Permanent Estate Tax Repeal: Old Plan, New Names

The legislative arc of federal estate tax repeal over the past five years reads like a bad joke: call it the "death tax," use inflammatory grave-robbing metaphors to get the tax repealed-- but include a provision in the enabling legislation which brings the whole thing back to life as if nothing had ever happened. As things currently stand, the federal estate tax (like Westley in The Princess Bride) is only "mostly dead." After being fully repealed for exactly one year (2010), the tax will go back to normal in 2011.

People have been (rightly) making fun of this half-assed approach to estate tax repeal for the past four years. It got enacted this way simply because one year of complete repeal was all the Republican leadership in Congress could afford in 2001, when the repeal was passed as part of the first round of Bush tax cuts. Since then, Congressional Republicans have introduced bills to make the repeal permanent (even as these cuts have become even less affordable due to growing budget deficits), and Dems have sought to stop the gradual repeal in its tracks with no further cuts.

But this year there's a new wrinkle. Permanent repeal legislation in both the House and Senate has been co-sponsored by Democrats. That's Bill Nelson (FL) in the Senate and Bud Cramer (AL) in the House, for those keeping score. This is a danger sign for those who think (as I do) that estate tax repeal is an unfair and unaffordable giveaway to Congress' wealthiest constituents.

Senate Majority Leader Bill Frist (TN) signaled last month that permanent estate tax repeal would be among his top ten legislative priorities for 2005. As you can see from the list, these aren't all looking terribly hot so far, but it's worth keeping an eye on.

North Carolina: Easley Proposal Soaks Poor

Democratic Governor Mike Easley has released his budget proposal. The Easley plan would hike the state's cigarette tax from 5 cents per pack (among the lowest in the nation) to 50 cents.
The plan would also keep a previously enacted half-cent sales tax hike that is scheduled to go away in July, but would allow a temporary income tax hike on the wealthiest North Carolinians to expire.

The plan would further load up on sales taxes by raising the tax rate on various items to a uniform 7 percent. This is partly being done to comply with the Streamlined Sales Tax Project (SSTP folks are trying to get rid of complexity in sales tax laws, and multiple rates are a primary culprit.)

Affected industries are raising a stink about the proposed sales tax base expansion, arguing that newspapers and movie theaters are special industries that shouldn't be taxed the same as other areas of consumption. Some are pointing out that not all of the base-expanding proposals are necessary to comply with SSTP, but I think that's missing the larger point. A basic goal of the sales tax should be to tax all personal retail consumption the same way. Easley's proposals here are clearly regressive in their impact, hitting low-income taxpayers harder than wealthier taxpayers, but represent a clear improvement from a different kind of tax fairness perspective: they would make it more likely that the amount of sales tax you pay depends only on how much you spend, not what you spend it on.

The cig tax hike should probably be thought of the same way-- probably the right thing to do, because the tax rate is so much lower than most other states', but still regressive.

So Easley has gotten things half right-- he's clearly gotten the message that the tax system is currently inadequate to fund services, but doesn't seem to understand the need to make North Carolina taxes more equitable.

And don't look now, but N.C. lawmakers are making noise about allowing a lottery. As this article points out, the "everyone else is doing it, so why can't we" argument seems to be taking hold. With all surrounding states now getting at least some revenues from a lottery, the argument goes, plenty of Tarheels are spending their cash in other states-- so why not bring this money back home?

This is a much bigger topic that demands a separate post. But let's just start by pointing out that lotteries are never just about taking back revenues that are being spent in other states. Inevitably, states end up actively encouraging people to spend more on an activity that most people agree is wrong. More on this later.

Slots in Maryland

Maryland's state House will get to vote, possibly today, on using slot machines for education funding. The bill would allow almost 10,000 slot machines in four counties around the state. See here and here for coverage. Responses from likely Democratic Gubernatorial candidates: Doug Duncan opposes it, Martin O'Malley sees it as a "reasonable compromise."

Gambling Issue Splits Maryland Dems

Sometimes bad tax policy ideas find bipartisan support. In many states, gambling revenues have been that way in recent years. But in Maryland, Democrats in the legislature have staunchly opposed this "quick fix" solution to their budget woes, even as Republican Governor Bob Ehrlich has persistently pushed gambling on the public.

But now, according to today's Washington Post, leading Democrats are split on this issue. The two leading Democratic candidates for the 2006 gubernatorial election come down on opposite sides, with Baltimore Mayor Martin O'Malley supporting some role for gambling and Montgomery County Executive Douglas Duncan opposing this change.

It's not like Maryland has no better options available. The personal income tax is among the least progressive in the country, and the decline of the state's corporate income tax has been well documented in recent reports by Progressive Maryland and the Maryland Budget and Tax Policy Institute. But many lawmakers persist in thinking of gambling revenues as a "voluntary tax"-- or as a form of entertainment. In fact, as ITEP has argued in a recent policy brief, gambling revenues ought to be thought of as a tax that falls most heavily on the poor--and those with a poor understanding of probability.

In fairness to O'Malley, he seems to understand that this approach to revenue raising is simply wrong, calling it "morally bankrupt" in the Post article. But this arguably makes his position even more unforgivable. If his plan for raising revenues is morally bankrupt, what does that make him?

Sin Taxes in Connecticut

New Connecticut Governor Jodi Rell (R) has gotten great approval ratings for the job she's done so far-- but her new budget proposal is dragging her numbers down. A new Quinnipiac poll shows Rell's approval rating dropping by 9 percent in the past month.

What accounts for this drop? For one thing, Rell wants to hike pretty much every sin tax on the books, from cigarettes to alcohol to gasoline. If the cigarette tax hike passes, Connecticut will have hit up smokers for tax hikes three times in the past five years.

More controversially, Governor Rell wants to delay a scheduled increase in the state's income tax-based credit for property taxes. That means that low- and middle-income homeowners and car owners will pay up to $150 more in property taxes.

Democrats have suggested more progressive alternatives. The "millionaire's tax" proposal, previously pushed (and then rejected) by former Governor Rowland, is among them, as is a broader "across the board" income tax increase.

But Rell's office is skeptical. From Sunday's New York Times:
A spokesman for the governor, Rich Harris, said 50 percent of state income tax revenue already comes from the state's top 10 percent of earners.''It's pretty hard to say these people aren't paying their fair share,'' Mr. Harris said.

Well actually, it's not that hard at all. Turns out that when you factor in taxes other than the personal income tax, the top 10 percent pay less of their income in tax, on average, than anyone else in the state. In fact, an ITEP analysis shows that the wealthiest 20 percent pay less than the poorest 80 percent of Connecticuters, on average.

The only way to redress this basic inequity in Connecticut's tax system is to increase the role--and the fairness-- of the personal income tax. Unfortunately, the Rell plan gets the lion's share of its revenues from regressive excise taxes. And the income tax revenues Rell proposes to raise would come primarily from the low- and middle-income taxpayers who already feel the biggest tax bite.

The One Connecticut coalition is working to promote a more equitable (and sustainable) approach to tax reform. Here's hoping the sensible reforms suggested by this group find their way into the mix before the legislative session ends in June.

Progressive Tax Cuts in Hawaii?

In many states, lawmakers are just hoping to get through 2005 without major tax increases. But things are looking a little more relaxed in Hawaii, where two competing approaches to tax cuts are being discussed in the legislature; Governor Linda Lingle's tax relief package includes progressive income tax cuts, while Representative Calvin Say in the House (HB1708) and a group of Senators seek to target tax cuts to wealthier Hawaiians. (SB1740).

The Governor wants to increase the standard deduction to half of 2004 federal amounts (HB726 & SB835) and create a refundable $55-per-person sales tax credit for households earning up to $40,000. (HB727 & SB836). Each of these proposals would be gradually phased in-- a sensible idea given the uncertainty of the state's projected surplus.

The legislative plan would widen the income tax brackets for married couples while leaving the tax brackets for singles unchanged, and would drop the bottom tax rate from 1.4% to 0.7% for married couples (no change for singles).

An ITEP analysis shows that the Governor's tax plan would cut taxes primarily for low- and middle-income Hawaiians. On the other hand, the kegislative plan would primarily benefit Hawaii's wealthiest taxpayers. If fully implemented in 2004, the Governor's package would cost about $50 million a year, while the legislative plan would cost just over $100 million.

Hawaiian lawmakers have the luxury (so far) of avoiding painful tax hikes. Let's see if they can do the right thing with any available surplus.

Making Iowa a better place to live?

State lawmakers would probably all agree that economic development is an important goal. But they often disagree completely on how to achieve it, with some arguing that good public services create the quality of life that makes a state an attractive place to live--and others arguing reflexively that tax cuts will solve all of a state's woes.

A recent proposal by State Senate Republicans in Iowa illustrates how myopic this second approach can be. The proposal would eliminate all state income taxes for workers under 30. No matter how much you earn, if you're 29 or younger and you work in Iowa, you won't be taxed on a dime of your earnings.

The AP reports that this plan has been greeted with broad, bipartisan, skepticism.

"Do we really think that a lot of people between 20 and 30 make a decision about where to live based on taxes?" said Rep. Jamie Van Fossen, R-Davenport. "Not a lot of those people pay a lot of taxes."

That's my initial question, too. Big corporations have well-documented records of setting up tax shelters in certain states or off-shore, but I doubt many young people want to play that tax-shelter shell game. Fresh out of college, a lot of folks (myself included) move to where the jobs--along with other young people--are. People move to cities like New York, Boston and Washington, DC because they are exciting places to live, not because we'll get a small tax break.

The GOP plan doesn't really get at these more fundamental quality-of-life issues. Iowa's legislators need to be more innovative in their approach to retaining bright young people. In 2003, the state ranked 41st in the nation for percentage of people with a college degree and 33rd in household income. Iowa's problems are not unique to the state. Following a national trend, tuition at Iowa State rose 22% last year. The senators might consider working to provide more state-based financial aid as a means to keep rising stars in-state.

The tax-cut proposal is also rather clumsy in terms of how it will impact people at different stages of their lives. If it is to be revenue-neutral, it would require raising taxes on everyone else--which means either a "rude awakening" when a citizen turns thirty or increased sales and property taxes on taxpayers of all ages.

Another problem with this approach is that (thanks to the state's current fiscal shortfalls) this idea should really be described not as a tax cut but as a tax shift. In the past couple of years, the state has consistently shortchanged local governments by cutting state aid earmarked for property tax reductions. The inevitable consequence? These state spending cuts have led to local property tax hikes, as documented by a recent Iowa Policy Project report.

The GOP proposal sounds like a gimmick rather than a serious tax policy proposal, and it may well be. But if it's designed to provoke debate, it would be nice if the debate focuses on the positive impact that public spending can have on quality of life issues-- not just on the immediate impact of poorly-thought-out tax cuts.

Welcome to "Talking Taxes"

Welcome to "Talking Taxes." This blog is devoted to discussing new developments in federal, state and local taxes. We'd like the blog to be a forum for constructive discussion of important issues affecting the adequacy and fairness of taxes. With the prospect of further fundamental changes at the federal level and continued fiscal shortfalls in states around the nation, this is an especially important time to share information and thoughts on the good, bad and outright insane tax ideas being discussed right now. Hope it's useful!
-Matt G