom, we had Y2K, a lot of money being spent there, so we had much stronger economic winds pushing, pushing, which we don’t have right now.”

The obvious circularity of the argument seemed to go unnoticed by members of the committee. Rys said, in essence, that the tax increases of the 1990s did not prevent economic growth because we had economic growth in the 1990s.

Stephen Entin of the conservative Institute for Research on the Economics of Taxation, made a similar comment to explain why the Clinton tax increases did not cause the economic stagnation that he predicts would result from tax increases today.

“The Clinton marginal tax rate increases were fairly modest and we were coming out of a downturn. The growth was going to look good anyway.”

Most of the tax increases proposed today, which Entin believes will lead to a reduction in GDP, actually would just allow some rates to revert to the Clinton-era rates, so it’s surprising that he calls the Clinton tax increases “fairly modest.”

Even more surprising is his comment that the Clinton tax increases were not damaging because “we were coming out of a downturn.” No one asked the obvious follow-up question: If tax increases did not prevent a recovery in the 1990s, why would they prevent a recovery today?

Entin went on to say that what also allowed the economy to grow in the 1990s was the capital gains cut signed into law by President Clinton in 1997, which reduced the top capital gains rate to 20 percent.

“Please remember that he did sign a capital gains tax reduction and a lot of the growth in that decade was due to that reduction in the cost of capital. It dwarfed the effect of raising the marginal rates.”

The capital gains cut did not go into effect until 1998 so it’s interesting that Entin thinks that accounted for “a lot of the growth in that decade,” meaning the 1990s.

It’s also noteworthy that allowing the Bush tax cuts to expire would allow the top capital gains tax rate to simply revert to 20 percent, the rate that Clinton enacted and which Entin seems to think was conducive to growth.

A close look at the numbers demonstrates that there is no policy basis for allowing capital gains income to be taxed at lower rates than ordinary income. Advocates of tax cuts for investment income have for years argued that the revenue collected from taxes on capital gains will actually rise in response to a capital gains tax cut, but the data does not bear this out. For example, capital gains tax revenue was lower in the years following Bush’s 2003 capital gains tax cut than during the Clinton years. This revenue fluctuates with the economy and does not seem correlated with tax rates.

Of course, we could give Rys and Entin the benefit of the doubt and assume they really mean that economic growth would have been even higher during the 1990s if President Clinton had not raised tax rates. But even that argument is entirely unsupported by the data. A 2008 report from the Center for American Progress and the Economic Policy Institute compares the economic recoveries following the major tax changes enacted during the administrations of Presidents Ronald Reagan, Bill Clinton, and George W. Bush. The report illustrates that the recovery under Clinton was far stronger, despite the tax increases that he enacted, than the recoveries during the other two administrations. 

Rys and Entin have both long advocated for making permanent all of the Bush tax cuts and enacting additional tax reductions. In 2010 CTJ wrote a response to arguments made by Rys and NFIB concerning the impacts of taxes on small businesses. In 2009 CTJ wrote a response to a report from Entin claiming that elimination of the estate tax would actually increase revenue.

Kentucky Republican gubernatorial candidate David Williams released the outline of his economic plan earlier this week. Williams proposes to repeal the state’s personal and corporate income taxes as part of a “revenue-neutral” tax swap, which of course means that the remaining taxes levied by Kentucky would have to be increased by close to $4 billion a year to make up for the loss of the income tax.

Williams would replace the state’s personal and corporate income taxes with a broader consumption tax of some sort. He says of this proposal, “If you tax consumption, people will make discerning choices about consumption and you will encourage productivity.”

Consumption taxes as a substitute for income taxes is backwards tax policy at its worst and is catastrophic for middle- and low- income families. In fact, the Institute on Taxation and Economic Policy (ITEP)  found that the impact of a similar proposal in 2009 was disastrous:  the poorest 20 percent of Kentuckians would have seen their taxes rise by $136 on average, while the richest one percent would have received an average tax cut of $40,910.

Explaining his plan to abolish the income tax, Williams says it will be somehow economically stimulative: “If you look at states that have done away with income taxes, states like Texas, Tennessee and Florida, many jobs there were created after they adopted that.”  

What Williams doesn’t seem to know is that none of these states had income taxes in the first place, so none have actually “done away” with them.  And whether it’s Texas’s oil or Florida’s tourism industry, these states have unique natural resources to fall back on that Kentucky can’t match.

What’s more, living in Texas, Tennessee, or Florida is hard for working families. ITEP found that all three of these states are in the top ten for the states with the most regressive tax structures, meaning they make it cheap for rich people live there, but expensive for everyone else because of reliance on consumption taxes.  Florida taxes its poor families at a rate of 13.5 percent, the second highest rate in the nation.

Williams, the GOP’s candidate for governor in Kentucky, proposes that an unelected tax reform commission of “economic and tax experts” should be appointed to create a plan based on his broad outlines.  It’s not clear, however, where he’ll manage to dig up a panel of actual tax experts who believe that income tax repeal is a smart move. The only support for that kind of policy is in conservative think tanks funded by corporations who, it is well known, hate paying taxes.

Should Williams unveil more details about his economic plans as the election approaches, we’ll be right here, ready to flag his more outrageous proposals and assumptions.

Photo via Am Heart Advocacy Creative Commons Attribution License 2.0