Politically Popular, But Misguided

We've discussed in earlier posts much of what Iowa's Governor Vilsack had to say about tax and budget issues in his Condition of the State Address. While the Governor stayed away from the "T" word (tax) in his speech, State legislators are doing a lot of talking about taxes and saying so. In fact, this week the Cedar Rapids Gazette reports that the Legislature will debate eliminating the tax on pensions and Social Security income. One House plan would completely phase out the tax on pension and Social Security income over 5 years.

There are several reasons why this proposal is misguided.

• It's just not necessary: As the Iowa Policy Project writes in their backgrounder "Older Iowans, Economic Security, and State Fiscal Policy" Iowans already enjoy a generous pension exclusion ($6,000 for singles and $12,000 for married filers). Also, about 2/3 of Iowans currently pay no tax on Social Security according to this issue brief. The poorest Iowans are already exempt from paying tax on their pension and Social Security income.
• Revenue Loss: The Gazette article says that by the time these taxes are fully repealed the cost to the state will be about $197.8 million. This means $197.8 less investment in Iowa, less education dollars, and less infrastructure for Iowa residents. As the baby boomers age the backgrounder above notes that reliance on state health care services will increase, yet the people most in need of those services won't be paying for them through the taxing of Social Security and pension income.
• False Hopes: On the other hand, backers of the plan to completely eliminate these taxes say that retirees and seniors will be likely to stay in the state because these taxes will be repealed. They argue that in fact the plan will eventually be revenue neutral. This simply isn't true. As this paper by Policy Matters Ohio notes it simply isn't true that families do or don't move to other states because of individual state tax structures. This policy issue brief from Iowa Policy Project notes that Seniors mostly just "stay put" as they age - elderly Iowans simply aren't likely to move to another state because of tax policies.
• Diminishing Tax Base: As the ITEP Guide to Fair State and Local Taxes says, "A narrow-based tax applies to fewer items...In general, broader tax bases are a good idea. At any given tax rate, a broad-based tax will raise more revenue than a narrow-based tax--because more is taxed." Not taxing these two forms of retirement income will create two huge holes in Iowa's personal income tax base, thus shifting the tax burden onto people without retirement income.
• Fairness: Fundamentally taxes should be based on people's ability to pay. Already, the poorest in Iowa are exempt from paying taxes on their retirement income. If wealthy Iowans have retirement income, why shouldn't they pay taxes on this money?

While it may be politically popular to completely eliminate the taxation of pension and Social Security income the passage of this legislation would result in increased unfairness in the tax code, an unnecessary change to the tax structure, huge revenue loss, and a diminished tax base.

QPAI: A No-Brainer for the States

You wouldn't know it from the wave of cigarette tax hikes being proposed by governors across the nation this winter, but a lot of states actually have some pretty sensible revenue-raising options to choose from as they seek to plug budget holes. A new ITEP policy brief takes a new look at an arcane, but important, corporate tax reform that is attracting increased attention among state lawmakers: decoupling from the "Qualified Production Activities Income" (QPAI) deduction that was created by the big federal corporate tax cut enacted in 2004.

"Decoupling" is an issue that arises anytime Congress passes a corporate tax cut that reduces the federal taxable income of corporations. Since almost all states tie their corporate tax to federal income definitions, federal corporate tax breaks usually end up reducing state corporate tax collections as well. So when the federal corporate tax sneezes, the states catch a cold. "Decoupling" is how states immunize themselves-- decoupling just means that states change their definition of taxable income to exclude tax breaks they don't want to go along with. In the case of QPAI, decoupling basically means changing a state's definition of taxable corporate income from "federal taxable income" to "federal taxable income plus whatever amount of QPAI deduction the company took." It's a simple change.

And, from the perspective of state economic development goals, it's an obvious change to make. At a time when lawmakers in many states are starting to ask more skeptical questions about the real impact of their own state tax incentives on corporate investment and employment patterns, this federally-imposed new state tax cut has to be the most expensive and worst-targeted state tax break imaginable: one that could reduce a state's corporate taxes by up to 5 percent-- with absolutely no linkage between the state's revenue loss and the level of corporate activity or employment in that state. Let's be clear: going along with this tax break amounts to rewarding corporations for doing exactly what they were already doing.

And yet, as the ITEP policy brief documents, almost 30 states have, so far, decided that they think this tax break is a good idea, and have gone along with the federal change.

Some states have already taken active steps to plug this loophole. Here's Massachusetts as an example of how simple this legislation can be. But the majority of states still stand to lose a lot of revenue by adopting QPAI.

If you want to know where your state's lawmakers stand on QPAI-- and whether this expensive deduction is currently blowing a hole in your state's budget--contact ITEP. Contact information can be found on the policy brief.

Hawaii: Lingle Strikes a Healthy Balance

Another day, another governor crowing over emerging budget surpluses. But compared to what we've heard in many states so far this year, Hawaii Governor Linda Lingle's State of the State address is getting positive early reviews. Her plan includes:

• increasing the income tax standard deduction to 75% of the federal amount;
• widening the income tax brackets (instead of $80,000, the 8.25% top rate would start at $100,000);
• introducing a new refundable tax credit designed to offset sales taxes-- $100 per family member, available to married couples earning less than $50,000
• a one-time refundable tax rebate of $150 per family member. This one has a higher income limit-- married couples earning less than $100,000 get it.

There's a lot to like here. A good chunk of the revenue loss from this plan would be a one-shot deal, thanks to the temporary tax rebate. And much of what's left is progressive, offering the most help (as a share of income) to low-income Hawaiians. The low-income tax credit is very clearly meant as a less expensive, better targeted substitute for the grocery tax exemption that at least four other states are considering right now-- and that's exactly what it is. On the whole, this package of reforms would give a needed jolt of fairness to a fundamentally unfair tax system.

Lingle clearly gets this: her State of the State address notes that "the bottom line is that we are collecting income taxes from people who simply can't afford to pay them."

The Honolulu Advertiser's editorial board is all over it. The Hawaii Tax Foundation is less impressed, accusing her of "pandering to the poor and middle class."

Lingle's strategy is apparently to co-opt her opponents' ideas-- the tax bracket expansion is an idea proposed by Senate President Robert Bunda. In fact, it sounds like the only salient tax reform idea she's not glomming onto is the Democratic proposal to enact an Earned Income Tax Credit.

A brief stop in Wonkville for complaints/comments:
1) Hawaii already has a low-income refundable tax credit with one set of rules. If Lingle's plan passes, it will have two, each with eligibility criteria that are different enough from each other to make things complicated but not different enough to have a real rationale. The smarter thing to do would have been to increase the existing credit.
2) There are certainly states where widening the brackets should be a priority. Take Alabama, where the top tax rate for married couples kicks in when your taxable income hits $6,000-- exactly as it did 70 years ago. Of course, when the income tax was introduced in 1933, $6,000 was the equivalent of $90,000 today. So a top tax rate that used to apply to the wealthiest few now hits 75% of all Alabamans. But Hawaii's not in the same boat. Right now married couples don't pay at the top rate until their taxable income hits $80,000. Expanding the top bracket from $80,000 to $100,000 is hardly a barn-burning need.
3) This package of tax cuts (pegged at about $200 million a year) may ultimately prove to be affordable-- but it would be nice to make sure. Closing a couple of unwarranted loopholes in the state's income tax code by taxing capital gains and pension benefits the same as regular income would go a long way toward ensuring the long-term adequacy of income tax revenues. And it's a lot easier to propose needed tax hikes when they're being used to finance needed cuts.

But all in all, Lingle's ideas are looking a lot fresher than what we're heading from the mainland these days...

The Rich REALLY Are Getting Richer....

Today our friends at the Center on Budget and Policy Priorities and the Economic Policy Institute released a really interesting study called Pulling Apart. The study, which was released nationally and in several states, documents the growing income inequality in this country. Questions like who were the economic winners between the early 1980s and the early 2000s and how much did the winners win by were answered in this report.

The results are pretty shocking even for those of us who think that the gap between the haves and have nots is already too broad - this helpful report gives us the data to back up this presumption. For example, in my home state of North Carolina, the poorest 20% saw an annual increase in their inflation-adjusted income of about $105 dollars a year over the past two decades, while the wealthiest experienced an average increase in their income of $4,050 per year! Wow! These figures tell me that if you are in the poorest 20% group it's real, real hard to move up the ladder. It's unbelievable to think that the richest 5% experience their income growing the equivalent of 4 new laptop computers each year, while the poor lag behind.

The authors found that the states with the largest income disparities between the poorest and wealthiest groups are:

• New York
• Texas
• Tennessee
• Florida
• Arizona

Obviously it's interesting to note that three of these states (Texas, Florida, and Tennessee) don't have broad based income taxes. These are also states that have very regressive tax systems, mainly because they lack an income tax. In states with regressive tax structures the poor pay more of their income in tax (in some cases, several times more) than do wealthier taxpayers. So not only are we seeing that the rich are getting richer, but in these states the tax system is actually accelerating this trend. No wonder the income gap is widening so much.

If you are interested in looking at what's going on in your own state with regards to the economic gap click here. If you're interested in learning more about your own state's tax structure click here.

Job Creation What?

In Newsweek, Allan Sloan has a new column about the job cuts at Ford and the American Job Creation Act of 2004. He makes a tongue-in-cheek point that "Congress should thank its lucky stars that federal truth-in-labeling laws don't apply to names it accords to legislation."

Here's the thing: Ford cut 10,000 American jobs last year. This year, they could cut up to 30,000 more. That's the population equivalent of a small city. This all went down at the same time that, as Sloan reports, "on page 2 of one of its news releases yesterday, Ford said that "repatriation of foreign earnings pursuant to the American Jobs Creation Act of 2004 resulted in a permanent tax savings of about $250 million." "

In other words, Ford is a company that the Republican tax incentive package was aimed squarely at. It is still faltering. Ford's tax savings was the result of "repatriating" about $850 million in foreign earnings during a holiday during which the rate was reduced to 5.25% from the standard 35% rate. So even a massive tax savings wasn't able to salvage the landscape for the automaker. And it was only a one-time shock of cash. Some might wonder how much worse Ford would have been hurt without the extra $250 million, but the point is that if the American manufacturing sector is going to make a comeback, it's going to take more than gimmicks. How about looking at major health care reform?

So, if the "Jobs Creation Act" didn't, you know, create jobs, then what did it do? Good question. Here's Sloan again:

American Enterprise Institute fellow Phillip L. Swagel, formerly chief of staff of Bush's Council of Economic Advisers, told my Post colleague Jonathan Weisman last August that "you might as well have taken a helicopter over 90210 [a Beverly Hills Zip code] and pushed the money out the door." That's a memorable quote—and a dead-accurate observation.

It'll be interesting to watch the State of the Union speech next week and see if the President calls for more the same failed policies or charts a new course. I've got a hunch we might be disappointed.

Tobacco, The MSA, and State Finance

Three columns--one by George Will, a second by Idaho AG Lawrence Wasden, and a third, written by Michael Siegel in response to the second--that were written earlier this month explore the impact of the tobacco settlement on state government finances.

Will asserts that the initial fraud case that accused big tobacco of fooling people into thinking that "low tar" cigarettes were healthier and thereby increased the cost of health care for state governments was more than a little dubious, and that the whole tobacco settlement might be unconstitutional because of a constitutional provision that states can't enter into compacts with other states without Congress' permission. Wasden retorts that the case has been reviewed so many times, in so many courts, that Will is standing on shaky ground by making such a claim.

Will is right about one thing--states have become over-reliant on cigarette-based revenue, whether from the tobacco settlement or from taxes. States have a public health incentive to reduce the incidence of smoking, but a financial stake in keeping people puffing away. Siegel goes a step beyond that and accuses several state Attorneys General of actually limiting the liability of tobacco companies (particularly with regard to other states) so that their own states do not risk suffering the loss of tobacco revenues, should the ruling ever change, or should smoking rates take a major dive.

From the perspective of state governments moving towards sustainable, stable revenue streams, all of these columns should stand as a warning. Tobacco settlement money should be viewed as a bonus, not as a cornerstone of a state's fiscal structure.

Taxes, The Budget, and Congressional Elections

My hope is always that budget issues get presented clearly come election time. With Congressional Elections a short 10 months away, AFSCME and SEIU are already running ads in Wisconsin that hit Mark Green (R-8).

The ad is notable because it connects each side of the ledger, tying tax cuts to increasing Medicaid co-pays, and reduced nursing home funding (the spot is particularly focused on senior issues).

Carrie Lynch has more details here.

Pataki: Watch Where You're Aiming Those Tax Cuts

Over at A Taxing Matter, Professor Beale points back our way, as she discusses Governor Pataki's new tax plan for New York.

Beale does a great job of contextualizing Pataki's plan. She writes: "More than half of the tax cut would go to those in the upper 10% in New York, and the state's estate tax would be eliminated. Id. New York deficits are expected to approach $4 billion by early 2009, due largely to the tax cuts projected." This is all particularly worrisome against the backdrop of public and private sector pension freezing.

Beale goes on to sum up the importance of distributive justice neatly:

Shifting taxes away from the rich at the same time that the rich are getting richer and the poor poorer does a double disservice--it keeps revenues from government that should support its programs, from disease intervention to counterterrorism, and it dumps more of the burden of supporting government programs on people who are increasingly struggling to manage.

Towards the end of her post, Beale gets into the problem of placing cash value on deeply moral decisions. It's a thought-provoking piece of writing, and well worth checking out. There are so many problems with Pataki's logic. He assumes that tax cuts will definitely "unleash" greater economic opportunity. He discounts the plain fact that tax cuts aimed directly at the richest citizens will not do very much for those with less income. But on top of the all of this (or perhaps underlying all of it) is the moral fiber of our government.

South Dakota's Deep Tax Freeze

Starting this year, more elderly South Dakotans will be eligible for the state's Property Tax Freeze program.

2004 legislation indexed the income limits for inflation starting in 2005. This year, the new indexing rule means that the maximum income you can earn and still be eligible for the credit goes up by about $550 for single taxpayers, from $20,440 to $20,990 and $25,550 to $26,240 for married couples. This may not sound like much, but over time it adds up. Check out ITEP's policy brief on indexing tax laws for some dramatic examples of this.
In addition to the income thresholds, there are a few more conditions that apply:

• Homes worth more than $150,000 are not eligible;
• You must be 65 or older, or disabled, to be eligible;
• You must own your home--renters need not apply.

As property tax freeze programs go, this is a pretty good one because it's got income limits. This keeps the cost of the tax freeze down and ensures that South Dakota property tax relief dollars are being targeted to homeowners for whom these taxes are more burdensome. However, like most property tax freezes, it only goes to elderly homeowners. The elderly are not the only ones who are susceptible to unaffordable property taxes--low-income homeowners and renters can be hit equally hard by property tax bills.

Perhaps the most problematic feature of the property tax freeze in general is that it doesn't make any kind of judgment about whether a given retiree's property taxes are "too high" in any given year-- it just says they can't grow anymore. A freeze obviously offers relief to eligible homeowners, but make no distinction between those taxpayers facing truly oppressive property taxes to begin with and those whose property taxes are relatively low. Everyone gets the same "freeze."

A better approach would be for South Dakota lawmakers to scrap the state's property tax freeze program and opt instead for a means-tested circuit breaker that doesn't care when your birthday is or if you own or rent. Property tax relief should be based solely on a household's ability to pay, not age or ownership.

Faith In Taxes

Out of Ohio:

More than 30 local pastors last night officially accused two evangelical megachurches of illegal political activities.

In a rare and potentially explosive action, the moderate ministers signed a complaint asking the Internal Revenue Service to investigate World Harvest Church of Columbus and Fairfield Christian Church of Lancaster and determine if their tax-exempt status should be revoked.

The grievance claims that the Rev. Rod Parsley of World Harvest Church and the Rev. Russell Johnson of Fairfield Christian Church improperly used their churches and affiliated entities - the Center for Moral Clarity, Ohio Restoration Project and Reformation Ohio - for partisan politics, including supporting the Republican gubernatorial candidacy of Secretary of State J. Kenneth Blackwell.

The reason religious organizations receive tax exemption status is because public policy deems that they have a certain standing worthy of this consideration. In order to qualify for this consideration, religious organizations must follow the rules. Therefore, religious organizations have a choice, they can preach overt partisan politics and foregoe their tax exempt status or keep the overt partisan politics out and maintain their exempt status. Religious organizations shouldn't be able to buck the system and have it both ways. However, it's not that easy. As with credits/exemptions in general, the difficulty is always in the details. In this instance, making the distinction between overt political activity and general statements that happen to include politics is blurry. This blog has tackled the issue before and there's an insightful take on it over at A Taxing Matter.

Georgia: Illegal Immigrants Pay Taxes Too

Georgia lawmakers, always on the prowl for opportunities to cut the costs of public services, have been making a lot of noise recently about the allegedly exorbitant costs imposed on the state by providing services to illegal aliens.

The Georgia Budget Policy Institute released a clever study earlier this week that takes a stab at quantifying the obvious response: that illegal aliens do, in fact, pay plenty of taxes to support the public services they consume. Starting from the premise that there are certain taxes (primarily sales taxes, excise taxes, and indirect property taxes in the form of higher rents for renters) that hit illegal aliens just as hard as Georgia citizens, GBPI estimates broadly the amount of these taxes that aliens likely pay to Georgia state and local governments each year at somewhere between $215 million and $250 million.

The methodology behind the report is hardly rocket science-- the economic behavior of undocumented aliens is very hard to measure accurately-- but it's based on the best available data. And GBPI goes out of its way to explain exactly how it derived its estimates-- and what could be wrong with them. It's a level of data transparency and honesty that other fiscal policy groups should shoot for in this sort of report.

State newspaper coverage can be found here and here. Continuing the long tradition of newspapers going out of their way to "out" nonpartisan think tanks that express any sympathy for, say, adequately funding public services, here's how the Journal Constitution described GBPI:

GBPI says it is a nonprofit, nonpartisan organization, though it is supported by and has received funding from groups advocating "progressive" social change and activism.

As if the only way to achieve "nonpartisan" status was to accept funding only from groups who believe everything is just fine in the world...

Pataki's Tax Cut Spending Spree

Here's more State of the State news ....

In his State of the State address, New York Governor George Pataki announced plans for a whole plethora of tax cuts:

• Eliminate the "marriage penalty"
• Eliminate the estate tax
• Provide a $500 heating fuel tax credit for elderly residents
• Reduce the top personal income tax rate from 6.85% to 6.75%
• Increase the income threshold against the top personal income tax rate for married filers
• Eliminate the Alternative Minimum Tax for businesses
• Reduce the top business net income tax rate from 7.5% to 6.75%
• Allow businesses to immediately expense the costs of capital investments (rather than over a multi-year period)
• Create a two-week sales tax exemption for clothing purchases under $250
• Increase property tax exemption amounts for seniors
• Create school tax rebate program
  

The Nelson A. Rockefeller Institute of Government reports that Pataki's tax cuts would reduce state revenues by nearly $3.5 billion when fully implemented. Additionally, the Rockefeller Institute reports that the Governor proposes to offset the first budget year's cuts (New York doesn't require out-year projections to be balanced) with reductions in state spending on tuition assistant, state support for state and New York City universities, changes in welfare, changes to state support for mental hygiene and capping Medicaid costs. In essence, these tax cuts "place more money in the pockets" of New Yorkers, unless they're a state college student or parents of a college student, you're a family that requires state assistant for life's essentials or you're in need of medical support. And these cuts to services are only for the first year of the tax cuts - imagine the cuts necessary to fully offset the full $3.5 billion. Furthermore, Pataki didn't provide an answer to the court case that requires the state to provide nearly an additional $9 billion annually towards public education.

Arizona: Napolitano Puts the Brakes on Tax Cuts

Continuing our survey of gubernatorial tax proposals:

In the context of recent proposals by Arizona Republican legislative leaders to enact large, permanent income tax cuts, the tax ideas in Governor Janet Napolitano's State of the State address seem relatively tame. She's been careful to contrast her limited, targeted approach to tax cuts to the "across the board" income and corporate rate reductions trotted out by the GOP. But there's some interesting stuff here.

The cleverest idea she trots out is a restructuring of the state's annual car tax to provide tax breaks for fuel-efficient cars. The speaker of the House says it's a regressive idea:

House Speaker Jim Weiers called it both anti-family and anti-poor. "A lot of times when you've got the larger families they have the bigger cars, which means that they get the worst gas mileage," he said. The poor, who can't afford newer, more fuel-efficient vehicles, would get no relief, he said.

I'm not sure I buy this argument-- I haven't seen studies that try to show how fuel-efficiency varies with income levels--but if Arizona lawmakers are that concerned with "anti-poor" tax provisions, they could start by looking at the gross inequities in the sales-tax heavy system that already exists.

The other interesting idea she's got is a tax credit for small employers who provide health insurance to their employees. Details are vague at this point, but the general idea is that companies with between 2 and 24 employees can get a $1,000 tax credit. No word on whether that's per-employee-covered or what-- and no word on whether the credit is available to companies who are already covering their employees (in which case it's a reward for something they're already doing). But this is worth keeping an eye on, not least because it's the leading edge of an interesting trend where states using tax carrots (or, as folks are debating in Maryland and Massachusetts right now, sticks) to encourage companies to do the right thing with health care coverage. We'll report more on this trend in the near future.

Georgia School Superintendents Association Critiques Governor's Budget

Simply because I can't get Governor Perdue's ridiculous proposal of giving $100 Gift Cards to Georgia teachers out of my head (see January 17 post), I wanted to share this report from the Georgia School Superintendents Association (GSSA).

They divide the Governor's proposals into a couple different categories including the "good, not-so-good, and the ugly."

Here's what they have to say about the "not-so-good" idea of gift cards:

The more appropriate (but less politically efficacious) solution would be to fund an appropriate amount for classroom supplies in the QBE [Quality Basic Education]formula, thereby making it possible for all teachers to be provided what they need without having to go shopping for it.

I say, "Right on GSSA!" The state simply hasn't sufficiently funded school supply budgets. The report says:

Only once since 1991 has there ever been an increase in the amount earned for materials and supplies used in the classroom.

Perhaps this "Election year gimmickry" will shed some light on the real issues facing education quality in Georgia.

Interestingly, the GSSA says "the ugly" from the Governor's proposals is the so called "65% solution." (Also mentioned in the January 17 post). The GSSA points out that this proposal attempts to lump all school districts together and force them into a "one size fits all" equation even though schools face diverse challenges, students, and even geography.

Here's a good example that is alluded to in their report, urban and rural schools have different needs. A rural school may need to employ bus drivers, while the urban school has no such need. In the "65% solution" world costs outside of the classroom, like transportation expenses, account for only 35% of a school's budget. The rural school district may not be able to meet the demands of a 65% in classroom expense budget. It's seems quite clear that this proposal would actually create more chaos and do more harm than good.

Illinois: More Bold Tax Proposals from Blagojevich

A lot of water has gone under the bridge since Illinois Governor Rod Blagojevich got elected on a "no new taxes" pledge in 2002. Blagojevich has pushed through a variety of "fees" and raided the state's pension fund for a cool $2 billion rather than confronting the very real structural problems facing the Illinois tax system-- all the while touting his allegedly painless solutions to the state's fiscal woes. Observers of last year's pension debacle could be forgiven for thinking that after all these fiscal contortions, the governor might learn the error of his ways.

But so far, it sounds like 2006 will bring more of the same. Even before delivering his State of the State address, the guv was lobbying hard for his plan to pay for educational infrastructure improvements using keno revenues (a kind of video lottery). From Monday's Tribune, here's a Blagojevich deputy on why this is the perfect way to pay for schools:

"Gov. Blagojevich wants to build new schools, and I'm sure many legislators do too," said Blagojevich's deputy governor, Bradley Tusk. "This is a way to do it that doesn't raise costs or taxes for anyone."

Except gamblers, of course. But who's counting them?

The governor's State of the State speech earlier today played down the gambling proposal, but included a proposed $1,000-per-kid tax credit for students in Illinois public or private colleges. If you live in Illinois and your kid attends an Illinois college, you get a $1,000 tax credit for each of the kid's first two years-- if your kid maintains a B average. If the credit is structured like the K-12 education credit that already exists, it will be nonrefundable-- meaning that low-income Illinoisans who don't have $1,000 of income tax liability will be ineligible for the full credit. While these nitty-gritty details aren't hammered out in the gov's speech, it's worth keeping an eye on.

For adherents to the "glass half full" school, you should know that the governor boldly chose not to renew his no-new-taxes pledge in his speech. But that's a far cry from the openness that's been shown by Democratic candidate Edwin Eisendrath, who called Blagojevich's no-new-taxes pledge from 2002 a "shame for Illinois."

Maybe the DLC sent Blago and every other Democratic governor a memo explaining that even implicit support for tax hikes is political suicide for those aiming for the 2008 presidential nomination. If so, Iowa's Tom Vilsack and new Mexico's Bill Richardson clearly have taken this memo to heart. But it doesn't have to be that way. Outgoing Virginia governor Mark Warner saw the fiscal writing on the wall and made revenue-raising tax reform the hallmark of his administration-- and the Dems I know seem a lot more energized about a Warner presidency than about the interchangeably tax-averse gang from Illinois, Iowa and New Mexico. Let's hope that the Warner pattern-- if not a profile of courage, at least a display of fiscal integrity--is what Dem governors emulate between now and election day.

$100 Gift Cards for Georgia Teachers

This has to take the cake.

In what is perhaps the best election year antic that I've seen lately, in his State of the State speech, Georgia Governor Sonny Perdue introduced a new program that would give each teacher in the state a $100 gift card. He describes it this way:

Teachers buy extra pencils and notebooks for their students … decorations for the bulletin board … materials for a class project … the list is just about endless. But the important point is that teachers are spending their own money to help our children learn.
That dedication deserves recognition. It also deserves a little bit of extra help from us. That’s why I’ve included $10 million in my budget to provide every Georgia teacher with one of these … the Classroom Gift Card.

The Classroom Gift Card works just like the store gift cards that many of us found in our stockings at Christmas. Each Classroom Gift Card will be worth 100 dollars that teachers can use to purchase school supplies during Georgia’s Back To School sales tax holiday this fall. It’s just one more tool we can provide our teachers to help them do their important job.

The Governor's "generosity" doesn't give me a warm and fuzzy feeling. If teachers are spending their own money on supplies, the state shouldn't encourage this by giving out gift cards, instead the state should make more pencils, paper, markers, and project supplies available. Some are calling this a bribe for votes come November, I'm inclined to call this a lack of leadership. The Governor would be doing a better service to Georgia's children if he directed that $10 million to ensuring that teachers and students have the supplies they need.

My colleagues have also mentioned a couple of other reasons why these gift cards may not be all they are cracked up to be. There is much concern in the state that this gift card policy violates Georgia's bribery laws. Afterall, who is to say that a teacher won't end up buying a single pencil for the full value of the card from his/her friend who owns a school supply store. Of course, we all like to assume that teachers wouldn't behave in this manner, but it's obviously possible that cards will be lost and who knows how those tax dollars would be spent then?

Secondly, if the gift cards function like the ones I got in my Christmas stocking (as the Governor proposed in his speech) then there is no guarantee that teachers will actually spend their gift card on school supplies. Again, no one likes to assume the worst from an educator, but this raises the important issue of accountability and this gift card system offers no room for that.

While Governor Perdue is trying to give away gift cards to teachers, he's simulataneously pushing policies that would hold local school districts hostage by asking the Legislature:

to establish a standard for local school districts to spend at least 65% of their budgets in the classroom.

This so called "65% Solution" (which is being pushed by conservative lawmakers across the country) is another gimmick. Education and child advocates are right to argue that this proposal offers no solution at all. In fact, following this arbitrary formula would mean that in some cases school departments like libraries, media centers, and guidance counseling services would be completely cut from a school's budget.

There are certainly improvements that need to be made in school districts across the country, but offering gift cards and phony solutions aren't the answer. Let's hope other lawmakers across the country don't follow Governor Perdue's lead.

What do you think?

South Carolina: The State Makes Sense

South Carolina legislators in both houses have been grappling with how to lessen the property tax burden on South Carolinians. In an attempt to make the tax system more fair most legislators have decided to "throw the baby out with the bath water." Instead of looking at targeted ways to provide property tax relief for those who most need it - there is talk of a massive upheaval taking place. This upheaval is a type of tax swap, which basically eliminates property tax and replaces those lost revenues with increased sales taxes.

The State (South Carolina's major newspaper), published a very good, common sense explanation in Sunday's paper as to why the unfairness inherent in this "tax swap" in not the way to fix South Carolina's tax structure.

Eliminating property tax and replacing it with sales taxes may seem fair and an easy way to balance the state's tax system. However, as this editorial notes when fixing a tax structure the question should not be about whether proposals are popular with the public, but if these plans do more harm then good.

As currently proposed, the tax swaps in both the House and Senate most certainly do more harm than good. Legislators should go back to the drawing board and introduce tax a plan that inroduces fairness, adquacy, and stability into South Carolina's tax structure.

Iowa: More Details on Vilsack Budget Proposals

More news from Iowa, where we reported a couple of days ago that President-in-waiting Tom Vilsack was using his final Condition of the State address to push a singularly timid vision of tax reform. Funny thing about not being willing to use the word "tax" in your speech-- it tends to give a low profile to all your tax ideas, even the smart ones. The Iowa press lost no time in seeking out the all-important opinion of local beer wholesalers on Vilsack's proposed beer tax hike, but utterly failed to mention that Vilsack also wants to enact combined reporting, a needed corporate tax reform.

Of course, that could be because Vilsack's speech didn't contain a peep about this either. Check out ITEP's policy brief on combined reporting to find out more. As with the cigarette tax, combined reporting is a windmill at which Vilsack has tilted previously-- better luck to him this time around.

Meanwhile, Vilsack continues to push all the wrong buttons in rationalizing his cig tax proposal:

[H]e said revenue from the hike would repay money owed to the Senior Living Trust, as well as capitalize an insurance pool that would help small businesses pay catastrophic health-care costs for their workers.

We've said it before: cig taxes should not be about the money, but about curbing smoking.

Indiana: Daniels Proposes Tax Hikes, Reforms

In his State of the State address yesterday, Indiana Governor Mitch Daniels uncorked several tax-related ideas. Daniels wants to hike the cigarette tax, give local governments new revenue-raising options, and reform the property tax assessment process.

On the cigarette tax, Daniels made pretty much the same pitch we heard from Iowa's Tom Vilsack a day earlier. Daniels wants to hike the state's cigarette tax by 25 cents a pack. But unlike Vilsack, who would use these revenues to fund health care, Daniels doesn't seem to be counting his winnings yet:

...no single step we could take would matter more than reducing the percentage of Hoosiers, particularly young Hoosiers, who smoke cigarettes. All the evidence shows that the most effective way to deter young smokers is at the cash register. I ask this Assembly to raise Indiana’s lowest-in-the-Midwest cigarette tax by at least 25 cents a pack.

In other words, it's not about the revenue-- it's about discouraging smoking. This is exactly what you want to hear from any lawmakers proposing a cig hike. Cig taxes have a proven track record of discouraging smoking. Their track record on revenue-raising? Er, not so hot.

The second tax idea from "the Blade" was pretty vague, but probably a good one:

I call on the General Assembly to liberate localities to raise funds from sources other than the overused and unfair property tax. And to begin assuming the costs of caring for endangered and abandoned children at the state level, also reducing property tax burdens in every county.

Even when it's well-administered, the property tax shouldn't be the only tax option available to localities. It's an unfair tax that can fund terrific schools in wealthy districts while funding subpar services in less well-endowed areas. Augmenting the property tax with a new local-option income tax (as some lawmakers tried unsuccessfully to do last year) could help equalize resources between poor and wealthy districts. And funding more services at the state level, as Daniels suggested here, would almost certainly have an equalizing effect. So this seems like good stuff.

The third prong of Daniels' tax manifesto is unambiguously a good thing: he wants to professionalize the process by which property is assessed for tax purposes.

Scattered authority produces bizarre tax assessments in which identical houses just blocks apart are taxed at widely different levels... I ask the local officials of our state to endorse and help effect the end of the archaic township assessment system and the transfer of this failed process to the level of our 92 counties.

He's proposing this for a good reason: a recent study by the Indiana Fiscal Policy Institute found a troubling lack of uniformity in assessment standards and quality between the many local governments in charge of this process in Indiana. Tax "fairness" is sometimes in the eye of the beholder--but almost anyone can agree that, as Daniels says, similar properties should be valued similarly. Period. Unpredictability in the assessment process breeds suspicion of the tax system and of local governments.

Of course, Daniels remains "the Blade," as he was known during his budget-slashing days as director of the federal OMB. So you're not gonna hear him talk about making the state's income tax more progressive (of the six states with flat-rate income taxes, Indiana is the only one that's not constitutionally required to be that way). You'll see nothing in his speech about the chronic unfairness of Indiana's tax system as it affects lower- and middle-income taxpayers. And you won't hear a peep about the decline of the state's corporate income tax due to clever tax avoidance schemes.

But Daniels' critique of the state's messy local property tax system is dead on. And if he wants to hike a regressive tax-- well, at least he's doing it for the right reason.

Iowa: Vilsack's 2006 "Tax Reform" Agenda

On Tuesday, Iowa Governor Tom Vilsack gave his final "Condition of the State" address. Vilsack's tax proposals are as notable for what they ignore as for what they address.

In a state that has seen interesting and vital debates over property tax reform and flattening the state income tax rates in recent years, Vilsack got through his final shouting-from-the-rafters speech without even uttering the word "tax."

This doesn't mean he avoided fiscal matters entirely, of course: Vilsack does want to make two changes to the tax system, increasing the cigarette tax by 80 cents and hiking the beer tax by 10 cents a gallon (or about 6 cents per six-pack). The cig tax hike would raise $130 million for health care; the beer tax would bring in $7 million for general purposes.
(Vilsack got away with proposing these hikes while avoiding using the dreaded "T word" by calling for "increasing the fees and cost of tobacco products" in his speech, and simply not mentioning the beer tax.)

In the immediate wake of Vilsack's speech, David Yepsen argues that drinking beer is less of a sin than lighting up a cigarette-- and that the case for hiking the Iowa beer tax is less compelling as a result. Whatever the social consequences of beer drinking, Yepsen is correct about one thing-- like the cig tax, a higher beer tax would make Iowa's already-regressive tax system even more so.

The GAO Speaks Truth to Power

Every year around this time, the US Treasury Department releases its annual "Financial Report of the United States Government," which is supposed to give a sense of our nation's budgetary health. And every year the General Accounting Office (GAO) includes a statement in the report confirming that the Treasury Department's statements are accurate.

This year (as they have for the past eight years), the GAO is withholding judgment. The Treasury's new fiscal year 2005 Financial Report includes a statement from the GAO that pointed to a wide variety of "material deficiencies in financial reporting." The government's inability to accurately measure the flow of funds between different agencies, the incomplete status of tax expenditure reporting (read more here) and the fact that some pretty hefty spending needs are not reflected in the Treasury's fiscal reckoning "[prevent] us from expressing an opinion on the federal government’s consolidated financial statements."

That's about as non-judgmental and dry as you can get in assessing the Bush administration's fiscal policies, but wait: it (gradually) gets better.

The current financial reporting model does not clearly and transparently show the wide range of responsibilities, programs, and activities that may either obligate the federal government to future spending or create an expectation for such spending. Thus, it provides a potentially unrealistic and misleading picture of the federal government’s overall performance, financial condition, and future fiscal outlook. The federal government’s gross debt in the consolidated financial statements was about $8 trillion as of September 30, 2005. This number excludes such items as the gap between the present value of future promised and funded Social Security and Medicare benefits, veterans’ health care, and a range of other liabilities (e.g., federal employee and veteran benefits payable), commitments, and contingencies that the federal government has pledged to support. Including these items, the federal government’s fiscal exposures now total more than $46 trillion, up from about $20 trillion in 2000. This translates into a burden of about $156,000 per American or approximately $375,000 per full-time worker, up from $72,000 and $165,000 respectively, in 2000. These amounts do not include future costs resulting from Hurricane Katrina or the conflicts in Iraq and Afghanistan. Continuing on this unsustainable path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security.

Hot stuff. GAO chief David Walker has repeatedly made waves for telling the truth about the fiscal iceberg our ship of state is approaching for a while, as this entertaining article recounts. Walker was appointed as GAO director in 1998, and has a 15-year term-- so he can tell it like it is with no fear of retribution. He-- and the GAO-- are resources we shouldn't take for granted.

Criminalizing the Earned Income Tax Credit

David Cay Johnston has an important story in today's New York Times. Turns out, the IRS has been withholding refunds from a significant number of poor Americans for the last five years.

Tax refunds sought by 1.6 million poor Americans over the last five years were frozen and their returns labeled fraudulent, although the vast majority appear to have done nothing wrong, the Internal Revenue Service's taxpayer advocate told Congress yesterday. A computer program identified the refund
requests as suspect and automatically flagged the taxpayers for extra scrutiny for years to come, the advocate said in her annual report to Congress. These taxpayers were not told that the I.R.S. criminal investigation division suspected fraud.

The advocate, Nina Olson, said the I.R.S. devoted vastly
more resources to pursuing questionable refunds sought by the poor - which under the highest estimate is $9 billion - than to the $100 billion in taxes not paid each year by people who work for cash and either fail to file tax returns or understate their income.

As for the suspected fraud in refund requests, Ms. Olson said her staff sampled the suspect returns and found that 66 percent were entitled to the amount sought or more. Another 14 percent were due a partial refund. She expressed doubt that many among the remaining 20 percent had committed fraud.
....
"At a minimum, this procedure constitutes an extraordinary violation of fundamental taxpayer rights and fairness," Ms. Olson wrote, adding that it "may also constitute a violation of due process of law."

This is just another example of the fundamental disrespect for government that this Republican administration has. It also reflects their prority, through either legislation or abuse of power-as in this case, of offering major giveaways to the rich while cutting necessary public services for everyone else. In this case, it might amount to essentially stealing from those who can't afford a tax lawyer to watch their backs. This action by the IRS, and Senator Chuck Grassley's response, reflect a toxic assumption that poor people must be criminals. This is an example of lowered-expectation governance. A lot of people who need it the most seem like they've lost a whole lot of money here. Lets hope this gets straightened out, and fast.

A Measure of Justice for Kansas' Students?

A new study by a Kansas legislative commission has found that in order to meet court-ordered school standards, the legislature will need to add between $316 million and $399 million to the education budget for the next school year.

The big question that jumps out at me, given the glaring discrepancy between the amount of money that they are talking about for next year, is will Governor Sebelius and the legislature be able to work together and be bold enough to come up with a long-term sustainable solution or settle for the quick fix?

Reviving Philadelphia Through Tax Abatements?

Today's New York Times has a summary of an interesting tax abatement program that's been used by the City of Philadelphia since 1997 to encourage redevelopment of the city's shrinking core. If a developer renovates or redevelops an old abandoned warehouse into residential property, the property keeps its pre-renovation value, for tax purposes, for 10 years. For property in run-down urban neighborhoods, this works out to be a sweet deal. In 2000, the program got expanded to include new construction anywhere in the city limits. So since 2000, if you build a new home in Philly, all you're paying taxes on is the land. For the next ten years. No matter how rich you are.

On one level, this is clearly a good thing: in most of our oldest cities around the northeast, the inner core has been steadily losing population to the suburbs for decades. And this tax abatement is being given a lot of credit for helping to change that. Most people agree that the best antidote to suburban sprawl is a thriving inner city, so if this tax break is helping achieve this goal, that's a really good outcome.

But there's a downside. First, according to a Philly Inquirer article, this tax break is now costing the city $30 million a year. Second, not to sound like a broken record, but every special tax break is really a tax shift, forcing someone else to foot a little bit more of the bill. The long-time homeowners who lived in Center City during the declining years of the city aren't getting a tax break from this provision. In fact, as the area becomes more desirable and their assessed values shoot up, they're paying more property taxes. When the long-term residents are paying exponentially more property taxes than newly gentrifying yuppies, it's hard to see how that satisfies anyone's definition of fairness.

Parenthetically, Washington DC has had a somewhat similar but better-targeted tax break in place since 1997. It's a $5,000 federal income tax credit for first-time homebuyers who purchase a home in certain areas of the District. It's a one-shot deal-- you get the credit the year you buy the house. And if your income exceeds a certain limit ($130,000 for a married couple), you don't get the credit. This study by the Fannie Mae Foundation calls the program a "success" because the nearly 22,000 people who claimed this credit between 1997 and 2001 represented about 77% of all the homes bought in the District during this period! This beats the Philly break on two counts: it's only for first-timers, and it has an income limit.

There are unanswered questions about both cities' approaches, though. As a first-time homeowner who bought in DC in 1998, I can testify that the housing boom was really getting underway by the time I made my home-buying decision-- and it's certainly never stopped since. The first thing I thought when I heard about this tax credit was that sellers were probably adding $5,000 to their asking price for any home they sold. If sellers are the ones getting this tax break in the end, it's hard to see why (in a hot real estate market) that's a good idea.

In Philly, the same sort of question can be asked (and, according to the Inquirer article, is being asked) about their tax abatement. Once a real estate market becomes hot, as Philadelphia's center city apparently has, general tax abatements may no longer be necessary to get people to buy. And sellers may be capitalizing some of the value of the abatement into higher sales prices for these homes.

As with any tax break that's contingent on your behavior, the critical question is whether people are really changing their behavior to get these breaks. A lot of DC folks (myself included) would have bought with or without the $5,000 credit. And at this point, I bet a lot of retro lofts are being built in downtown Philly that would find a quick buyer whether there was a tax abatement or not.

At the very least, this sort of program should have an income limit so that the tax abatement is made available only to those new (first-time?) home-owners for whom the prospect of paying property taxes on their purchase is enough of a deterrent to keep them from buying.

Philadelphia-- and Pennsylvania-- have bigger property tax-related fish to fry, of course. Having a good circuit-breaker style low-income property tax credit in place could help mitigate some of the tax shift (to long-time residents) the abatement is likely causing. But the way things are now, it sounds like redevelopment in Philly's Center City doesn't need training wheels anymore-- which means that the only real impact of this break these days is to enrich the gentrification classes at the expense of long-time city homeowners and renters.

Gambling With Sales Taxes

As more and more states begin to legalize gambling and rely on its subsequent revenue to bring in more taxes, there's an interesting issue that needs to be addressed, the effect of gambling tax revenues on the sales tax.

A recent special report in the December 26, 2005 issue of State Tax Notes takes a look at just that. Written by Jim Landers of the Indiana Legislative Services Agency, his study found in the literature and through his own analysis that:

... casino wagering can displace taxable consumer expenditures and, as a result, sales tax revenue.

More simply put, new public revenues coming from gambling may not turn into as much additional revenue as hoped for because sales tax revenue may decline as a result. The more people spend on gambling, the less they'll potentially spend on items subject to the sales tax. This is an important consideration to account for when policy makers look to gambling revenues as an additional revenue source.

From the Silk Purse Department: the "AMT Assistant"

It's now January 2006-- which means that temporary Alternative Minimum Tax relief enacted for tax years 2004 and 2005 has expired. Unless Congress acts to extend the temporary increases in the AMT exemptions, millions of more Americans will be drawn into the AMT.

As we've argued before, there is an obvious solution to this problem: increase the exemptions permanently. One would think that Congress might seize on this one pretty easily, not least because the clock is ticking. But the folks at the IRS don't seem to have much faith that Congress will get its act together, judging from the January 4 debut of the "AMT Assistant" on the IRS website. It's a clever, mostly simple interactive tool that you can use to determine whether you'll need to worry about the AMT next year. And hurrah for the IRS for coming up with this.

But it's a helluva poor substitute for a Congressional agreement to preserve the AMT.

Federal Regulators Do the FASBury Flop

Everyone remembers the spectacular flameout of the Enron corporation a few years back. But federal regulators seem not to have learned any lessons from the Enron debacle, if a recent ruling by the Financial Accounting Standards Board (FASB) is any indicator.

Most people remember that Enron wildly overstated its profitability on its financial statements-- but few remember how it was done. This article describes one of the tax loopholes that made Enron's phantom profits possible.

In hindsight, we know that many of the tax breaks cooked up for Enron and other companies by Arthur Andersen and their ilk were phony, insubstantial tax maneuvers designed with no other purpose than to reduce the taxes paid by the biggest and most profitable corporations.

With this in mind, FASB decided this past summer to make it harder for companies to use doubtful tax shelters. A proposed FASB regulation, available on the FASB site here, would have required that companies claiming dubious tax breaks should only be allowed to record these tax breaks on their financial statements if "that position is probable of being sustained on audit based solely on the technical merits of the position." In other words, firms shouldn't be able to claim newfangled tax breaks unless they have a pretty good reason to believe they would stand up to legal scrutiny. In the reckoning of tax accountants, the new rule was understood to mean that any tax break should have at least a 70% to 80% chance of actually being legal.

After publishing the proposed rule this past summer, FASB opened up the floor to public comments. As you can see here, the rule attracted 119 comments, all but two of which were from irate corporations who felt that such a rule would diminish the creativity of their accounting. The two comments from outside the corporate world, from Senator Carl Levin and the Tax Justice Network, supported the proposed rule as a way of preventing a torrent of creative corporate accounting a la Enron. As Levin's letter put it:

If companies knew that they were required to meet a "probable" standard before they could incorporate a tax position into their financial statements, it would not only protect the integrity of their financial reports, but also reduce the incentive to buy a risky tax shelter for the purpose of reporting more favorable financial results.

Unfortunately, these two voices were drowned out by 117 corporations eager to preserve their liberty to create new and unimagined tax shelters-- and FASB retracted the proposed rule. In place of the proposed 70% rule, FASB decided instead to use a 50% rule-- in other words, that it should be more likely than not that any new tax break will stand up to legal scrutiny.

No one-- whether it's individuals or corporations-- should be able to make up dubious tax shelters and hope they get away with it. The draft standard put forth by FASB this past summer would have made a good start toward restoring the integrity of financial statements--an important goal in the post-Enron era. But now that FASB has backed away from applying a heightened level of scrutiny for Enron-style accounting shenanigans, corporations are now once again free to roll the dice on shady tax schemes with little fear of reprisal.