April 26, 2006

South Carolina: Breaking New Ground on Property Tax Reform

South Carolina senators continued their never-ending debate over how best to achieve property tax reform last week--and finally threw in the towel until early May. While much of the debate was familiar-- anti-tax lawmakers continue to muddy the waters by insisting that the only way to prevent Palmetto State families from being taxed out of their homes is to completely repeal the school property tax-- one interesting development is a plan that would create a big and bold property tax circuit breaker.

South Carolina is one of the few states without a circuit breaker of any kind-- but this proposal would go from zero to 60, rebating all property taxes exceeding five percent of a homeowner's income for anyone earning less than $40,000. The proposal was in an amendment that got rejected, but you can read the text in the Senate's journal here.

There are design issues to complain about here-- no relief at all for renters, and five percent is probably too high a threshold to be really effective for low-income homeowners--but a circuit breaker that has no cap on the allowable credit would be unprecedented. Every circuit breaker in existence has a maximum credit amount-- this one apparently doesn't.

Circuit breakers always give property taxes a little hint of the "ability to pay" principle that income taxes implement so well, so adding a circuit breaker amounts to changing the property tax to more of a hybrid property-income tax-- but an uncapped circuit breaker is a bold attempt to precisely define the limits of a homeowner's ability to pay, basically asserting that no low-income South Carolinian's property tax should EVER exceed five percent of their income. It would make the South Carolina property tax a lot more like a (flat-rate) income tax.

This would be expensive, although certainly less so than the other proptax reform solutions being thrown around the Palmetto State. It would be potentially hard to administer, since you need to know each family's total income as well as their total property tax to decide whether they get it. And it would arguably be better to save a little money by putting a cap on the allowable credit and then lowering the %-of-income threshold for low-income taxpayers to something less than 5%. But this is a promising step.

April 25, 2006

More No New Taxes

It seems that DC candidate for mayor, Adrian Fenty, has been stricken ill by "no new tax pledge fever":
At a candidates forum sponsored by some of the District's premier business organizations, Fenty was the only one of five major candidates to answer yes when asked whether he would commit to levying no additional taxes on business.
As we've noted before on this blog, no new tax pledges are irresponsible and potentially damaging.

Fenty's no new tax pledge is even that much more reckless because he's been pushing for a large school modernization bill:
Ed Lazere, executive director of the liberal D.C. Fiscal Policy Institute, questioned Fenty's sudden zeal for restraining taxes. He noted that a massive school modernization bill championed by Fenty and recently approved by the council requires that certain taxes on commercial real estate transactions go up automatically if sufficient funding cannot be found in the current budget.

Lazere said the city has approved more than $300 million in tax cuts over the past few years, adding, "I don't think anyone should cut off the option of tax increases to address huge, pressing problems like school modernization and affordable housing."
No new tax pledges are nothing more than political pandering. It's not only important to spend responsibly, it's also just as important to raise money responsibly. By taking this pledge, Fenty is making an irresponsible decision. A responsible civic leader doesn't take anything off the table - especially something as vital to public policy as taxation.

April 20, 2006

Virginia's Governor is Missing the Point

Just this week, Virginia's newly elected Governor Tim Kaine made a media splash with this press release.

The Governor seems quite proud of the Tax Foundation's findings that Virginia is indeed a low tax state. There are lots of reasons to question the methodology behind this much-publicized report that identifies "Tax Freedom" day for taxpayers. For more on that click here for a stellar report from the Center on Budget and Policy Priorities. But I can't resist sharing this from the report's methodology:

"Local taxes are excluded, such as property taxes and local sales taxes."
Apparently, not all taxes are even included in this calculation.

But for purposes of this blog post we'll assume that the methodology behind the Tax Foundation's claim is accurate and that Virginia does indeed have one of the lowest tax burdens in the country.

If the conservative rhetoric around taxes is accurate then we would see a flood of new businesses locating in Virginia. I'll leave it to our readers in Virginia to comment if such a migration is really happening.

But the real point is that while the Governor celebrates, he's missing the point. Even after taking into consideration the low income tax relief that was included in the 2004 tax reform package, low income Virginians still pay a higher share of their income in state and local taxes than do the wealthy. This means that if we accept that Virginia has a low tax burden overall - the accurate reality is that poor Virginians have a higher tax burden than do rich Virginians.

Perhaps Governor Kaine should stop celebrating and worry himself more with whether or not poor Virginians are being penalized by the current tax structure.

EVERYONE pays taxes...

As recent protests around the country illustrate, immigration is a hot button issue.

Many policymakers have openly questioned whether or not documented and undocumented workers are taking advantage of government services (health care, education, etc) and aren't doing their part to pay into the system. Most would agree that it's pretty impossible to quantify the amount of services a person (immigration status aside) receives for tax dollars paid. However, one aspect of this debate can be quantified and should be considered as this debate rages on, and it's this - documented and undocumented immigrants do pay taxes.

A study from the Georgia Budget and Tax Policy Institute found that an average undocumented family in Georgia contributes between $2,340 and $2,470 in state and local taxes.

At a minimum, it's pretty impossible in most states to not pay sales taxes on items purchased. I've never known a cashier to ask to see someone's green card before allowing someone to buy groceries. Even if immigrants don't own a home they probably still pay property taxes, since most agree that property taxes are included in rent payments. Again, land lords don't usually ask for green cards and we can assume that undocumented immigrants do pay property taxes as well.

There's further evidence that documented immigrants who work not only pay sales and property taxes - but they pay federal and state income taxes too.

As this debate continues, it's important to note that undocumented and documented immigrants contribute financially to federal and state governments.

Parts of this post were originally published in CTJ's Tax Digest, a weekly email that highlights state and federal tax trends across the country. If you'd like to subscribe to the digest send an email to: ctj@ctj.org

April 19, 2006

Wiggling Around No New Tax Pledges

It's fascinating to watch people make irresponsible promises and then realize they can't keep them.

So seems the story with most of the "no new tax" pledgers in the Blue Grass State. This article from Kentucky's Courier-Journal turned me on to the newest political game: raising money - but doing so without saying the dreaded "T" (tax) word.

According to Americans for Tax Reform, Kentucky's Governor Ernie Fletcher is one of 6 governors to sign the pledge saying that he will not support any new taxes. In the legislature, 42% of Kentucky Senators have taken the same pledge--and 32% of House members have limited themselves to governing without the ability to raise taxes to pay for roads, schools, health care or education.

So it would seem that if lawmakers pledge not to raise taxes then they must think that current levels of state revenues are sufficient. However, in Kentucky policy makers, including the Governor, are now realizing that perhaps more money is needed. But they've already taken and campaigned on a pledge that wouldn't allow them to raise taxes. This might put them in a bind, right? Yet, last week Kentucky lawmakers decided to tack on a 25 cent sales tax to the sale of cigarette roll papers to bring in $750,000 in increased revenue. How did they get out of this apparent flip-flopping?

Here's the kicker, legislators aren't considering this a tax at all.

Anybody in their right mind would call this a new tax, right? Actually the rhetoric around this new tax is what prompted this blog post. The Governor refused to admit he's breaking his pledge and instead is says this legislation is closing a "tax loophole." The speaker of the Kentucky House, Jody Richards, says that this is "not a tax increase, it's just tax equity."

Seems to me if something quacks like a duck, and walks like a duck - it's a duck. This new tax on cigarette papers is indeed a tax and just proves that some pledges are made to be broken.

This article will be highlighted in the upcoming addition of a Citizens for Tax Justice weekly email Digest which offers readers interesting articles about current tax and budget trends across the country. To subscribe to the Digest, just send an email to: ctj@ctj.org

South Carolina: How Not to Inform a Tax Debate

The easiest-- and worst-- thing you can do to debase a public discussion on tax policy issues is to correctly identify a legitimate problem with a tax, and then incorrectly identify complete repeal of that tax as the only possible solution. It's happened with the federal estate tax in a long, slow battle over the last decade. Supporters of a national sales tax have made this approach a mantra. And it's happening with the property tax in South Carolina right now.

South Carolina lawmakers have been been arguing about property tax reform options for much of 2006-- and with good reason. Home values are shooting up in certain parts of the state, especially coastal areas, and since South Carolina does not currently have any property tax relief measures that protect homeowners from rapid growth in property taxes, that's a real concern.

But a group called "No Home Tax" apparently thinks the only possible solution to this problem is to completely eliminate homeowner property taxes. Their latest contribution to the state's tax debate is this radio ad, which started airing earlier this week:

Sound effects: Murmurs of a press conference beginning.
Senator: OK, OK, people. Let's get this party started. First question. Go ahead now.
Female reporter: Senator, we're being told that the taxpayers of South Carolina are being financially devastated by their skyrocketing property taxes. Your thoughts?
Senator: It couldn't be that bad, could it? I haven't heard from the voters. Besides heh, heh the government needs the money, don't it honey?
Male reporter: Senator, how do you respond to working class folks who say they are going to have to sell their home because they can't afford the yearly increases?
Senator: Well, unless the voters scream bloody murder, or vote me out, this is a dead issue. I'll need to get calls, letters, e-mails and personal visits from the public before I change my stance. The people can speak up or pay up.
Female reporter: Senator, are you even listening to the voters?
Senator: It's kind of hard to when you're up to your ears in special interest money. Hey, now, wait, now hold on, don't print that.
Announcer: If you want property taxes eliminated, you must contact your state legislator today. For information, go to NoHomeTax.org. That's NoHomeTax.org. If we fight together, we'll win. Paid for by NoHomeTax.org, Emerson Read, chairman.

You can listen to it here.

In surveys, property taxes regularly rank among the least popular ways of raising revenue. And there are good historical reasons for this:
  • poor administration;

  • a disproportionate impact on the poor;

  • arbitrary "tax cap" rules that discriminate between otherwise identical homeowners based on how long they've owned their homes;

  • the lack of a linkage between your tax bill and your ability to pay it, which can lead to tax hikes on the fixed-income seniors who can afford it least.
But none of these problems-- NONE of them-- are inherent in the tax. They can all be at least partially resolved through a variety of sensible reforms that have been enacted in many states. The South Carolina homeowners who are most threatened by the current rise in home values would be very well served by implementation of these reforms. But you wouldn't know that from the fine folks at "No Home Tax," who think the only solution is complete repeal of the homeowner property tax.

Repealing a tax is certainly a simple solution to any complicated tax policy problem. But, as South Carolina Senator Larry Grooms noted last week, "I like simple. I love simple. But when simple won't work, you can't have simple."

April 18, 2006

Cheney, Bush Make Out Like Bandits Under Bush Tax Cuts in 2005

Never let it be said that the Bush administration doesn't understand the advantages of a preemptive strike. The White House released the tax returns of President Bush and Vice-President Cheney a little early this year, and got some pretty compliant press coverage as a result. The Good Friday release, on April 14, prompted some pretty analysis-free coverage from MSNBC, which had this to say about Cheney's taxes:
The White House also released the 2005 tax return filed by the Cheneys. They reported adjusted gross income of nearly $8.82 million, which was largely the result of exercising stock options that had been set aside in 2001 for charity. According to the return, they have overpaid their taxes this year and are entitled to a refund of about $1.9 million.
The Washington Post's headline on their story is equally analysis-free: "Bushes Paid $187,768 in Federal Income Tax." (Which the Houston Chronicle reprinted under the byline "Bushes' tax bill almost $190,000.") Neither article makes any attempt to put these tax bills in the context of the Bushes' ability to pay.

A new CTJ analysis puts a little meat on these bones. The analysis shows that Bush paid 25.4 percent of his income in federal income taxes, saving $26,000 in 2005, while Cheney paid just 5.7 percent of his income in tax, saving almost $1.1 million.

Of course, what made Cheney's huge tax savings possible is that he gave away close to 80% of his income this year-- for which he deserves kudos, although his hands were somewhat tied by a promise he made a while back to donate proceeds from his Halliburton stock options to charity.

A big part of Cheney's tax savings have to do with the tax bill passed late last fall, allegedly for "Katrina relief," that makes it easier for the super-rich to write off more of their deductions. Under normal rules, a taxpayer's charitable deduction is limited, for federal income tax purposes, to 50 percent of their adjusted gross income. But the most recent round of "Katrina relief" signed into law last fall suspends this limit for donations made during the last four months of 2005 only. Without this temporary tax break, Cheney's tax cut would have been substantially less.

The oddest feature of this so-called "Katrina relief" is that wealthy contributors don't actually have to channel their donations to anything hurricane-related to get the tax benefit. Cheney's donations went to the University of Wyoming, a Washington DC hospital, and an outfit called "Capital Partners for Education," which helps low-income
Washington, D.C. students pay private school tuition. There's almost certainly a Katrina or two in the pay of one of these institutions, but the linkage between this tax break and hurricane relief seems pretty tenuous.

A Sales Tax in Oregon?

Oregon is one of five states that don't have a statewide sales tax-- and its tax system is less regressive than most. There's been irregular talk, over the years, of enacting a sales tax-- but Oregon voters have repeatedly shot down this idea. Now this issue is back in the news, since incumbent Governor Ted Kulongoski (a Democrat) said in a primary debate the other day that it might be a good idea:
We need to have a tax system that provides stability over the long term, which would include, in my opinion, a substantial reduction in the income tax and looking at a consumption tax of some kind.
While his staff seemed to be backpedaling slightly from this statement afterwards, Republican leaders aren't eager to let this one go:
"This is a linchpin, a turning point in this election," Kevin Mannix, a Republican candidate for governor, told a King City Republican women's group. "For the rest of this campaign, we need to remind voters it is Ted "Sales Tax" Kulongoski who will be running."
Meanwhile, the folks at Blue Oregon are discussing whether the state's current income-tax-based system is (in the moderator's words) "a recipe for instability."

It's been well-documented that Oregon has been a fiscal basket case in recent years. But the "income tax instability" argument is a red herring. As contributors to Blue Oregon have noted repeatedly, the real cause of Oregon's fiscal instability is the "kicker," its automatic rebate of surplus revenues. If a family is not permitted to sock away extra money during good times, it stands to reason they'll have more difficulty getting by when times are tough. And that's basically what Oregon faces with its restrictive kicker law, which prevents the state from accumulating a meaningful, effective rainy day fund. The Oregon Center for Public Policy has more on the kicker here. For more on rainy day funds, check out ITEP's policy brief here.

April 17, 2006

Florida Property Taxes: A New Idea

We've frequently drawn attention to the pathologies of the Florida property tax system in recent posts. Assessment caps create unjustifiable inequities between similar homeowners; poorly targeted agricultural tax breaks benefit real estate speculators. But the bottom line on the Florida tax system is that it's the second-most-regressive in the nation, according to ITEP's January 2003 "Who Pays" report. From this broader perspective, property tax reform is akin to rearranging deck chairs on the Titanic. Until Florida moves away from its historic over-reliance on property tax and sales tax revenue and enacts a personal income tax, it will remain among the most punishing tax systems for poor and near-poor working families.

Of course, an income tax is not on the table for Florida elected officials right now. But in today's Fort Lauderdale Sun Sentinel, Broward Mayor Ben Graber calls for the next best thing: a property tax designed on the "ability to pay" principles that make the income tax uniquely progressive:
I propose development of a progressive ad valorem or real estate tax based on income. Those at the lower end of the economic scale will qualify for a yearly decrease or increase of their real estate tax based on individual economic circumstances.
Graber is understandably short on details-- this is, after all, an op-ed--but envisions implementing this change through an increase in the state's $25,000 homestead exemption.

This is, of course, exactly what property tax circuit breaker credits are designed to do, and do quite well in many other states. So from an originality perspective, Graber's idea is akin to Dr. Evil inventing the laser. But in Florida, where "success" in the progressive tax reform arena means making it through a year without repealing any more taxes, Graber's proposal is a bold one.

At the end of the day, the property tax problem to be fixed, in most states, is the basic disconnect between your property tax bill and your ability to pay it. From one year to the next, what happens to your property tax bill is largely determined by your home's market value, which operates completely independent of your financial circumstances. If your lose your job, the property tax doesn't care-- the bills keep going up. (By contrast, the income tax does a bang-up job of going up (and down) with your ability to pay it.)

Circuit breaker credits help eliminate this basic disconnect, by allowing tax credits for homeowners (and, sometimes, renters) for whom property taxes exceed a certain percentage of their income. They're cheap, they're targeted, and almost all states now have them.

At a time when Florida lawmakers are far more concerned with how to get rid of a projected budget surplus, Graber deserves credit for asking the hard questions about how to make Floridians less angry about the property tax--and also gets kudos for coming up with the right (broad) answer.

April 13, 2006

Minnesota Health Impact Fee Comes Back to Bite Pawlenty

State lawmakers frequently resort to sleight-of-hand tricks in their zeal to avoid anything that can be characterized as a "tax increase." So when Minnesota Governor Tim Pawlenty (who had taken a "no new taxes" pledge during his 2002 gubernatorial campaign) pushed through a "health impact fee" that most people correctly identified as a 75-cent cigarette tax last summer, it was a mildly amusing subterfuge, but hardly news.

No one is laughing now, however: the Minnesota Supreme Court is currently hearing a case that may force retroactive repeal of this "fee" dating back to its August 2005 implementation. The reason: to make it look more like a "fee" instead of a tax, lawmakers dedicated proceeds from the new cig tax to a special Health Impact Fund designed to help the state pay smoking-associated health care costs. But, tobacco industry representatives now point out, that's exactly what the 1998 tobacco settlement was designed to do, and Minnesota had already agreed not to pursue further claims against the industry as part of that settlement. Hence the lawsuit.

Even if the story ended there, it wouldn't be especially heartwarming--but it gets worse. The ongoing cigarette "tax" case could blow a $360 million hole in the state's two-year budget, which, in turn, could scuttle legislators' plans to provide a 10 percent property tax rebate to homeowners this year. In a tightly contested election cycle (Republicans have a two-seat majority in the House of Representatives), lawmakers are understandably concerned about the possibility that a tax rebate designed to arrive in Minnesota homeowners' mailboxes in October might not appear.

Policymakers can learn valuable lessons from this experience-- you shouldn't use clever terms to hide the impact of what you're proposing; calling a tax a "fee" tends not to fool people anyway; etc. But Governor Pawlenty seems to have learned mainly to retract his spine even further:
Brian McClung, a spokesman for Pawlenty, said after the court hearing that Pawlenty would not support replacing the fee with a tax if the court ruled against the state."If the health impact fee is ruled out of order and goes away, it would be the governor's personal choice to just let that go," McClung said.
All in all, a pretty unsavory episode in Minnesota's fiscal politics.

Repealing Tax Breaks for Spanish American War Vets

Yesterday, in a tongue-in-cheek explanation of why periodic sunsetting of state tax breaks is unnecessary given the diligence of today's omniscient, always-questioning state lawmakers, I cited South Carolina lawmakers' successful effort last year to repeal property tax exemptions for veterans of the Spanish-American war.

Turns out not everyone has been so successful. Wyoming lawmakers failed in an effort to modernize their veteran-related property tax exemptions this year. As a result, special property tax breaks are still on the books for "An honorably discharged veteran of the Indian Wars, Spanish American War, Filipino insurrection, Boxer rebellion, Puerto Rico campaign or First World War."

I'm trivializing a serious problem with this example, of course. Since every veteran of the "Indian Wars" is long dead, it matters not at all whether this tax break stays on the books. But there are plenty of tax breaks that really do drain public resources over the long haul that should be scrutinized more regularly. Publishing a regular, detailed tax expenditure report is the first and best approach to achieving this level of scrutiny.

Automatic sunsets, of the sort that Washington State has just enacted, are a step beyond this, and could create problems of their own-- mostly in that the volume of decision-making by lawmakers could increase dramatically, depending on how frequently the sunsets were done. The best tax expenditure reports (like Oregon's) give pro-and-con arguments for each tax break, along with an estimate of how much it costs, and actually weigh in on whether the tax break is achieving its purpose. This is the sort of thing that a properly funded state revenue department should be able to accomplish on its own. It's certainly less burdensome than Washington's sunset clause; the likely tradeoff is that it's also less effective in getting rid of useless tax breaks.

April 12, 2006

Should States Sunset Tax Exemptions?

A couple of weeks ago I had a good chuckle reading about this: Washington State lawmakers have enacted a bill mandating periodic audits of all tax preferences. Once every ten years, a special commission must put every single tax break under the microscope and ask whether these breaks still make sense. Nothing will escape their scrutiny. Oh, except for
"sales and use tax exemptions for machinery and equipment for manufacturing, research and development, or testing, the small business credit for the business and occupation tax, sales and use tax exemptions for food and prescription drugs, property tax relief for retired persons, and property tax valuations based on current use."
Because god forbid we should ever have to ask any kind of hard questions about poorly targeted tax giveaways to wealthy seniors, agribusiness or drug companies.

We laugh because it keeps us from crying. But here's the question: does the harm done by this paragraph full of sacred tax cows outweigh the good done by Washington lawmakers' willingness to confront the rest of these old tax breaks? I'm thinking no, but it's a close call.

In its purest form, sunsetting tax exemptions is a fine idea. Lawmakers at both the state and federal level have a tendency to treat tax breaks like entitlement spending rather than annual authorizations. So anything that helps drive home the point that tax breaks should be made more like spending (that is, regularly reauthorized) is a good thing. Of course, even a comprehensive "sunset" rule would have its problems in practice. Lawmakers are so busy carving out new tax breaks that it would take a lot of resources to have any kind of regular review of them all. I mean really, who could keep up?

And the real argument against institutionalized "sunsets" of this sort is it's selling our hard-working lawmakers short. We know that eventually, our elected officials will come back to wrestle with antiquated or poorly designed tax breaks. To prove it, look no further than South Carolina, where lawmakers last year pulled the plug on a property tax exemption for Spanish-American War Veterans. As in the Spanish-American War that ended (and started, for that matter) in 1898. In the nineteenth century.

Didn't need any newfangled sunset provision to get rid of that one, did they? Although it turns out New York still has such a tax break on the books.

Postscript: perhaps I'm overstating how cobwebby this tax break was. Turns out the last living veteran of this war died only in 1992, which was practically yesterday.

April 11, 2006

Individual Income Tax Proposals Across the Nation

For those of you following state income tax changes (or potential changes) across the county, here's a quick update of last week's activities:

Iowa Democratic lawmakers unveiled a proposal to repeal the state's deduction for federal income taxes. Lawmakers would use some of the revenue for low-income tax cuts, but would also exempt all pension benefits for Iowans earning less than $100,000 a year.

Nebraska lawmakers passed a bill which will create the nation's twentieth state Earned Income Tax Credit. But in this election year, the bill includes a variety of other less well-targeted giveaways.

A Missouri legislative committee considered a truly progressive income tax reform. The bill would increase state revenues by $1 billion while reducing taxes on the poorest sixty percent of the state's income distribution. Read ITEP's testimony here.

Meanwhile, in the Ocean State, Rhode Island lawmakers asked tough questions about a proposal to flatten the state's income tax rates.

Parts of this post were originally published in CTJ's Tax Digest, a weekly email that highlights state and federal tax trends across the country. If you'd like to subscribe to the digest send an email to: ctj@ctj.org For a look at our complete weekly digest click here

Silly Taxes?

Despite what many people may want us to think paying taxes isn't a silly thing. It's something many of us will be thinking about consciously for the next week or so since our federal income taxes are due on April 17. Paying taxes ensures (to some degree) that we have roads to travel on, safe food to eat, and that our children have the opportunity to receive an education. While we might bicker about how well our tax dollars are used, undoubtedly good things are funded with this money.

But in preparation for tax day I thought it might be fun to poke a little fun at some aspects of many state tax codes that are silly. Here's a list of often illogical sales tax regulations in a state near you. Included on this list are items like this:

In California, fresh fruit is exempt, but an apple purchased through a vending machine is taxable on 33 percent of the price.

But when I took a closer look at this list, I realized that these special tax breaks are quite serious. These special loopholes could cost a state millions of dollars in needed revenue.

State and federal lawmakers should be making conscious decisions about what to tax and what not to tax in a uniform and informed way. Too many of the items on this list appear to be lobbyist-driven instead of based on good tax policy. Lawmakers should be taking these decisions seriously and working on ways to ensure that the farthest thing from anyone's mind would be to describe any aspect of their state's tax code as "silly."

April 09, 2006

Property Tax Breaks for Farmers: Is Use Value the Right Answer?

In a famous book a couple of years back, James Surowiecki argued for the "wisdom of crowds" as a way of making correct policy decisions in the long run. But sometimes everyone agrees on a thing that later turns out to be wrong. Judging from recent events in several states, a special property tax break for farmers called "use value" may be the latest example of incorrect tax policy groupthink.

Virtually all states have enacted use value, which typically says that agricultural property will be valued, for property tax purposes, according to its use as farmland-- not according to its potential market value to developers. The idea is that as suburban development encroaches on farmland, farmers shouldn't be pressured by growing property taxes into selling their land.

The problem that is now cropping up in Florida, South Carolina and Idaho is that a tax break designed for family farms is being claimed by speculators, wealthy vacationers, and even governors.

In South Carolina, the problem appears to be that it's pretty easy to get property taxed according to use value. All you need is five acres of trees or ten acres of crops and bingo-- in the eyes of South Carolina tax assessors, you're a farmer in need of property tax relief. Editorial boards around the state are hitting this on all cylinders. While legislation has been introduced that would require agriculture to be the primary intended use of a property in order to get the tax break, but it doesn't appear to be going anywhere fast.

In Florida, a great series by the Miami Herald last summer detailed abuses of the agricultural tax break by speculators. The problem here appears to be that lawmakers defined eligibility for the tax break too vaguely as "good faith commercial agriculture" activity. Despite this, reform now appears to be dead for this year.

The problem in Idaho stems from a well-intentioned bill passed in 2002, designed to ensure that farmers selling their land for development wouldn't be taxed based on market value until they actually sold it. A last minute amendment changed the bill so that the developers purchasing the land could claim the tax break too-- right up until houses were actually built on it. Read more about this sordid tale here. Idaho lawmakers passed legislation in March to fix this problem.

What's interesting about the way this story is developing in these states is that no one is questioning whether use value is a smart idea to begin with--people are just getting mad because a tax break that should be given to every family farmer in the state is being given to folks who aren't family farmers.

If use value is a good thing, then the reforms being discussed in these states are absolutely correct: tighten up eligibility requirements so that only real family farms get the tax break. But the more you look at the way use value works, the more it seems that the sort of modifications being discussed right now amount to rearranging deck chairs on the Titanic.

So what's wrong with use value? Three basic things.
1) It's over-inclusive. Any farmer, however rich or poor, is eligible for this tax break. Plenty of farmers are in truly dire straits-- but use value basically asserts that no farmer can afford to pay their property taxes. And because use value shifts property tax burdens away from agriculture as a class and toward residential property as a class, it basically asserts that homeowners can afford to subsidize agriculture.
2) It's under-inclusive. To get the use value tax break, your farm has to be in an area where it would be worth more as a residential development than as a farm, and has to be in an area with a healthy mix of agricultural and non-agricultural property. That's true in rapidly developing suburban areas, but is usually not true in truly rural areas dominated by agriculture. To see this, imagine a dirt-poor rural county where virtually all of the land is agricultural. If the whole tax base is made up of farms, giving a preferential assessment to farms doesn't benefit anybody, since the loss to the tax base has to be made up by increasing the tax rate on the remaining base--and the remaining base is made up of exactly the same farms who are getting the use value break. The more completely rural a taxing district is, the more completely useless use value is as an agricultural tax relief mechanism.
3) It short-circuits the already-tenuous linkage between the property tax and a landowner's ability to pay it. There are two steps that should be taken to rationalize property tax bills for any property owner: making sure that the measure of "property wealth" used for tax purposes is accurate, and relating this measure of property wealth to the landowner's income. Use value ignores the second goal, and takes states further away from achieving the first.

This is a battle that is already being fought in the residential property tax arena. Income-poor families who own homes in rapidly-appreciating areas get nothing from their skyrocketing home values unless they sell. They're not "rich" in any meaningful sense as long as they stay put. More and more states are introducing "circuit-breaker" tax credits to ensure that income-poor homeowners and renters don't get socked with huge tax bills.

So why aren't states asking the same questions about agricultural property tax relief? Why not eliminate use value and rely entirely on an agricultural "circuit breaker" tax credit that makes property tax relief available only to the low-income family farms for whom these taxes are most oppressive?

Bad Arguments for Property Tax Repeal, Idaho Style

This blog has recently discussed the shell game that anti-tax lawmakers frequently play with the property tax: the basic argument is that fixed-income homeowners (and especially seniors) are getting hammered by growing property taxes, so we should...cut property taxes for every homeowner. Here's another example of this fallacy from Idaho, where lawmakers have been fighting over how to provide property tax relief for about six months straight. State Representative Ken Roberts lays it out for us in the Lewiston Morning Tribune (helpfully republished by Idaho Public TV).
First he lays out the problem to be solved:
Many of our residential property owners are especially overburdened. Property valuations are rising exponentially...Last year, statewide property valuations increased an average of 14.4 percent. In Valley County alone, the valuations increased an incredible 44.2 percent.
Fair enough. Home values are growing, although part of that is due to a building boom around the state. When you build a new subdivision, your district's valuation will shoot up-- and it should. Still, there's a basic problem with the property tax in its purest form, which Roberts correctly identifies next:
The property tax assesses people based on property value. The property tax is blind to how much money a person makes from year to year. Property assessments go up even if your income goes down.
Absolutely right. Roberts deserves kudos for identifying this basic disconnect between the property tax and a homeowner's ability to pay it. But his response to this problem is dead wrong--he just assumes there's nothing you can do to fix it, so we ought to just repeal it and rely on the sales tax instead. Of course, as we've argued ad nauseum, there is a way of fixing this flaw in the property tax--a circuit-breaker style property tax credit-- and Idaho already has one (for senior citizens only). An honest assessment of Idaho's property tax woes would at least discuss whether expanding the circuit breaker to become an all-ages credit might be a smarter alternative. Given that Idaho lawmakers (including Roberts) recently voted unanimously to increase the elderly circuit breaker (the bill's currently on the governor's desk), it seems unlikely that Roberts is just unaware of this sensible, targeted property tax relief alternative. So why doesn't he mention it?

The always-handy Wikipedia defines a shell game as "a situation in which conspicuous actions are taken to cover up deception." Is this what's going on here? You be the judge.

April 08, 2006

Progressive Income Tax Cuts in Alabama

On Thursday night, Alabama lawmakers sent an income tax cut bill, HB 292, to Governor Bob Riley for his signature. In a state that clearly needs progressive tax reform, this bill is an important first step in the right direction.

Alabama has been widely derided for its low personal exemptions and deductions, which tax the very poorest Alabama families further into poverty. As the Center on Budget and Policy Priorities' annual income tax threshold report shows, in 2005, Alabama families with two children owed income tax when their earnings reach just $4,600--lower than any other state.

HB 292 changes this deplorable situation in two ways:
1) the standard deduction, currently capped at $4,000, is increased to $7,500 for married couples with incomes under $20,000. For couples earning between $20,000 and $30,000, the benefits of this tax cut are gradually phased out-- so couples earning over $30,000 will get the same $4,000 standard deduction they always did, but get no new tax break from this bill. (For single Alabamans, the maximum deduction goes up from $2,000 to $2,500 with the same phaseout range; for single parents, the deduction goes from $2,000 to $4,700.)
2) The dependent exemption Alabama families can claim for each of their children, currently a rock-bottom $300 per kid, is increased to $1,000. The benefits of this tax cut are phased out too, but in a different way: with a "cliff."
Here's what it looks like:

Income Range      Per-Kid Exemption
Less than $20,000      < $1,000
$20-$100,000      < $500
Over $100,000      < $300

And that's the whole plan.
Just in case you lost track, these income limits don't mean anyone gets a tax hike--they just mean that when your income exceeds a certain amount, you don't get any new tax break. This approach to tax relief is a compromise between the goals of Governor Bob Riley, who wanted to cut taxes for people at all income levels, and the goals of progressives who wanted to pay for low-income tax cuts with income tax hikes on wealthier Alabamans.

So beyond the basic its-a-good-progressive-tax-cut observation, what's worth knowing about this bill? Two things stand out.

1) The use of phaseouts on the exemptions and deductions has pluses and minuses. The federal government and many states have provisions in their tax laws that make certain tax breaks available only below certain income levels. Anytime you do this, you need to either gradually phase out the tax benefits (as Alabama now does with its extra standard deduction) or have a "cliff" where one additional dollar of earned income results in a sudden tax hit (as Alabama now does with its extra dependent exemption).
The feds take the phaseout approach in a few prominent ways. The $1,000 per child credit phases out starting at $110,000 for married couples. Itemized deductions start to phase out at about $140,000 for marrieds, and exemptions start to phase out at a much higher $215,000 or so.

This practice has good points and bad points. The bad part is twofold: first, it's one more hoop that tax filers have to jump through, making tax forms marginally more complicated than they used to be. Second, anytime you impose income limits on a tax break, you're increasing the effective income tax rate on people whose earnings are in the phaseout range. (To see this, imagine a guy with two kids who earns $20,000. His new dependent exemption under HB292 is $1,000 per kid, for $2,000. But if he earns one more dollar, his dependent exemption is only $500 per kid for a total of $1,000. So that $1 of additional income increased his taxable income by $1,000; at a 5% tax rate, that's a $50 tax hike for one additional dollar of income. Hardly the end of the world, but not a very smart idea either.) High-income people are probably less sensitive to these little bumps in the effective tax rate, which is why the federal phaseouts cited above are so high in the income range. Putting these phaseouts much lower in the income distribution, as Alabama is doing, means that marginal tax rates are a little bit higher than they used to be for some working families (even though anyone facing these higher marginal rates is, without exception, paying less under HB292 than they were before).

There are two good things about this sort of phaseout: it saves money, and it makes the income tax more progressive. By starting the phaseout as low as they have, Alabama lawmakers made this tax cut much more targeted to low-income families, and much less expensive, than it otherwise would have been.

2) Alabama's income tax has several unusual flaws, and this bill helps fix exactly one of them. Flaw #1 (which HB292 does nothing to fix) the state's narrow tax brackets. Married couples with taxable income over $6,000 pay at the 5% top tax rate, much lower than most income taxes. (The top federal income tax rate only applies when a married couple's taxable income hits $326,000.) Flaw#2 is the state's deduction for federal income taxes, which few states allow and which disproportionately benefits the wealthiest Alabamans. Flaw #3, which this bill does take baby steps towards resolving, is the low "income tax threshold" above which families start to owe state income tax in Alabama. As a result of HB292, Alabama is no longer last in the nation by this measure-- they're fourth from last in the nation.

Kimble Forrister of Alabama Arise gets it just right in his characterization of this bill:
"This is a great first step, a politically possible first step, and our tax system will be fairer for low-wage workers."
It's a first step, but Alabama has a long, long journey ahead of it before its tax system can be considered even remotely fair.

April 07, 2006

Responsible Government Gets High Marks from Bond Rating Agencies

New Jersey Governor Jon Corzine has taken a lot of heat in recent weeks for his budget proposal that included major spending cuts and increases in the state's sales and cigarette taxes, coupled with a surcharge for the corporate income tax and an extra sales tax on luxury automobiles. Corzine also indicated that the state may not be able to fully fund expanded property tax rebates enacted two years ago. Even if these changes are enacted, all agree that property tax reform will be a major issue once the budget has passed.

Democrats and Republicans alike have distanced themselves from Corzine's proposals. Few legislators want to be put in the position of raising taxes during this seemingly never ending era of anti-tax feelings.

Turns out that bond rating agencies like responsible government that doesn't just pass tax cuts on whim. All three bond rating agencies (Standard and Poor's, Moody's Investor Service, and Fitch Ratings) have given Corzine's tax hiking budget the thumbs up. For more on this interesting story click here.

Parts of this post were originally published in CTJ's Tax Digest, a weekly email that highlights state and federal tax trends across the country. If you'd like to subscribe to the digest send an email to: ctj@ctj.org

April 06, 2006

Mississippi: No Tax Swap in 2006

It's all over but the shouting in Mississippi, where the 2006 legislative session has come to an end without major tax reform. Twice this year, the legislature passed "tax swap" legislation that would have cut the sales tax on groceries and paid for it with a cigarette tax hike. Twice Gov. Haley Barbour vetoed these bills. And on both occasions, the legislature was unable to come up with the majority necessary to override Barbour's veto.

A lot of folks are mad at Barbour for doing this. The editorial board at the Jackson Clarion Ledger says:
These bills would have been a small step, but an important one for tax fairness, raising a tax on tobacco that is too low and lowering the sales tax on food, which is the highest in the nation....The governor has been successful in lobbying for his programs. When will he lobby for Mississippi tax relief?
A separate editorial from the same paper tells readers exactly which lawmakers to blame for the failure of this bill.

For better or for worse, the Mississippi tax reform debate this year was about the merits of one particular proposal-- the outcome was clearly gonna be passing this thing, or passing nothing at all. And Mississippi is not a state where terms like 'fairness' and 'adequacy' get bandied about all that much by people with any political power. So it's somewhat understandable that people wanted to see this bill go through. But now that the legislative session is over, maybe it's time to ask whether this was the best approach to achieving these laudable fairness and adequacy goals. Gov. Barbour's veto message explains, in pretty much the same terms I would use, why this wasn't the smartest tax reform idea on the planet:
[The tax swap] would replace a growing revenue source (sales tax on groceries) with a declining revenue source (cigarette tax)...Every year going forward the reduction in revenue - the loss to the state's programs - will be greater and greater. This is bad policy, especially now.
You can question whether possibly Barbour's cozy relationship to tobacco industry lobbyists is what really drove his veto decision. You can question whether maybe what's really going on here is that he won't accept a tax hike of any kind, even when it's a tax that many (wrongly) consider voluntary. But the substance of his veto message remains quite true: it's dumb to try to pay for ANYTHING using cigarette taxes, and it's especially dumb to try to pay for a cost that is going to grow (as food tax repeal would) with a funding source that won't grow. So whether he means it or not, Barbour is right.

The Clarion Ledger is absolutely right about the unfairness of Mississippi taxes. But now that the food tax swap has failed, everyone involved can stop thinking practically about what's on the table and start thinking more generally about what a good progressive tax reform plan should look like. It will be fun to see what 2007 has in store for Mississippians.

April 05, 2006

Florida's Tax Policy Shell Game

It's the ultimate tax policy "shell game." Identify a tax policy problem--for example, fixed-income seniors whose property taxes are growing faster than their ability to pay them--that everyone agrees is a bad thing. Then come up for a "solution" that has nothing to do with the problem, but instead lavishes big tax breaks on the wealthiest homeowners of all ages.

Florida did it more than a decade ago with their melodramatically named "Save Our Homes" property tax cap. It took a while, but people are figuring out that they've been taken for a ride. Check out a great editorial from the St. Petersburg Times here.

"Save Our Homes" is an assessment cap, which means it limits the amount by which a home's taxable value can grow each year. Florida's cap is 3 percent or the rate of inflation, whichever is lower. So if your home's market value increases each year faster than inflation (a pretty good bet for Floridians living in most coastal areas), a gap is created between what your home is really worth and what it's worth for tax purposes. And that gap gets a little bit bigger every year. Of course, newly built homes get no immediate benefit. And when homes are sold, the taxable value resets to equal the market value.

This leads to the sort of inequity that is now being routinely cited in Florida papers, where two neighbors' homes are worth the same amount but they pay very different amounts of property tax.

One unintended consequence of this inequity is that when you sell your house and buy another one in Florida, you lose your tax break. Losing a poorly targeted tax break is maybe not the worst thing in the world, but some Florida lawmakers are very, very worried about this.

One boneheaded, but entertaining, solution being bandied about right now would let people take their accumulated tax cap benefits with them when they sell their home and buy another one in Florida. So if you've lived in your home for 30 years, and its market value is $500,000 but the tax code says it's worth $300,000, your tax benefit from the cap is $200,000. When you buy a new home, whatever it's worth and however rich you are, you get to subtract that $200,000 from the market value of the home.

The Times editorial board, to its credit, recognizes that this is more of the same shell game:
The elderly widow is being invoked again, this time because she is supposedly trapped in her home for fear of higher property taxes even if she moves to a smaller home. Yet the tax break is being offered, again, without regard to ability to pay. So wealthy widows, or wealthy homeowners, would reap the benefit...If lawmakers truly were concerned about elderly widows on fixed incomes, they would fashion a constitutional amendment targeted only at them.
Let's hope state lawmakers can be this level-headed in an election year.

April 02, 2006

North Carolina: Is a Lottery a Tax?

Perhaps the most interesting story behind the new North Carolina lottery is a failed lawsuit that sought to prevent the implementation of the lottery on the grounds that it was a new tax, and that lawmakers failed to follow special procedural rules required for tax hikes. (NC lawmakers must vote on tax legislation over a period of three separate days, according to the state constitution.)

The judge in the case ruled that the lottery was not a tax because a tax is "a forced contribution to government which has no necessary immediate relationship to a benefit conferred." And nobody holds a gun to anyone's head to play the lottery, so it must not be a tax.

Of course, by this measure there are plenty of "taxes" in North Carolina that really aren't. As the Greensboro News & Record puts it:
The state doesn't force anyone to purchase gasoline, cigarettes or beer, yet it imposes a gas tax, cigarette tax and beer tax.
It's an interesting point: lawmakers aren't choosing the lottery to fund schools because they think it's a great idea, they're doing it because it's easier than raising taxes. The North Carolina lawsuit asks the important question: why should this be easier than raising taxes?

North Carolina Hits the Jackpot?

Earlier this week, North Carolina became the 42nd state to implement a lottery; tickets went on sale Thursday morning. The lottery was a contentious issue for years, but what finally seems to have won over lawmakers was the argument that every neighboring state already had one. If NC residents are gonna gamble, the argument goes, it should be NC government that benefits, not Virginia.

Virginia lawmakers are now feeling the other side of this double-edged sword, since the 8 to 10 percent of Virginia lottery revenues that used to come from NC residents will presumably no longer be there. The same story appears to be playing out in South Carolina.

Lottery advocates frequently delude themselves by arguing that lottery revenues won't be paid by state residents, but will come largely from visitors from non-lottery states. This argument was presumably made in Virginia and South Carolina when their lotteries were created. Now that North Carolina has become the last Eastern Seaboard state to enact a lottery, that argument rings pretty hollow. In any region, the goal of saddling neighboring states with the cost of funding education through slots, lotteries or other forms of gambling will not be met. This "race to the bottom" leaves each state funding public services by a "voluntary" tax on its own poorest residents.

One editorial board tells it like it is here.