Tag: TaxJusticeBlog

The American Legislative Exchange Council (ALEC), working with Arthur Laffer and Stephen Moore, has updated its “state economic competitiveness index.”  The authors claim that the index analyzes how well state lawmakers are using fifteen “policy levers … that can make their state a desirable location” for individuals and businesses.

The study contains numerous absurdities and arbitrary features that could be picked apart in a longer article (for example: levying an estate tax, regardless of its size, is for some reason assumed to be exactly three times more damaging than failing to require a supermajority vote in the legislature in order to raise taxes).

But the more important problem is that the ALEC study makes almost no effort to evaluate the quality of public services provided within a state’s borders.  Virtually everyone agrees that good schools, adequate police protection, and an efficient transportation network are central to what makes a place a “desirable location” to live and work.  But none of these factors can boost a state’s “competiveness” score under the ALEC index.

In fact, it’s even worse than that.  Since more than half of the “levers” relate to keeping taxes low, adequately funding public services can actually hurt a state’s “competitiveness.”  And since states also lose points for every public employee living within their borders, most new laws designed to reduce class sizes, increase police patrols, or hire additional road construction workers will also hurt a state’s desirability and competitiveness, according to ALEC.

Unfortunately, the problems with this report aren’t just confined to its data and methodology.  As with previous editions of this study, a significant portion of its text was simply copied-and-pasted from the Wall Street Journal’s editorial page (one of the authors is on the Journal’s editorial board).  Most notable is the section on Oregon’s “missing” millionaires – a virtual carbon copy of a December 2010 editorial that ITEP and others thoroughly debunked on more than one occasion.

Ultimately, the authors have done little more than count the number of conservative priorities achieved in each state, and tack on some boilerplate anti-tax rhetoric that we’ve all seen before. “Rich States Poor States” is about as serious as the TV miniseries that inspired its name.

Lower the tax rate…or else.  Continued threats from Illinois business lobbyists warning that businesses will leave the state have forced the Illinois state legislature to order a joint House-Senate Revenue Committee to review Illinois’s corporate tax structure.  Companies like Caterpillar and the Chicago Mercantile Exchange continue to complain about the corporate tax rate and threaten to skip town and find another state to do business in if the committee doesn’t respond with dramatic rate cuts.

Illinois Senate President John Cullerton says the committee will not only look at corporate tax rates, but will also consider reducing corporate subsidies and special exemptions to ensure any change in the rate won’t reduce the overall corporate tax revenues.

Many businesses have come out in support of eliminating loopholes, not surprisingly most of which pay the full statutory corporate tax rate.  David Vite, president of the Illinois Retail Merchants Association, said that “the most important thing is to have a fair structure that makes Illinois efficient and as attractive as it can possibly be so we can get more businesses here to spread the burden of running the government more broadly.”

A myth that the corporate tax rate is the primary factor in business decision-making just won’t die.  A recent CTJ article showed that business executives consider taxes low on their list of priorities.  The tax rate is just one small factor that businesses take into consideration when deciding what state will give them the best chance to be profitable.  As Doug Whitley, President and CEO of the Illinois Chamber of Commerce said, “robust economic activity also requires sustained and significant investments in transportation infrastructure…educational opportunities that ensure a quality workforce and support retraining when required.”  The fact is, these investments all cost money, and if corporations are going to benefit from them they should contribute to their funding, just as individual Illinois taxpayers do.

Similarly, when a family is looking for a place to settle down, low taxes are pretty low on their list of priorities.  They want to know about the educational system, the community, and whether or not this is a good place to raise their children. Everything that makes a community  appealing to that family is supported by the tax base.

You wouldn’t expect a family to uproot itself and move to another state simply because they could save a couple hundred dollars in taxes next year.  Why would a corporation?

Lost in this tax debate are the vital public services that support the growth of the private sector.  Corporate taxes are simply one cost of doing business.  This is not to mention that all of these complaining companies have failed to mention the extraordinary financial and logistical costs of moving an entire business to another state.

We can always expect business leaders to call for rate cuts that would fatten their profit margins, but we shouldn’t expect Illinois’ elected officials to believe they’re acting in the public interest.

Photo via spudart Creative Commons Attribution License 2.0

On June 30, Ohio Governor John Kaisch signed into law a $56 billion, two-year budget that includes painful cuts to many public services including education. That didn’t stop the governor and legislators from finding room to give tax breaks to the wealthy. 

Ohio’s biggest revenue drop and boon for the state’s wealthiest taxpayers will come from the repeal of the state’s estate tax.  Ohio law held that estates worth more than $338,333 would be taxed before it was distributed to heirs or beneficiaries.  That’s less than 10 percent of all decedents’ estates in the state. Unfortunately, the loss of this highly progressive tax in Ohio will probably be made up through increases in regressive local taxes.  A recent CTJ article highlighted the need for an estate tax.  Eighty percent of the tax revenue from estates goes to local governments, which amounted to $230.8 million in FY 2011.  Coupled with other cuts in public services including education, local governments will really be feeling the pain this fiscal year.

A last minute addition to the budget is a new tax break for investors of Ohio small businesses worth up to $100 million a year, dubbed “InvestOhio.”  While supporters of the law claim it will spur job creation, there a few important details that suggest Ohio may just be wasting badly needed revenue.  Qualified investors will receive a tax credit, but nothing in the law requires that investment to contribute to job creation. Furthermore, the law may be subsidizing investing activity that would’ve happened anyway.  State Representative Mike Foley put it succinctly: “It’s basically just a giveaway to rich people.”

Perhaps the most telling part of the budget is what was left out. A common-sense law that would have required a review of Ohio tax expenditures (deductions, credits, and exemptions) worth $7 billion a year was removed from the final budget.  This sunshine provision would have allowed lawmakers to openly review and report on the success (or lack thereof) of tax policies annually.  By stripping the review law, the conference committee undermined the legislature’s authority, and demonstrated to Ohioans that accountability and transparency are too easily sacrificed in favor of narrow special interest groups.

With the state’s gas tax pegged to the price of gasoline, North Carolina is scheduled to raise its gas tax rate tomorrow (July 1). This increase was entirely predictable, but is understandably controversial. Unfortunately, the debate surrounding what to do in the wake of this increase has been far too narrow, focusing on just two options: capping the maximum tax rate, or doing nothing at all.Read the ITEP Press Release.

Photo via herzogbr Creative Commons Attribution License 2.0

Unfortunately, Rhode Island lawmakers rejected Governor Lincoln Chafee’s balanced and reform-minded approach to closing the state’s budget shortfall for next fiscal year.

Senate members gave final approval to the House’s revised spending plan this week, both chambers choosing significant spending cuts over the governor’s sensible tax package.  Governor Chafee proposed closing half of the budget gap with a $160 million comprehensive sales tax reform package that included adding dozens of services to the state’s sales tax base, lowering the state sales tax rate from seven to six percent, and taxing more than 40 currently exempted goods at a one percent rate.  Chafee also supported mandatory combined reporting which would have helped level the corporate tax playing field for in-state businesses.

Caving to special interests who lined up in April to denounce the Governor’s plan, the final budget only adds five items to the sales tax base including non-prescription drugs and sightseeing tour packages.  Combined with a few other minor tax and fee changes, the final budget raises only $30 million in new revenue and reduces spending by more than $150 million.  According to the Providence Journal, more than half of the budget cuts impact programs for the poor, elderly, disabled and homeless.

Photo via J. Stephen Conn Creative Commons Attribution License 2.0

Revenue Increase the Obvious Answer to Budget Deficits

Some members of Congress are threatening to allow the U.S. to default on its debt obligations — and send financial markets into a tailspin — unless the President agrees to large, sudden cuts in the budget deficit without any increase in tax revenue. But the most recent data reveal that the U.S. is already one of the least taxed countries in the developed world. Only two OECD countries have lower taxes as a share of gross domestic product (GDP) than the United States.

Read the report.

Minnesota state government is on the brink of shutting down.  Despite months of intense negotiations between the state’s Democratic governor, Mark Dayton, and the Republican controlled legislature, neither party seems prepared to budge from their preferred positions on balancing the budget. 

Their positions were staked out in last year’s campaign season and both sides are looking to deliver on their promises.  Governor Dayton wants to address the state’s budget shortfall with a combination of sensible spending reductions and increased taxes on Minnesota’s wealthiest households.  Republican lawmakers aim to block all tax increases and prefer to slash state spending to damaging levels.

An Institute on Taxation and Economic Policy opinion editorial on the budget predicament explains that the legislature’s approach disproportionately burdens Minnesota’s low- and moderate-income working families.  The piece goes on to say that Governor Dayton’s proposed tax increases on the richest two percent of Minnesotans is entirely reasonable.  “Asking the wealthiest to pay more simply means that the state will have more revenue to invest in the public structures and services provided now and over the long term.”

Update: The Government of Minnesota is now shutdown.

New Hampshire joins the majority of states that have patched next fiscal year’s budget gaps with a cuts-only approach.  Democratic Governor John Lynch will allow the budget to go into effect Friday, July 1 without his signature, fearing a veto would only lead to a more austere budget than the one presented to him last week (the Republicans have a veto-proof majority in the House and Senate).

The budget contains a long list of spending reductions including cutting higher education funds in half (which will lead to higher tuition), state worker layoffs, and cuts to agency funds. 

The most nonsensical cut included in the New Hampshire budget is a 10 cent reduction in the state’s cigarette tax (dropping from $1.78 to $1.68) and lower taxes on other tobacco products.  Proponents of this tax change argued that a decrease in taxes on tobacco would lead to greater revenue as smokers from neighboring states would be incentivized to cross the border to purchase cigarettes. 

However, as the New Hampshire Fiscal Policy Institute (NHFPI) points out, this change is likely to reduce tax revenue by at least $14 million and as much as $30 million over the next two years.  Their analysis points to data from the state’s Department of Revenue Administration that shows even an increase in the sale of tobacco products would lead to the lower end estimated revenue loss.  NHFPI also questions whether or not a drop in taxes would lead to greater tobacco sales given that the long-term trend in cigarette sales is down.

Based in part on the flawed logic of the tax cut’s proponents and in part to the rushed process to include this provision in the final budget bill, lawmakers failed to account for any revenue loss from the tax cut.  This means that New Hampshire’s new budget is likely already out of balance before the year starts and more spending cuts are likely to come mid-year.

It’s no secret that once enacted, tax breaks receive far too little scrutiny from state lawmakers.  Consider the debacle in Missouri, for example, where the state accidentally spent $1 billion more on tax credits beyond what lawmakers originally intended, in large part because the state’s budget rules left lawmakers with very few options for properly overseeing those tax breaks.

In an attempt to encourage lawmakers to spend more time discussing the true costs and benefits of tax breaks, Oregon enacted a law in 2009 requiring the vast majority of its tax credits to sunset within two, four, or six years.  Last week, with the first batch of credits scheduled to expire at the end of this year, the Oregon legislature sent Governor Kitzhaber a bill that will scale back the size of the expiring tax breaks by some 75 percent over the next two years – from $40million to $10million.  Similarly, the credits’ six-year, $500million price tag (had the legislature simply extended all the credits) will fall to roughly $136million.

Among the credits reduced by the legislation are the film tax credit, the biomass credit, and the research and development credit.  The much maligned business energy tax credit (BETC) will also be replaced with new and smaller credits designed to encourage conservation and renewable energy.

Unfortunately, there is one troubling addendum to this story.  Just days after passing these tax credit reductions, the legislature also gave approval to a costly new credit based on the federal New Markets Tax Credit (NMTC).  The NMTC is ostensibly designed to encourage business investment in low-income communities, but as our friends at the Oregon Center for Public Policy (OCPP) point out, the credit often flows straight to the pockets of wealthy investors building upscale hotels and condominiums in areas that are hardly impoverished. 

Moreover, the OCPP notes that this credit “will subsidize projects that will occur anyway,” and “despite all the talk about creating jobs, the bill does not attach job standards to receipt of the subsidy.”  Additionally, “nothing in the bill matches the rhetoric that investments will be made in small businesses. The bill has no provision limiting the investments to small businesses.”  On the bright side, there’s still time for Governor Kitzhaber to veto the NMTC, and regardless of whether or not the NMTC becomes law, Oregon’s tax credit spending will be much lower in the years ahead than would otherwise have been the case.

This success is thanks in no small part to the role Oregon’s 2009 sunset law played in pushing these costly tax breaks into the spotlight.

For more information on steps states can take to enhance the level of scrutiny applied to tax breaks, read CTJ’s report, How to Enact (and Maintain) Tax Reform.

Last Friday night (6/24/11), New York Governor Andrew Cuomo signed into law the state’s first ever property tax cap, one of the biggest legislative priorities of his administration. As Citizens for Tax Justice noted even before its final passage, however, the new property cap is one of the most extreme in the nation and widely viewed as ill-advised.

The cap limits annual growth in property tax revenues to 2 percent or the inflation rate, whichever is lower, with comparatively strict limits on exceptions to the cap: chiefly, state pension system increases above 2 percent of payroll. Voters in a given locality could also override the cap by a 60 percent vote.

Considering that property taxes are rising at about 5 percent annually, the cap will force dramatic cuts in local education, medical, and public safety services.

Many advocates argue that the enactment of a similar property tax cap in Massachusetts proves that it will not hurt the quality of education or local services, but the Center on Budget and Policy Priorities has thoroughly debunked this claim, showing how the cap has been disastrous in Massachusetts.

Compounding this, according to the Fiscal Policy Institute (FPI), New York’s cap is actually much worse than the one in Massachusetts considering that it’s 60 percent stricter in terms of reducing revenues, and, is not coupled with significant additional state funding to local governments.

Even if Cuomo’s goal is just to help low and middle income families with relief from rising property taxes, the FPI explains that a much more effective and less costly approach would be to enhance the state’s property tax circuit breaker.

Calling the tax cap “a cap on student achievement, especially for the poorest school districts” Karen Scharff, the Executive Director of Citizen Action New York points out that in reality the property tax cap is just “one more fake Albany quick fix.”