May 30, 2006

Further Evidence that Undocumented Immigrants Contribute to State Economies

There is growing interest in trying to quantify the contribution that undocumented workers make to their communities.

In earlier posts we highlighted a report from the Georgia Budget and Policy Institute. Researchers there "estimate that an average undocumented family in Georgia contributes between $2,340 and $2,470 in state and local sales, income, and property taxes combined. An undocumented family that does not pay income taxes would have a sales and property tax contribution of between $1,800 and $1,860."

A similar issue brief was recently released from the Oregon Center for Public Policy detailing the investment that undocumented workers are making in Oregon through their tax dollars.

Now there is at least one more study available showing that undocumented workers are paying taxes. This new study from researchers at New Mexico Voices for Children found that workers contribute approximately $47 million in tax dollars annually. To read the study click here. For a press clip about the report, click here.

May 29, 2006

Should Gas Prices Be Higher?

Drivers nationwide are learning that at $3 a gallon, everything from commuting to vacations will be a lot less affordable in the future. And even as Congress and state legislatures are dreaming up new ways of cutting gas taxes, folks like the Earth Policy Institute's Lester Brown are arguing that the gas tax should be much higher. In a recent Chicago Sun-Times op-ed, Brown argues that we should hike the federal gas tax by $3 per gallon over the next decade. Tom Friedman makes the same point in a recent New York Times op-ed.

The most obvious fairness argument against gas taxes is that they hit low-income drivers much harder. As with anything else families spend money on, spending on gas take a much bigger chunk out of low-income families' wallets than from the wealthy. Greens who want higher gas taxes recognize this, and pretty universally recommend coupling the tax hike with a payroll tax cut, or a low-income credit-- something that will mitigate the impact on low-income working families.

But for most Americans, the more salient fairness argument is that they've been conditioned to expect that gas prices will remain lower than in most other developed democracies. Since the interstates got built, Americans have been given every reason to live wherever the hell they want to, without thinking about how far they'll have to drive to get to work. Good Jobs First and others have documented how public policies have encouraged sprawl. And gas prices have stayed well below what's charged in other nations for decades.

Hiking gas prices to better reflect the social and environmental costs of oil consumption amounts to pulling the rug out from under families who (however myopically) have chosen to live in less-expensive suburbs or "exurbs" at the price of spending two hours a day in their cars. And as long as the incentives created by high gas prices are being offset by the sprawl-creation incentives that result from other areas of public policy, such as the economic development incentives cited by Good Jobs First, the result will be an incoherent set of policies that work against each other.

At least some Americans will almost certainly change their driving patterns (and living patterns) as a result of what looks like permanent $3 a gallon gas. But in the short run, most people don't have a real choice to adjust. They can't just quit their jobs, can't just move-- they're stuck paying higher prices for gas. Friedman may well be right in his apocalyptic assertion that "The major industrial country that gets the greenest the fastest, with the smartest technologies —that's the country that will lead the 21st century." But if we're going to achieve this with the stick of higher gas taxes, it's important to do it in a way that will be fair to low-income working families.

Do Toll Highways Diminish Public Safety?

An interesting op-ed in USA Today asserts that the tendency of state governments to jack up tolls on state highways is endangering public safety. The argument, made by Jim Hall, a former chairman of the National Transportation Safety Board, is that many people-- especially low-income drivers-- will respond to higher tolls on major highways not by driving less, but by driving on slower and more dangerous secondary roads:[
T]he losers are, as usual, the poor, the young, the elderly, the small-business owner, and the independent trucker. These folks will not be scooting along in the express toll roads; they will be dodging oncoming traffic and fighting to stay in their lane on the undivided and unsafe - but no-cost - highways.
Hall isn't arguing that it's a bad thing to make driving more expensive; his point is that tolls make one form of driving more expensive than others. And since (Hall asserts) secondary roads are inherently more dangerous because they have multiple access points and are less well-maintained, this is a bad outcome from a public safety perspective.

His policy solution is to fix the secondary roads, not to equalize the cost of driving on good and bad roads. But in a political climate where lawmakers (as Hall recognizes) frequently can't summon up the courage to pay for needed infrastructure improvements, the attainable solution might be to impose user fees on drivers in a way that doesn't encourage them to drive on lousy roads. A higher gas tax fits the ticket, since the tax is the same no matter where you choose to drive.

Of course, the million-dollar question right now is whether it's "fair" to impose higher costs on drivers in general. More on this question here.

May 25, 2006

EITC Denied to Working, Legal Residents?

The Earned Income Tax Credit (EITC) over the years has been championed by Republicans and Democrats alike. Even small-government proponent, President Ronald Reagan said that the program was "the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress." For many working families the EITC has been an invaluable resource and one that's been necessary in a time of growing economic inequality. For more on the nuts-and-bolts of the EITC click here to read ITEP's Policy Brief.

The EITC is now a pawn in the current immigration debate. Even in the wake of reports from Oregon and Georgia estimating the taxes paid by undocumented immigrants, the Republican leadership in Congress is pushing to deny the federal Earned Income Tax Credit to undocumented workers-- even though these workers typically pay the same regressive payroll taxes that are most burdensome for other workers.

The Center on Budget and Policy Priorities makes a powerful statement against this move.

Illinois School Spending Plan: Not Reform

Illinois Governor Rod Blagojevich, has announced a plan to sell or lease the state's lottery in order to increase funding for schools. The Governor anticipates this would result in a one time windfall of $10 billion:
Under the governor's plan, $6 billion from the proceeds of any lottery deal would be set aside in a long-term trust fund and the remaining $4 billion would be mixed with other state money to provide $6 billion to schools over four years. The school construction money would come from bonds.
The Governor's plan is nothing more than a one time gimmick for a long-term problem. The plan provides revenue for four years, but what about year five and beyond? The Governor instead should be focusing on long-term solutions for increasing school funding.

Such a long-term solution will require meaningful tax reform. Currently Illinois' tax system results in a structural deficit-- that is, the taxes coming in are not enough to fund existing spending needs. Adequate long-term funding for public schools can only be achieved through a complete overhaul of the current tax system; reform that will bring in additional revenues and resolve the structural deficit issue. One group that has been championing such reform is the Center on Tax and Budget Accountability out of Chicago. You can find their plan, SB750, here. Illinois' public schools deserve dedicated, long-term, adequate funding, not gimmicks.

May 24, 2006

Setback for Ohio Taxpayers - Supreme Court's Cuno Decision

In a setback for opponents of corporate tax giveaways, the US Supreme Court ruled last week that Ohio taxpayers did not have a legal right to contest the constitutionality of $300 million in tax incentives given by the state of Ohio to the DaimlerChrysler corporation. The Cleveland Plain Dealer reports on the decision in this article.

The good news is that by relying on this technicality to dismiss the case, the Court left the door open for the main policy question at stake: whether corporate tax incentives are constitutional to begin with.

Good Jobs First has issued a short analysis of the decision's implications here. The text of the Supreme Court's opinion is 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:

May 23, 2006

Tax Tidbit: Dog Controversy in Iowa

What do dogs, the Humane Society, and the Iowa Federation of Animal Owners all have in common?

A storm is brewing in Iowa and it has nothing to do with residential property taxes or even tax cuts for the elderly. According to this article, the Iowa Federation of Animal Owners worked hard to pass a bill through the legislature that "would allow breeders and pet shops to classify dogs as farm products, making them eligible for a tax break on the supplies used to raise dogs." The Governor has until June 2 to decide if he wants to sign the bill.

Current law says that dog kennels have to levy a sales tax when they sell a dog and then also must pay "state sales tax on the feed, veterinary supplies, utilities and other items they buy to raise dogs. " This legislation would ensure that sale of these items would be tax exempt.

The Humane Society says that this legislation "sets a bad precedent of listing dogs and livestock in the same sentence."

Not an incredibly interesting debate unless of course you care really strongly one way or another - but it's just further proof that taxes permeate all aspects of our (and our pets) lives. Of course the real question is whether or not tax exemptions like this one really serve any purpose at all.

For a good look at the true cost of tax expenditures like this one - check out ITEP's policy brief on the subject here.

May 22, 2006

Wild Mood Swings in Iowa

Last year Iowa lawmakers came up with a simple solution for the ailments of their state income tax: stop taxing young people. (Blogged here). A Republican plan would have exempted everyone under 30 from paying state income taxes. This idea went down in flames, as it should have.

This year, Iowa lawmakers came up with a radically new solution for the state's income tax woes: stop taxing old people. And this time it went through.

Iowa was already much nicer to seniors than they were to young people. On top of the generous exemption for most Social Security benefits allowed by federal income tax rules, Iowa exempted still more benefits. A married couple could exempt up to $12,000 of pension benefits on top of the Social Security break-- with no comparable tax break for working seniors' wages. These tax breaks created an inequity worth fixing, by shifting the tax load from retired seniors to working seniors-- but the new law just makes this inequity worse.

This year's bill makes two changes: first, it completely exempts Social Security benefits from tax. Since only wealthier seniors paid tax on Social Security benefits to begin with, this makes the state tax system more unfair. Second, the bill creates a higher no-tax floor for seniors than for non-elderly Iowans. Married couples over 65 won't pay income taxes next year until their total income (from taxable and non-taxable sources) exceeds $24,000. This no-tax floor will gradually increase to $32,000 by the end of the decade.

By comparison to the Social Security break, which complicates the Iowa income tax while providing nothing to most seniors, the higher no-tax floor looks like rocket science-- all the benefits go to low- and middle-income seniors.

Probably the best thing one can say about the "no-tax floor" provision of the bill, however, is that it makes the existing pension and Social Security tax breaks virtually superfluous to most low- and middle-income seniors. For Iowa policymakers seeking to raise the banner of income tax simplicity in the 2007 legislative session, repealing or paring back these retirement income tax breaks would be a good place to start. So while the bill may be a lemon from the perspective of tax fairness, it gives reform-minded legislators a chance to make some terrific lemonade next year. Click here for an aging, but still relevant, report outlining options for simplifying the Iowa income tax.

In advance of the final vote on this bill, the Iowa Policy Project issued a terrific report that systematically dismantled anti-tax arguments that tax-motivated seniors were fleeing the state. Unfortunately, lawmakers don't seem to have heard this message at all.

May 16, 2006

Evaluating This Year's Tax Cut

As our overseas creditors anxiously await the signing of the latest federal tax giveaway legislation, the post-mortems are starting to trickle in. Bloomberg's John Wasik gets it right in his discussion of the $70 billion tax shift recently pushed through Congress. First, here's Wasik on the alleged economic benefits of the capital gains and accelerated depreciation provisions of the bill:
While the extension of the so-called Section 179 expensing of as much as $100,000 of business assets for another two years is a boon to firms, it's doubtful whether that write- off will create or maintain any jobs. There's no credible academic evidence directly linking breaks on capital gains and dividends to increased employment or economic activity in the past two years. Yet there's little doubt as to who will benefit.
And after making it quite clear who will benefit (the wealthiest), we get this:
This newest mangling of egalitarian tax policy adds more layers of complexity and confers breaks to the minority of taxpayers who can curry favor with legislators.
Outstanding stuff. Anyone who's waded through Schedule D in the last ten years (and especially in the last four) knows that the capital gains and dividend tax cuts have had only one clear economic effect--growing the tax preparation industry.

May 15, 2006

Trendy Tax Break

Perhaps one of the most misunderstood and unpopular words in the English language is tax. Partner this T-word with something that has really positive appeal like the word holiday and for politicians across the country you've got a great election year policy.

Tax holidays are sweeping the nation and they aren't just for school supplies any more!

Earlier this month, both houses in the Florida legislature voted for a 9-day sales tax holiday and Governor Jeb Bush will most certainly sign the bill into law.
Florida shoppers won't have to pay sales tax on books, clothes, wallets and most bags selling for up to $50 and school supplies such as pens, pencils and binders selling for up to $10.
This holiday comes with quite a price tax - $38 million in lost revenue to the state and an estimated $7 million loss for local governments. Florida tax holidays aren't just for school supplies either. On May 21 through June 1, no sales tax will be levied on products purchased for "Hurricane Preparedness." Included in the list of tax-exempt items are:

  • Cel phone batteries with a price tag of less than $60
  • Candles that cost less than $20
  • Tiki torches worth less than $20

For a complete list of exempt items click here.

Late last month, Alabama Governor Bob Riley signed a "back-to-school" sales tax holiday into law for the first weekend in August. During that weekend individual clothing items that are less than $100 are exempt from sales tax.

Even though sales tax holidays are politically popular they aren't a silver bullet for legislators trying to offer genuine tax relief. For more on the policy implications of sales tax holidays click here to real ITEP's Policy Brief on this topic.

May 12, 2006

Senate Passes Tax Cut Bill - How Did Your Senators Vote?

On Wednesday the House of Representatives voted 244-185 in favor of a reconciliation tax bill that will cost $70 billion over the next five years. See our earlier blog post here to view details of the vote.

A day later, the Senate approved the bill by a 54-44 vote .

The bill extends tax cuts on dividends and capital gains that weren't even set to expire until 2008. Also, this legislation only offers a one-time temporary Alternative Minimum Tax (AMT) fix for 2006. Instituting a long term remedy to the growing problem of the middle-class paying the AMT is crucial and necessary tax reform. Unless AMT reform is legislated over the long run, more than 15 million middle-class taxpayers will be forced to pay the AMT even though it was originally created as an alternative tax for the very wealthy.

Interested in knowing how your Senators voted? Here's the voting record for the bill.

The votes fell mostly along party lines, but here's a list of Senators who didn't vote with their party and links if you'd like to send them a comment:

Republicans who voted against the tax cut bill:
Olympia Snowe - Maine
George Voinovich - Ohio
Lincoln Chafee - Rhode Island

Democrats who voted for the bill:
Bill Nelson - Florida
Benjamin Nelson - Nebraska
Mark Pryor - Arkansas

May 11, 2006

Another Year, Another Tax Shift

The latest round of Bush tax cuts appears to be a done deal. On Tuesday, a conference committee agreed on a tax plan that will reduce taxes by $70 billion over the next five years. The plan includes a raft of new giveaways for wealthy Americans and corporations, but offers only a temporary fix for what has become a permanent problem: the expansion of the individual Alternative Minimum Tax (AMT).

Not surprisingly, the plan offers peanuts to low- and middle-income Americans while giving away the candy store to a handful of the wealthiest taxpayers. CTJ has already published distributional analyses on both of the plan's major components: for the AMT, click here. For capital gains, click here.

What’s In the Conference Committee Plan
The agreed-upon tax bill includes $70 billion in tax cuts over the next five years.

The biggest single tax cut in the bill is a one-year extension of previously enacted cuts in the individual AMT. Congress had earlier enacted a temporary increase in the AMT exemption to help ensure that only wealthier Americans would be subject to the tax, but that higher exemption expired at the end of 2005. The bill extends, and slightly increases, the higher exemptions for tax year 2006 only. The one-year extension carries a price tag of almost $34 billion.

The bill also provides a two-year extension of temporary tax breaks for capital gains and dividends. 2003 legislation lowered the top tax rate on capital gains and dividends to 15 percent for five years; these temporary cuts had been scheduled to expired on January 1, 2009. The two-year extension is estimated to cost $21 billion over the next five years.

The third-most-expensive part of the newest tax cut is an expanded tax break for businesses investing in new equipment. The new law allows companies to immediately write off up to $100,000 of the cost of new equipment. The five-year cost of this new tax break: $7.3 billion.

The new law also provides a corporate tax break, worth almost $5 billion over the next five years, to companies such as General Electric and Citigroup by allowing them avoid paying taxes on certain income shifted overseas.

What’s Not In the Conference Committee Plan
The Alternative Minimum Tax remains a major concern for Congressional tax writers even after the passage of this latest tax cut: as the chart at right shows, the agreed-upon higher exemption will expire at the end of 2006. CTJ has estimated that if the exemption is allowed to fall back to its currently-scheduled levels in 2007, more than 15 million Americans will be forced to pay the AMT for the first time.

The main reason for Congress’ reluctance to provide more than a one-year patch for what has become a permanent problem? Its cost. House and Senate negotiators could agree on "only" a $70 billion tax cut over five years—and even a two-year extension of Alternative Minimum Tax relief would eat up most, if not all, of that amount.

Of course, every member of Congress knows the AMT is a problem they must solve by next year. The exclusion of AMT relief amounts to Congress trying to fit two pounds of sugar in a one-pound bag.

The agreed-upon tax bill is also notable for its exclusion of a variety of "extenders"—temporary tax cuts, mostly for businesses, that have expired or are about to expire. These tax cuts are widely supported among Congressional tax writers—and will likely cost at least $20 billion over five years.

Not a Tax Cut-- a Tax Shift
A casual observer of this tax-cutting frenzy would be forgiving for not remembering that the nation already faces a $300 billion budget deficit for this year alone. Of course, this means that every penny of the latest tax cut is being paid for with borrowed money.

This money may ultimately come out of the hides of state governments, in the form of reduced federal assistance to the states; it may be paid by higher taxes on lower- and middle-income Americans. It may come out of your currently Social Security benefits. (Sorry, baby boomers!) Or the bill may just be sent straight to your grandchildren.

But however it's paid for, what Americans need to recognize is that right now no one is picking up the bill. Which means this isn't a tax cut at all-- it's a $70 billion tax shift.

Who Crossed Party Lines on the $70 Billion Tax Cut?

The House of Representatives has approved the conference committee report for the latest $70 billion tax cut. With the Senate's approval (voting record analyzed here), it's off to the President's desk.

The bill, HR 4297, cuts capital gains taxes (for two years) and the AMT (for one year). A detailed list of the bill's provisions (and the five-year and ten-year cost of each) can be found on the House website here.

The House vote was largely a party-line affair, but a few members crossed party lines each way.

Here are the 15 House Democrats who voted for the tax cut:
John Barrow, 12th District - Georgia
Melissa Bean, 8th District - Illinois
Dan Boren, 2nd District - Oklahoma
Ed Case, 2nd District - Hawaii
Robert "Bud" Cramer, 5th District - Alabama
Henry Cuellar, 28th District - Texas
Lincoln Davis, 4th District - Tennessee
Harold Ford, 9th District - Tennessee
Bart Gordon, 6th District - Tennessee
Jim Marshall, 3rd District - Georgia
Jim Matheson, 2nd District - Utah
Mike McIntyre, 7th District - North Carolina
Charlie Melancon, 3rd District - Louisiana
Collin Peterson, 7th District - Minnesota
John Salazar, - 3rd District - Colorado

Here are the 2 Republicans who voted against it:
Sherwood Boehlert, 24th District - New York
Jim Leach, 2nd District - Iowa

The complete roll-call vote is here.

May 10, 2006

Why We Need An Estate Tax

Defenders of the federal estate tax have pointed out ad nauseum that the tax affects only a small number of the wealthiest families. (See CTJ's analysis here, citing IRS data that shows 1.25% of estates owed tax in 2004.) But the estate tax remains quite unpopular among most Americans, largely due to effective scare tactics by the anti-estate tax lobby. A lot of people have been scared into believing they're gonna be part of that 1.25 percent.

But perhaps American voters need a more compelling reason to support the estate tax than "you won't pay it." A January 2006 report by a Federal Reserve Board researcher is a stark reminder of the real reason why the estate tax is a vital part of our tax system: the incredible (and growing) inequality of wealth in this country. The report, written by long-time FRB researcher Arthur Kennickell, estimates changes in the distribution of wealth between 1989 and 2004 and finds that:
  • The wealthiest 1 percent of Americans held 33.4 of the wealth in 2004.
  • This was up from 30.1 percent in 1989.
  • The top 5 percent collectively held 55.5 percent of the wealth in 2004.
  • The poorest 50 percent of the American population collectively held 2.5 percent of the wealth, down from 3.0 percent in 1989.
  • And the very wealthiest 1 percent of Americans own a bigger piece of the pie (33.4 percent) than the poorest 90 percent put together (30.4 percent).

For particular types of property, the inequality of holdings is even greater.

  • The wealthiest 1 percent of Americans owned 62.3 percent of the business assets in 2004.
  • The wealthiest 5 percent collectively owned 88.7 percent of business assets.
  • The wealthiest 5 percent also owned 93.7 percent of the value of bonds, 71.7 percent of the nonresidential real estate, and 79.1 percent of the value of stock.

Amidst all the fuss about who does and doesn't pay the estate tax, hardly anyone has drawn much attention to the profound inequality of wealth that makes the estate tax necessary, if only as a marginal restriction on the further growth of inequality. And part of the reason may be that this level of inequality is simply too difficult to comprehend.

A recent CTJ analysis has already highlighted the relative ineffectiveness of the estate tax in restricting the ability of the wealthiest Americans to pass on their fortunes under current law-- the analysis shows that the biggest estates paid less than 20 percent of their value in federal and state estate taxes. This new SCF data suggests that outright repeal would simply open the floodgates.

May 08, 2006

Congressional Leadership Sees the Writing on the Wall

One of the striking (and maddening) things about the way the federal tax debate has developed over the last six months is that the different way lawmakers are treating the two big tax cuts currently in play.
1) The temporary higher AMT exemptions, which expired at the beginning of 2006. Everyone knew it was gonna happen, and so far Congress has been unable to agree on how to fix it--even though everyone agrees it must get fixed. And the main reason for this inaction is...
2) the temporary lower capital gains/dividends tax rates, which won't expire until 2009. The Republican leadership in both houses is much more intent on extending these not-yet-expired tax cuts than in fixing a tax cut that expired more than four months ago.

So why is this happening? Why is Congress skipping dinner and heading straight for the dessert?

An interesting article in Bloomberg today suggests that it's because Republican tax writers are starting to worry that they won't be running things when 2009 rolls around-- and may even be looking for new offices before the end of 2006:
Republican lawmakers, facing the prospect that their power to cut taxes may soon be curbed, plan to extend breaks that mostly benefit the wealthy and Wall Street at the expense of reductions for middle-income households. "In politics, timing iseverything; you do what you can when you can, and this is what's queued up right now," says Arizona Senator Jon Kyl, the No. 4 Republican in the Senate.
It's not too late to fix the AMT problem. And Republican Senate and House leaders would almost certainly laugh out loud at the notion that they're getting what they can while the getting is good. But it's a plausible explanation of why Congressional leaders have been so spectacularly unsuccessful in extending needed AMT relief-- and the more plausible it starts to sound, the worse the news may get for Republicans in November.

Colorado's TABOR: If You Can't Say Anything Nice...

The shortcomings of Colorado's "Taxpayer Bill of Rights" or TABOR rules, which gutted the state's ability to adequately fund public services over the past fifteen years, have been widely and effectively documented. The state's TABOR rules forced state lawmakers to refund state tax collections that were labelled "surplus" revenues under a ludicrously broad definition of what constitutes a surplus. Even worse, some anti-tax advocates who observed the workings of TABOR (before the wheels fell off Colorado's tax system in the last few years) mistakenly saw TABOR as an example to be copied in other states. As a result, lawmakers across the nation who could be enacting constructive (and necessary) structural tax reforms are instead bickering about whether or not to enact one of these misguided revenue caps.

This is all bad, bad stuff, and the wave of negative press and analysis that has fallen on Colorado policymakers for enacting this mess is all well-deserved.

But I got one good thing to say about Colorado's TABOR: if you're a state lawmaker and you're gonna dole out "surplus" revenues, you could do a lot worse than to follow the Colorado example. Back in the good old days when TABOR was dropping suitcases full of fifties in the backyard of every Coloradan, the state was funding an Earned Income Tax Credit with TABOR money. The biggest and most progressive sales tax credit you could imagine was funded with TABOR money. These were tax cuts that offered the biggest benefits to low-income working families-- an unusually progressive step for state lawmakers anywhere in the late 1990s.

It wasn't all good, of course. Check out the Colorado Legislative Council's list of the various rebate mechanisms here to see that TABOR could also fund tax cuts for capital gains, interest and dividends.

And at the end of the day, if Colorado lawmakers thought an EITC was important enough to enact, they should have done it permanently, in a way that wasn't contingent on having "surplus" revenues. Presidents Reagan and Clinton both saw a generous EITC as a vital tax incentive for working families below the poverty line-- not as something to do with whatever extra cash you've got lying around at the end of the fiscal year. The Bell Policy Institute gets this exactly right in their call for a permanent Colorado EITC.

So I lied. I don't really have anything good to say about TABOR-- this is actually a slam on an unintended consequence of the November 2004 ballot changes that helped fix TABOR's flaws. The November 2004 changes definitely reduced the damage done to the state's budget each year, by putting a moratorium on TABOR rebates for the next five years. And the state will likely be marginally better equipped to adequately fund services now as a result. But Colorado lawmakers should remember that in doing so, they've pulled the rug out from under working Colorado families who depended on the EITC. Incorporating the best tax-cutting provisions from the TABOR rules as a permanent part of the Colorado tax system could be a smart, and progressive, move.

South Dakota: Letting the Voters Decide on Tax Policy

If you already knew about South Dakota's growing love affair with direct democracy, it's probably because you've heard about a pending ballot initiative (likely headed for a November 2006 vote) that would overturn the state's recently enacted abortion ban.

But there are a lot of other ideas headed for the November 2006 ballot-- including four tax proposals. At least two of these ideas are potentially harmful enough that it would be a shame if the national attention given to the abortion thing drowned out an informed debate on the tax issues.

The Argus Leader has an overview of what's out there, and identifies the following tax initiatives that may qualify for the ballot:

1) One proposal would follow in the footsteps of Iowa and repeal the state's video lottery. This is a big deal because proceeds from the video lottery are currently used for one purpose: to cut property taxes. Current status: gathering signatures.
2) The video lottery repeal would probably force South Dakota back toward a heavier reliance on property taxes-- but never fear. An initiative that's already qualified for the November ballot would (wait for it)... limit the allowable growth of local property taxes. Current status: already qualified.
3) South Dakota lawmakers, in a very rare tax hiking frenzy a couple of years ago, enacted a gross receipts tax on cell phone users. Another pending initiative would repeal this tax. Current status: gathering signatures.

Jeez- so if South Dakotans repeal the video lottery and the cell phone tax and limit the growth of property taxes, where can they turn to fund public services? You guessed it...

4) Hike the cigarette tax by $1 a pack, from 53 cents to $1.53 a pack. The revenues from the tax hike would be split evenly between three spending areas: property tax reduction, education, and health care. Very clever of the initiative's authors to identify not one but three fast-growing areas of public spending to match up with a declining revenue source. Current status: signatures submitted, awaiting approval.

There's plenty of time for South Dakotans to make up their mind about these specific proposals, if and when they qualify for the November ballot. But this will be a good time for state residents and lawmakers to think about the uses--and the limitations-- of direct democracy as a policy tool. It's not too hard to see a public vote on hot-button social issues as being a decent use for the initiative. You gotta respect the public's right to stake out a position on issues like abortion and gay marriage, even if you don't like the outcome.

But you can make a strong case that tax policy is, in general, simply too complicated and arcane a thing to be decided by voters. Every year there's litigation in a number of states over how to concisely, accurately and impartially describe the goals of tax-related ballot initiatives-- and there's good reason for this confusion. In almost every case, even if the proposal's direct effects are simple (repealing a tax, for example), the indirect effects are anything but. Advocates and opponents of proposed ballot initiatives fight endlessly over how to boil down a complicated proposal into few enough words to fit on a voter's punch card. Inevitably, important details are lost-- or are never even brought up.

And this seems true of this year's crop in South Dakota. Repealing taxes is a simple thing ( video lottery, cell phone tax). But if any of these repeals go through, the state would have to come up with an alternative revenue source at some point quite soon-- and voters don't have to make that tough choice this fall. All they have to do is decide whether they'd like a couple of taxes to just go away.

The property tax cap proposal has the same troubling indirect implications, but (unlike the others) isn't even simple on its face. Look to the shambling mess that is California's post-Proposition 13 tax system, or Florida's growing property tax mess, to see how disastrous and unpredictable property tax caps can be. It's simply irresponsible to ask voters to figure all this out on their own.

The cigarette tax is a simple idea-- we should make smokers pay for the costs they're imposing on society. But there are still complicated issues about where the money should go and whether the money coming in will be sufficient to fund the services it's supposed to fund. These are technical details that are simply too arcane for most voters to care about.

There's a reason why we pay state, federal and local lawmakers-- to make informed decisions about issues we don't have the time or the expertise to learn about. When lawmakers hand off the technically hard decisions onto voters, a constituent can reasonably ask "what are we paying these guys for?"

May 07, 2006

Ben Stein in NYT: "You're Rich? Terrific. Now Pay Up."

Economist Ben Stein is not usually known for his progressive flights of fancy. But in today's New York Times, he uncorks this diagnosis of what ails American society:

The real problem is the difference between the rich...and the poor. It is up to the government to redress this extraordinary difference in incomes of the rich and the nonrich, even at the margins.

Stein thinks that at least in some cases, we need to fix both extremes of the rich-poor divide:

What Congress can do, and should do, is address the stunning underpayment of military men and women and the staggering budget deficits that will be a burdenon our posterity for decades, by raising the taxes on the rich.
There's nothing particular new about this argument--the causal linkage between the Bush tax cuts and our ongoing ability to fund public services is not exactly rocket science at this point--but it's absolutely novel, and great, to hear it from a public persona with no particular ax to grind. Stein's diagnosis of the problem couldn't be clearer:

It's fine that there are rich people. It's even fine that there are superrich people. But if they are superrich, they derive special benefits from life in the United States that the nonrich don't...It is just common decency that they should pay much higher income taxes than they do. Taxes for the rich are lower than they have been since at least World War II — that is to say, in 60 years. This makes no sense in a world at war, in a nation with so many unmet social needs, in a nation with so many people without health care, in a nation running immense and endless deficits... Whatever rationale there may have been in 2001 for lowering their taxes is long gone. It's time for them — us, because it includes me — to pay their (our) share.
Stein doesn't provide much in the way of numbers to back up this assertion (and shouldn't be expected to, given his limited word count)-- but the numbers don't lie:

1) According to a 2004 CTJ analysis, the wealthiest 1 percent of Americans paid (on average) just under one-third of their incomes in combined federal, state and local taxes.) The average income in this group was just under $1 million.
2) The 20% of Americans smack-dab in the middle of the income distribution paid...almost as much as these wealthiest guys. 27 percent of their income in federal, state and local taxes. Average income in this group was $34,500.
Put these two things together and you've got a tax system that is, at best, modestly progressive--hardly the confiscatory system you'd expect from the anti-tax rhetoric being slung around by Congress and the President.

And when you've got a distribution of income as unequal as ours, the difference between "modestly progressive" and "pleasantly progressive" can cost a lot of money. The wealthiest 10 percent of Americans have as much income as the poorest 80 percent put together-- in such an unequal society, a progressive tax system is the only way to adequately fund services. Requiring low- and middle-income Americans to pay almost as much of their income in taxes just isn't a smart idea from a revenue-raising perspective-- you can't squeeze blood from a stone.

Stein's column is the latest indicator of a growing consensus that the tax system lets the wealthiest Americans off too easy. The more we hear this argument coming from sensible centrists, the more likely it becomes that our elected officials will grow a spine and come to terms with our growing budget deficits. Thanks, Ben!