Potential for a Big Mistake: New Hampshire, Medicaid and Fiscal Honesty

When New Hampshire faces budget deficits, they don't have a lot of tools at their disposal. They're the only state in the nation with neither a sales tax nor a broad-based income tax. As a result, lawmakers have to get pretty clever about finding new revenue sources during recessions. This year lawmakers have outdone themselves, as Dan Barrick notes in a great article in today's Concord Monitor. Lawmakers are apparently considering introducing monthly Medicaid premiums to help balance the budget. This would be on top of the "co-pays" that NH already has in place for various services.

Supporters of premiums point to Oregon and Florida, where similar legislation has reduced state costs. But that point is obvious, if not redundant. Costs are reduced because, um, the state is deferring the bill. Small co-payments, on the other hand, which New Hampshire already has, have been frequently cited as a good way of reducing unnecessary visits to the doctor without preventing necessary medical care.

Premiums would be a shameful way of cutting costs for two reasons. First, Medicaid premiums (ranging from $120 to $240 a year, under this proposal) amount to a tax increase on the people with the least ability to pay. Second, it doesn't reduce health care costs. All the premiums do is potentially drive people away from regular, often preventative visits to the doctor. This leads to more costly emergency room visits and in turn a larger tab waiting to be picked up by the hospitals themselves--as well as people who have private insurance and will see their rates rise as the hospitals transfer the increased cost onto them.

And there are implications for federal funds flowing to New Hampshire as well. This article in the Union Leader addresses the compound problem of cutting the state's budget for Medicaid because of the lost federal funds that will go along with the potential cuts.

New Hampshire's budget process started auspiciously when the Lynch administration promised a budget which "funds all of the state's health and human service area agencies to strengthen the national model we've built for community support of people with disabilities." They still have a chance to get there. But the legislature would do well to avoid imposing backdoor tax hikes on the poor while also shifting increased health care costs onto providers and everyone with insurance.

There is a lot of talk in New Hampshire about balancing budgets and providing services without any new broad-based taxes. It would be a travesty if that promise is kept only by introducing a new tax targetted directly at the state's neediest citizens.

Bunning Amendment: Saving Social Security One Golf Resort at a Time

Those of us who are scheduled to retire sometime after 2041 (the date at which CBO now says the Social Security trust fund will be depleted) have been whining an awful lot lately about ensuring that the system will still be there for us.

But what about today's wealthy seniors? How can we make sure they get what's coming to them? Relax-- Kentucky Senator Jim Bunning is on your side. Bunning's successful amendment to the Senate budget resolution (which passed last week) would increase the after-tax Social Security benefits of current retirees by amounts ranging from zero (for roughly the poorest three quarters of all current Social Security recipients) to 14% (for beneficiaries earning over $200,000). The Bunning plan would target more than half of its benefits to the 8.8 percent of Social Security beneficiaries with total income over $100,000-- and would completely exclude the 50 percent of Social Security beneficiaries living on $30,000 a year or less. (These numbers come from a new CTJ analysis showing that the Bunning amendment would offer little or no relief to most low- and middle-income retirees, but would be a bonanza for wealthy Social Security recipients.)

Does this seem like a crazy plan to you? If so, you're not Jim Bunning. The Bunning plan achieves this upside-down increase in Social Security benefits by repealing the second tier of federal income tax on Social Security benefits. The second tier, enacted in 1993 as part of the Clinton administration's historic deficit reduction legislation, basically allows up to 85 percent of Social Security benefits to be taxed like regular income, for a small number of the wealthiest Social Security beneficiaries. (The first tier, which is unaffected by the Bunning amendment and was signed into law by President Reagan, subjects up to 50 percent of Social Security benefits to tax at a lower income threshold, but still applies to relatively few taxpayers.)

Given the bleak long-run fiscal forecast the nation currently faces, you don't need a Teleprompter to see that this plan would increase the Social Security benefits of today's wealthiest retirees while further endangering our ability to pay full benefits for the low- and middle-income retirees of the future for whom these benefits are most crucial. Max Sawicky brings this point home very well. Mortgaging our future to benefit today's leisure class is hardly a surprising move for the GOP leadership-- but this is an especially innovative way of doing it.

Of course, this is not a done deal yet. This provision will still have to find support in the House. But getting through the Senate is usually the hard part for fiscally irresponsible, regressive tax cuts these days. It's alarming that 55 Senators (including five Democrats) would vote for a plan that violates the basic maxim: "When you're in a hole, stop digging."

Tax Reform in DC: Baby Steps

The District of Columbia now allegedly has a budget surplus, and DC elected officials are in a hurry to dispose of it. The DC City Council heard testimony from a lot of smart people last week regarding one proposal to increase the city's income tax exemptions and standard deductions to equal the federal amount.

Pretty much everyone who testified said about the same thing: if DC can afford an $80 million-a-year tax cut, this is a decent way to do it. Exemptions and deductions are the basic mechanism most states use to shelter a minimum amount of income from tax, and DC's exemptions are pretty low by comparison to most other states. This means that DC's income tax hits families near the poverty line much more heavily than in most other states. Increasing the exemptions and deductions would help solve this problem and would reduce the inherent unfairness of the current DC tax system.

However, as Ed Lazere at the DC Fiscal Policy Institute pointed out, fully implementing this plan would eat up the entire budget surplus-- hardly the wisest move for a government just emerging from years of budget deficits.

And as Ed and others have also pointed out, DC has other problems. Skyrocketing property assessments are going to require some form of property tax relief in the near future-- and lawmakers are currently discussing poorly targeted tax caps that would bust the budget once again while providing little tax relief to the low-income homeowners and renters who need it most.

So while lawmakers are to be congratulated for addressing tax fairness issues, it's worth asking whether they've forgotten about the even more important goal of tax adequacy.

Extreme Relief in Nevada

A good friend of mine is a huge fan of home improvement reality shows such as ABC's Extreme Makeover: Home Edition and The Learning Channel's Town Haul. The basic premise of these shows is simple - they help disadvantaged property owners fix up their homes and/or small business properties. My friend marvels at the extent to which these properties are remodeled and revamped. I on the other hand, being a progressive tax advocate, think - Wow, I wonder how much their property taxes are suddenly going to increase once the property is reassessed?

Now think about this concept on a much larger scale and you have an idea of what Nevada property owners are going through. In the past few years, market forces have dramatically increased the assessed value of Nevada homes--which means property taxes are going to increase too.

Nevada lawmakers, to their credit, have seen this coming-- and are scrambling to come up with tax relief measures that can prevent an anti-tax revolt. The main constraint they face is a constituional rule that tax breaks must be"uniform and equal"-- meaning that all Nevada residents must be taxed the same way. (This constitutional rule handicaps Nevada in a number of ways, not least of which is that they're not allowed to levy a progressive personal income tax.) The leading proposal is to cap the growth of property taxes for single-family homeowners, with homes not exceeding $500,000 in taxable value, at 4 percent. For owner's whose property is worth more than $500,000 in taxable value, non-owner occupied or commercial, they would receive relief conditioned on average assessed value for their area. Note that in Nevada, taxable value is 35 percent of actual market value. For example, a home worth $500,000 in taxable value is actually worth $1,428,571 on the market.

This plan is allowable despite the "uniform and equal" requirement because Nevada's constitution has a exemption for cases of "economic hardship". The "economic hardship" exception has been employed in order to provide relief to Nevada's senior citizens in the form of a circuit breaker. This circuit breaker is allowed to senior citizens 62 or older with incomes equal to or less than $21,000. The actual amount of relief is determined by the senior citizen's income and property tax bill. The maximum amount of relief allowed is capped at $500.

The "4% cap" proposal assumes that taxable value is an adequate measure of someone's economic hardship. This could very well not be the case; there are more than a few instances where homeowners are property rich but cash poor. Why don't Nevada lawmakers simply use income as a measurement of economic hardship? Good question. Why not expand the existing property tax relief for seniors, which is based on income, to all of Nevada's most vulnerable homeowners? Another good question. Proponents of the "4% cap" proposal like it because they believe it would pass the "uniform and equal" requirement. However, if there's already a circuit breaker in place based on income that has passed constitutional requirements, why not simply expand it for all Nevada residents?

Messing With Texas

HB 3 Passed the Texas House of Representatives yesterday. This is bad news for most Texans. It is described as revenue neutral, but is also being sold as a better way to fund schools that are lacking funds (hmm).

The Austin American-Statesman does a pretty good job breaking down the problems with the legislation. Essentially, HB 3 lowers the cap on the state-level property tax rate. It doesn't touch the local rates. In exchange for this, the bill raises lots of other taxes, most notably the cigarette tax and the general sales tax.

The Center for Public Policy Priorities examined the bill last week. Their findings can only be described as disheartening. 80% of Texans would se a tax hike, while those making over $100,000 would enjoy a tax cut.

Sales tax hikes raise more tax dollars from those with the least ability to spare them. A sales tax does not factor in how wealthy a person is when they make a purchase. The bill does exempt some "essentials" like diapers, but that doesn't come close to making up the difference.

Another big problem with this tax shift is that renters--typically less wealthy people than home owners--will not feel the effects of the lowered property tax cap. Eddie Rodriguez (D-Austin) tried to add an amendment that would have required landlords to pass along at least 75% of the money not spent on property taxes to their tenants. That proposal did not get very far.

And this is a bad decision for the long-term stability of the current level of school funding. By shifting revenue sources from property taxes onto cigarette taxes, the legislators have chosen a source that is sure to decline over time, forcing them to eventually raise the rates more and more as smoking, or at least tobacco purchases in Texas diminish.

This bill amounts to a handout to the most wealthy Texans at the expense of the vast majority of the state.

As The Daily Tax Report notes: "The speaker said the bill would create 48,000 jobs by 2007 and would boost personal income by $2 billion and investment by $3 billion. "Passage of H.B. 3 means voting for property tax relief, increased personal income, more investments, and tens of thousands of new Texas jobs," Craddick said"

It's a mystery where he pulled $2 and $3 billion from. As far as the job growth, perhaps. But only if he is predicting that 48,000 more people will need to work two jobs to afford buying goods with his new sales tax in place.

Hopefully the Texas Senate will think better of this scam.

Doyle Vetoes Wisconsin Property Tax Caps

For the second time in three years, Wisconsin Governor Jim Doyle has vetoed legislation that would have imposed caps on the growth of local property taxes. GOP lawmakers are threatening to keep on passing tax cap legislation until Doyle stops vetoing it.

Doyle is right. Property taxes are certainly high in Wisconsin, but given the state's dire financial straits it's important to come up with a solution that will provide tax relief to those who need it without breaking the bank.

Tax caps are not that solution. Artificial caps on growth in tax revenues is problematic for two main reasons.

First, these caps give tax breaks with no consideration to a homeowner's ability to pay-- basically asserting that no one, at any income level, can afford to have their property taxes grow beyond a certain rate. This is baloney. We know that property taxes are a lot more burdensome for low-income homeowners, taking a much bigger share of their income on average. This free-handed approach to tax cuts obviously costs a lot more than targeted tax relief alternatives such as a circuit-breaker or a homestead exemption.

Second, tax caps restrict the growth of revenues with no consideration for needed growth in spending. Lawmakers ought to be able to decide how much services they wish to provide, and then figure out a sensible way to raise enough revenue to pay for those services. With tax caps, it's a lot harder to lawmakers to come up with the money to fund education and other services. Of course, that's what the anti-tax advocates who support tax caps are counting on. But if Wisconsin lawmakers are going to scale back government (and I'm not saying they should), they ought to do it in an honest way that lets them evaluate the spending side and the tax side with as few arbitrary constraints as possible.

There's a lot of debate about the long-term impact of California's Proposition 13 tax cap. But the two most frequently cited effects are (1) less property tax revenue means public schools got a lot worse and (2) to some extent, impoverished local governments went and found other non-tax revenue sources to help provide services. Neither of these are really defensible as policy goals.

New Jersey: Fred Burke

One of the most influential guys I never heard of died last week. Fred Burke was the commissioner of education in NJ under Gov. Brendan Byrne between 1974 and 1980, and a principal architect of New Jersey's most important school funding reforms. This was a critical period for education funding in New Jersey. During his tenure, the legislature grudgingly complied with a court order to adequately fund schools. The lack of state-level taxes to supplement local property taxes was a big factor in the court's decision, and when the state finally balanced the books in 1976, they did it by passing a broad-based personal income tax.

This was pretty much the only option available for NJ: the court required the state to reduce disparities in education spending between poor and wealthy districts, which necessarily meant a big, big infusion of state aid. By all accounts, it was a politically painful process, but finally resulted in a broad-based income tax.

The New York Times has a very nice obit, and some columnist at the Star-Ledger wrote a snarky thing. Not much attention paid to this otherwise.

Back in the day, property taxes were the name of the game for state and local governments. When property values collapsed (and property taxes with them) in the Great Depression, a lot of states enacted state-level sales and income taxes to diversify the tax base. Some (like New Jersey) managed to hobble along with an income tax for a while. Others (like Tennessee) are still avoiding this basic reform even now, in 2005.

The few states that survived without at least one leg of the state tax "three legged stool" ( income tax, sales tax, property tax) for a few decades all started to construct their own mythology around their special tax status after a while. As a result, every state that has enacted an income tax in recent decades (New Jersey and Connecticut are the most recent examples) or that has considered it (Tennessee and New Hampshire) have seen protracted, sometimes violent battles over this proposed change. Opposition to an income tax is so much part of the political culture in New Hampshire that gubernatorial candidates of both parties routinely take "the pledge" not to enact one. Which is why people who canvassed NH during the November 2004 elections probably saw a lot of "No Income Tax" yard signs supporting the Democratic candidate, John Lynch (who ultimately won).

Current headlines make it clear that NJ has not exactly solved the basic problems of tax adequacy and high property taxes that prompted the reforms of the 1970s. But Fred Burke (whose name graces the Abbott v. Burke decisions that helped enshrine an adequate education as a basic New Jersey right) had a lot to do with getting New Jersey started down the long and painful road to an equitable and adequate education system. The state would likely be in a lot worse shape if not for Burke's efforts to achieve school funding adequacy.

No Supermajority in North Dakota

In the current political climate, it's hard enough to get lawmakers to talk openly about tax increases. But some state lawmakers in North Dakota are bent on making fiscal responsibility even harder to achieve. Fortunately, legislators have just rejected a proposal to impose a "supermajority" requirement for tax increases. The bill, HRC 3004, would have amended the state constitution to require a 60 percent vote of each legislative house to enact most tax increases.

How common is this supermajority approach to tax hikes? By one tally, 14 states have some form of supermajority or other form of legislative restraint on raising revenues.

Proponents of the supermajority rule argue that it requires lawmakers to reach a broader consensus when attempting to raise taxes. That's certainly true. But lawmakers ought to be able to make fiscal policy decisions on a level playing field: tax hikes should be no harder (and no easier) to enact than tax cuts.

And supermajority rules sometimes distort fiscal policymaking in ways that are less obvious. Take the case of Arkansas, where a 1929 constitutional amendment imposed a supermajority on all taxes in existence at the time. It turns out that the amendment's language does not apply to any tax (for example, the general sales tax) that was enacted after 1929. As a result, it's much easier for lawmakers to enact sales tax hikes than to enact income tax hikes-- and Arkansas legislators have responded to this incentive time and again in recent years.

The rules of the game should be used to make sure the game is played in an orderly way-- not to determine the game's outcome. But supermajority rules make it much harder for lawmakers to evaluate tax policy changes on their merits.

There may also be troubling questions about majority rule here. As Rep. Lawrence Klemin (R) of Bismarck noted, "In this country, we believe in majority rule, with an obligation on the part of the majority to respect the rights of the minority...However, under this resolution, there would be minority rule, with no corresponding obligation by the minority to respect the right of the majority."

I'm not sure how compelling this argument is, though. Both federal and state legislatures have procedures in place to give legislative minorities disproportionate power, as the current tug-of-war over Senate filibuster rules reminds us. I don't yet have a well-thought-out explanation of what makes the filibuster OK and the tax increase supermajority not OK. But putting all fiscal policy decisions, including tax hikes and tax cuts, on the same playing field would make me a lot more inclined to accept supermajority rules.

Corporate Tax Reform in Maryland

Lots of good corporate tax reform bills were discussed in the Maryland legislature's tax writing committees last week. ITEP's testimony on these bills is here.

SB 403 in the Senate and HB 676 in the House would require combined reporting of taxable income for multi-state corporations. ITEP has a nice policy brief explaining why this is a good idea. Here's a quick summary: Right now in Maryland and in maybe 20 other states, corporations that have subsidiaries in other states can report the taxable income of their subsidiaries on separate tax forms. This gives them an incentive to make it appear as if they're earning lots of income in subsidiaries that are located in low-tax states, and little income in their subsidiaries in high tax states. Combined reporting makes this "income shifting" impossible by requiring companies to report all of their subsidiaries' income on the same form.

The other bills, HB 1135 in the House and SB 748 in the Senate, would create a "minimum tax" to ensure that all corporations would pay some tax no matter how many tax loopholes they could otherwise claim.

The minimum tax is an important reform that many states haven't dealt with. No matter what you think of the corporate income tax, everyone can agree that something's wrong with some profitable corporations pay nothing in tax while their competitors pay at 35 percent. Corporate minimum taxes are designed to ensure that every company pays some baseline amount.

Why is Maryland discussing both combined reporting and the minimum tax? Because they tackle very different problems with the state corporate income tax. Combined reporting makes sure that all of a company's income gets reported in-state, but can't do anything to prevent lawmakers from then reducing taxable income using an array of special deductions or credits. A minimum tax just says that no matter which tax breaks you might otherwise be able to claim, you still have to pay some basic amount of tax.

Maryland lawmakers have very good reasons for being concerned about corporate taxes right now, about which more in a later post.

Cigarette Taxes. Again.

Here's a thumbnail sketch of the recent tax policy debate in one midwestern state:

As budget season starts, the state government faces a big projected budget deficit for the upcoming fiscal year. In the wake of a couple of years of austerity budgets that have cut spending to the bone, further spending cuts are no longer feasible as a budget-balancing solution. But the governor doesn't have the guts to propose general tax hikes , so s/he proposes a cigarette tax hike.

Pop quiz: in which midwestern state is this plot line NOT unfolding?
A) Illinois
B) Iowa
C) Michigan
D) Minnesota
E) Indiana

The answer: Indiana, where Gov. Mitch Daniels has better ideas (about which more in a separate post). Illinois, Iowa and Minnesota all have governors who have proposed (or have signaled their willingness to accept) cig tax hikes this year. Michigan's Governor Jennifer Granholm has not done so-- but only because she pushed through a 75 cents-per pack hike last year.

Taxing cigarettes is not an entirely bad thing. Smoking imposes some major social costs, and there's a lot of evidence that higher tax rates will encourage a lot of people to quit. In that sense, the cig tax is a decent social policy tool.

But these midwestern governors are not interested in using cig taxes as a social policy tool-- they're using them as a fiscal policy tool. They want to use the revenue from these taxes to pay for state construction projects (in Illinois), Medicaid spending (Iowa) or offsetting tax cuts (Minnesota).

This is a bad thing simply because cigarette taxes tend not to grow much over time. Unless you change the tax rate, the only thing that makes cigarette tax revenues go up is an increase in consumption. But that's not happening now, and hasn't been happening for about 30 years.

So in the long run, cigarette taxes will decline-- even as state spending on construction and health care continues to grow. Which means the states will have to find some other way of paying for all that good stuff they promised us.

Think Illinois taxpayers are skeptical of government now? Wait five years (or less) and see what they think when the next governor informs them that cig taxes weren't sufficient to pay for all that construction they were promised.