Beware: Fake Circuit Breakers!

Like many states Indiana is struggling to provide property tax relief in a meaningful way. In the past several years Indiana has struggled with how to utilize property tax relief mechanisms already in place to offset the nearly guaranteed property tax increases Hoosiers faced because the state changed property tax assessment practices.

During the last legislative session property tax relief was again foremost in the mind of legislators and a brand new circuit breaker passed into law.

Circuit Breakers are one of the best tax policy mechanisms around that ensures people who most need property tax relief actually get it. Here’s an ITEP brief on the subject. In a nutshell a circuit breaker protects low-income residents from a property tax "overload" just like an electric circuit breaker: when a property tax bill exceeds a certain percentage of a taxpayer’s income, the circuit breaker reduces property taxes in excess of this "overload" level.

One of the reasons why people so dislike property taxes is because they aren’t based on people’s ability to pay. For example, if you lose your job your property tax bill won’t change even though your income has dramatically decreased. The circuit breaker acts to link the property tax with a taxpayer’s income level.

Given that circuit breakers make a state’s tax structure more fair, I was really pleased to see Indiana lawmakers decide to implement a circuit breaker. Wanting to learn more about this circuit breaker, I read this report from Indiana’s Department of Local Government Finance. To my dismay I learned that what the legislature passed really isn’t a true CB at all!

In fact, the Indiana circuit breaker doesn’t have anything to do with income levels, it’s a type of property tax cap. When the circuit breaker becomes law property taxes won’t be able to exceed two percent of a property’s assessed value. That’s it. Nothing that helps make the overall tax structure more fair and nothing that specifically helps low income people.

Local governments are fuming too. Check out this article from the Fort Wayne paper to see why many local governments aren’t endorsing this policy prescription either.

The moral here seems to be - just because it says it’s a duck, doesn’t really mean it’s a duck. Indiana lawmakers would do better to create a real circuit breaker that offers real benefits to working Hoosiers and their families.

ExxonMobil is Drowning in Taxes?

If you saw this ExxonMobil ad in the Washington Post the other day, in which the company claims to have a 275% tax rate on their profits last year, you were either impressed with Exxon's good corporate citizenship-- or wondered how they cooked the books to arrive at this number.

The ad asserts that "Last year, ExxonMobil earned about $36 billion, but incurred $99 billion in taxes worldwide." Pretty outrageous overtaxation if it's true. But in a new column in the American Prospect's online edition, Citizens for Tax Justice Director Bob McIntyre picks apart Exxonmobil's assertion by dusting off the company's annual financial reports:

First of all, the $36 billion that ExxonMobil’s ad says it earned worldwide in 2005 was after taxes, not before. The company’s pretax profit, i.e., what it paid income taxes on, was $59 billion. Second, it turns out that three-quarters of the “$99 billion” that ExxonMobil’s ad claims it paid in total taxes were actually gasoline taxes and similar foreign levies that were paid by its customers (and that didn’t come out of profits).

When the statistical dust clears, according to McIntyre, what ExxonMobil really paid was $23 billion in tax on $59 billion in profits-- a healthy, but hardly absurd, 40 percent rate.

In the wake of prior revelations that ExxonMobil had paid less than half of the 35 percent legal US corporate rate in the three years between 2001 and 2003, it's understandable that they'd be interested in burnishing their image a bit. But in the age of the on-line financial report, it's not difficult at all for good-government advocates to check up on these outlandish claims.

California: Oil-Profits-Tax Advocates Accused of "Cyber-Squatting"

The fight over California's oil-tax ballot initiative, Proposition 87, is heating up. The latest legal tussle isn't about the initiative itself (which would raise $4 billion over ten years from oil companies doing business in California) but about the variety of websites that have sprung up to support (and oppose) the measure.

When Prop 87 qualified for the ballot, forward-thinking proponents of the oil tax initiative cleverly bought up a bunch of domain names that opponents would likely want to use themselves, such as www.noonprop87.org. As a result of this "cyber-squatting," someone who typed in that web address hoping (reasonably enough) to find an anti-87 website would get forwarded to a website that supports Prop 87.

This is tricky, but nothing new, and certainly not illegal, right? Well, it turns out California has a law called the "Political Cyberfraud Abatement Act" that is designed to ensure that Internet users seeking a particular perspective on a political issue don't have to (horror of horrors) check out a website that takes the opposite perspective. The idea, I guess, is that you should be able to judge the metaphorical book by its cover.

Prop-87 proponents have forestalled the emerging legal morass by voluntarily handing over ownership of the domain names to opponents of the tax. And so now if you click on www.noon87.com, you'll go to a website that really wants you to vote no on 87.

My question: if we're going to start requiring "truth in labelling" for website domain names, shouldn't we start by requiring these guys to hand theirs over?

Florida: Nasty Tax Talk in Gubernatorial Campaign

In Florida, two Republican gubernatorial candidates are duking it out in advance of the September 5 primary election. Frontrunner Charlie Crist and distant-second Tom Gallagher have been engaged in a spirited who's-more-conservative battle for the last month, and in a recent debate Crist (who has moderate positions on issues such as same-sex civil unions, stem cell research and abortion) set the tone for the tax debate by asserting that "I have never supported a new tax, and I never will, unlike my opponent."

In a state that confronts fundamentally worrying structural problems in its tax system, this approach hardly establishes Crist as green-eyeshades material. But it gets worse. Apparently what Crist is referring to with the "unlike my opponent" swipe is that Gallagher supported a 1 cent hike in the state sales tax to pay for prison construction-- in 1993. So the last time Gallagher thought a tax increase was necessary was before the Internet was invented (as far as most people are concerned, anyway) and that makes him a liberal? A truly execrable anti-Gallagher website elaborates on this theme by calling the Gallagher prison tax idea "the largest tax increase in Florida history."

If you wonder how a 1 percent hike in a sales tax that's already 6 percent can be the "largest in history", then you're smarter (or at least more honest) than the creators of the aforementioned website. After all, the 1 cent hike enacted in 1988 that pushed the rate from 5 cents to 6, and the 1 cent hike enacted in 1982 that knocked the rate up from 4 to 5, were not smaller than the Gallagher-supported 1 cent idea in any meaningful way. Sales taxes bring in a little bit more every year as Florida's population grows and prices go up. That means each cent of the sales tax brings in more and more-- and also means that any proposal to increase the rate will bring in more as time goes on. [And, of course, you want the yield of a tax to increase over time, because inflation drives the cost of funding public services up each year as well.]

Gallagher's hands aren't clean either, however:

Gallagher pointed out that Crist in the 1990s supported a penny-per-pound tax on sugar to pay for Everglades cleanup, although his opponent now insists that was a fee increase.

It's probably too much to expect these guys to seriously analyze the flaws of the Florida tax system in a debate (or, sadly, at any time during the course of the campaign), but this is just horrendous. Can't wait to see what the Democratic candidates are up to...

Detroit: High Gas Prices Are Here to Stay

It's been a while now since the price of gas hit $3 a gallon. But many of us who remember the halcyon days of low gas prices and open highways have a little tiny voice inside us that says things will return to normal soon enough. Unfortunately, Detroit automakers are now strongly suggesting that we shouldn't hold our breath. Here's the chief sales analyst for the Ford Motor Company:

We don’t see the price of gasoline returning to the levels that we all enjoyed in the 90’s and the early part of this decade...[T]he base case assumption around which we’re planning our business is that gas prices remain high. The days of inexpensive gasoline are gone.

A Chrysler exec is quoted saying pretty much the same thing: he says Chrysler is "planning internally as if it is $3 to $4 a gallon" for the foreseeable future.

Should this forecast affect the tax policy strategies of state and federal lawmakers trying to cope with public anger over high gas prices? Opponents of gas tax hike frequently bleat that "with $3 a gallon gas, now is not the time" for a gas tax hike. But if the Detroit guys are right about price trends, there will never be a better time.

Meanwhile, evidence is mounting around the nation that more states need more transportation funding (which comes principally from gas taxes) to repair their crumbling highways and bridges. In Wisconsin, a legislative committee is recommending immediately ramping up transportation spending by 40%. Part of the reason such a big hike is needed is that the state has been siphoning off transportation funding revenues to help balance the regular budget in recent years. And a Pennsylvania commission has just issued a similar recommendation, calling for almost $900 million in new transportation spending.

Like it or not, we're entering a new era of higher gas prices. With a growing number of states nearing crises in their transportation infrastructure, policymakers will have to strike a balance between their dislike of regressive gas taxes and their need to keep the roads safe.

The Paradox: Working Americans See Their Wages Fall, The Rich Get Richer and the White House Reports Increased Revenues

Census data released yesterday shows the median income for working-age Americans declined in 2005 and poverty was basically unchanged. The median income for non-elderly households fell by about $275, or 0.5 percent while the poverty rate was 12.6 percent. As the Center on Budget and Policy Priorities points out, this rate of poverty is actually higher than the 11.7 rate that held during the lowest point of the recent downturn in 2001. Historically, the fourth year of an economic recovery usually is far kinder to Americans than it is this time.

But hasn't there been talk lately of federal revenues looking better than expected? If so many people are worse off, how can the government be collecting more tax money?

The Office of Management and Budget published their mid-year review in July that said revenues were unexpectedly high and the 2006 deficit would therefore be "only" $290 to $296 billion in 2006. Then in August the Congressional Budget Office put out numbers projecting a 2006 deficit of "only" $260. (The differences between the two figures actually just has to do with the CBO being better able later in the summer to see what agencies will actually spend). Even the lower deficit number represents a major deterioration in our fiscal health over the years that President Bush has been in office (from a surplus of 2.4 percent of GDP in 2000 to an estimated deficit of 2.0 percent of GDP).

Whatever revenue surge there is may have several causes, but increased wages paid to middle-income or low-income people is certainly not one of them. As the Center on Budget and Policy Priorities points out, half of the revenue surge results from an increase in corporate taxes paid. Increased capital gains and dividends are another factor. These are all clearly enjoyed by people at the higher end of the income scale. As for income taxes, some argue that increased income polarization is actually a cause of increased income tax revenue. If some Americans become very poor and an equal number become very rich, taxes may go up because the richer Americans pay taxes at higher rates than middle or low-income families.

We see today that wages are a smaller percentage of the economy than in any time in post-World War II economy, while corporate profits are a higher percentage of the economy than any time in the past 40 years. It almost seems like we're living in two different economies. In one, working people see their wages fall in real terms, while in the other, stockholders and those with very high salaries see their incomes rise faster than ever. The taxes paid by the latter group are causing a small short-term boost in revenues even while the former group stagnates.

Does the revenue boost mean that supply-side economics is working, at least partially? No way. For one thing, both personal taxes and corporate taxes are very low as a share of the economy compared to other similar points in our history. For another, as you look back in American history there is clearly no connection between tax breaks and revenue surges. For example, in the late 1990s, after taxes were increased the economy, and revenues, surged, resulting in a budget surplus.

Idaho: A Touching Display of Advisory Democracy

Since Idaho's temporary governor used a legislative super-super-majority to push through a property-for-sales-tax swap in a one-day special session last week, there have been (justified) howls of outrage from the blogosphere.

The session is widely being described as anti-democratic for the vigor with which Republican leaders prevented alternative approaches to property tax reform from being discussed. But interestingly, even though the Dem leadership's alternative plan-- which would have restricted property tax cuts to just Idaho homeowners, rather than providing breaks to businesses and second-home-owners--didn't get a hearing during the Friday special session, the legislature now professes to be very interested in knowing whether the public thinks they did the right thing. Here's a section from the newly passed property tax swap legislation that creates an "advisory" question on this November's ballot:

SECTION 25. The Legislature finds and declares that the issue of the property tax funding maintenance and
operations of public schools is of importance to the citizens of the state of Idaho. As a representative body, members of the Legislature desire to be responsive and responsible to these citizens. For this reason, the Legislature herewith submits an advisory ballot to the electors of the state of Idaho, and the results will guide the Legislature as to whether the [just-repealed M&O property tax] should continue to be removed and the funds be replaced by a sufficient increase in the state sales tax. The Secretary of State shall have the question below placed on the 2006 general election ballot ... The question shall be as follows: "Should the State of Idaho keep the property tax relief adopted in August 2006, reducing property taxes by approximately $260 million and protecting funding for public schools by keeping the sales tax at 6%?".

It's cute that they're interested in knowing what people think about the legislative steamroller GOP leaders just pulled. But what happens if voters say they don't like it? The language of the bill says the legislature "will be guided" by the results. Does this mean the Democratic alternative will get a hearing when the legislature comes back in January?

Oregon: Challenging Out-of-State Initiative Backers

National news outlets have reported recently on the troubling influence of out-of-state money in financing often-damaging ballot initiatives around the nation. Today Blue Oregon reports that Oregon Governor Ted Kulongoski has challenged one of the biggest offenders, the aptly-named Howard Rich, to come to Oregon to debate a TABOR-style tax initiative that Rich has helped bankroll. Here's an excerpt from a letter Kulongoski has apparently sent Rich:

Since you are the chief financial backer of Oregon ballot Measure 48, I invite you to Oregon to publicly debate the merits of the measure. You have already put $1.1 million dollars into this effort, so I am certain that you can afford the price of a plane ticket. ... For too long out-of-state special interests have used Oregon as a laboratory for their failed ideas... If you are willing to pour millions into our state as a social experiment, the least you can do is come here and explain in person to Oregon voters why the face of our future is so important to you.

Outstanding stuff. The media folks who have documented the role of out-of-state money in bankrolling ballot initiatives are helping to make it clear that what was once viewed as an important experiment in direct democracy is now, in many states, as beholden to monied interests as the regular legislative process. Kudos to Governor Ted for calling Howard Rich out.

Cabela’s: Outdoors Store and....Museum?

Across the country, large retailers continue to extract huge subsidies from local governments desperate for jobs and corporate investment. In the latest example, a giant Cabela's outdoors store to be built in the suburbs of Chicago would save on its property taxes because 15% of the 185,000 square foot store would be designated a tax-exempt museum. Cabela’s stores contain several thousand square feet each of taxidermy, aquarium, and other displays that are open to the public, and this is the area that would be designated a "museum" under the proposed incentive package. The property tax break is projected to save the store $5.5 million over the next twenty years, in addition to the $18 million given in direct sales tax rebates, according
to the Chicago Tribune.

Meanwhile, in the suburbs of Kansas City, Merlin Entertainments Group of London is in talks with local governments about the construction of a proposed Legoland amusement park. The group has asked the state to raise over 50% of the $740 million for the project using public funds from bond issues, which the state and local governments will be paying back for years. Near the end of the article, the reporter offers this particularly revealing tidbit: [...]the payoff could be enormous, not only for the reputation of Olathe, which has felt overshadowed by Overland Park, but the entire metropolitan area". This short line demonstrates the power of the developer’s strategy. Olathe feels compelled to offer such generous incentives because the city is afraid of losing the project to other suburbs. As the proposed bond issue shows, this divide-and-conquer strategy has been very successful for developers.

Worst of all, no one seems to know if the local governments get what they pay for so generously. A Good Jobs First case study found that when a local paper tried to find out if the $32 million subsidy package granted to the Cabela's that opened in Hamburg, Pennsylvania was paying off, none of the government offices that touted the project could provide any specific numbers about the deal's outcome. No one knew if the project had generated more investment, or increased tourism, or any of the other benefits the store was supposed to bring. The lack of record-keeping by local governments nationwide makes it impossible to know if such business subsidies are a good use of taxpayer’s money.

Voters should not allow businesses to hold their local governments hostage for development money on projects of unknown value to the community. Local governments should not be forced to pay the costs of business expansion.

Business Rejects TABOR

A new Kiplinger article sees an interesting trend in the battles being fought over the tax-and-spending limits known as TABOR in state houses nationwide: business interests are opposing these limits in state after state. Here's the Kiplinger forecast for this fall:

Expect businesses to mount pitched battles to defeat such initiatives in Maine, Michigan, Montana, Nebraska, Nevada and Oregon. Companies fear that a lack of state spending on services and infrastructure will make it impossible for them to attract talented employees, especially for high-tech jobs.

Observers of big tax battles in Virginia and Alabama in recent years (and of Colorado voter's partial rejection of their existing TABOR rules in last fall's election) know that when a state's Chamber of Commerce comes down on the side of fiscal sanity, good things can happen. Kudos to business interests in these states for recognizing that the fiscal policy coin has two sides, and that unaffordable tax cuts will directly result in spending cuts that make a state a less attractive place to do business.

Idaho Governor Pushes Through Property Tax Swap

In Idaho, anti-tax lawmakers are once again using fixed-income seniors as a political football to engineer across-the-board property tax reductions.

Temporary Idaho Governor Jim Risch called a one-day special session (held yesterday, August 25) to debate his property tax plan, which would cut Idaho property taxes for all homeowners and businesses by about 20 percent and make up most of the money by hiking the sales tax rate. As the Idaho Center on Budget and Tax Policy has noted, this tax swap will benefit wealthier Idaho families at the expense of lower- and middle-income taxpayers.

The plan also attracted criticism from Democratic lawmakers who have proposed targeting property tax cuts only to homeowners, and from a former state Supreme Court judge who says it's probably unconstitutional for the governor to hold a special session at which only one bill (his own) can be discussed.

But, in a depressing display of supermajority power, the legislature rammed through the Risch proposal in yesterday's special session. It took a very long day-- the Eye on Boise blog gave us running commentary on the progress of the session, including the (ultimately useless) procedural tricks used by minority Dems to try to slow down this steamroller--but in the end, the Risch tax shift was enacted.

You could fill a warehouse with what's wrong with this outcome, but there are two big ones:
1) the complete mismatch between the stated goal of Risch and the Republican leadership (helping fixed-income seniors) and what they ended up doing (helping everyone with one hand, and then taking most of it back with another).
2) the pointlessly antidemocratic way in which the special session was held. The refusal to hear out alternative plans for tax reform is the sort of thing we've grown accustomed to seeing from legislative leaders in Washington DC, but one would like to think that Idaho leaders could let policy, rather than politics, do the talking here.

This op-ed from last week's Idaho Statesman, in which a long-time House tax committee member asserts that the Risch bill is "the only way to give relief," is symptomatic of both problems. The author, Ken Roberts, clearly understands the current problem in Idaho, noting that "must decouple the school M&O from the huge market value increases that many parts of the state of Idaho are experiencing," and that the property tax as currently structured "does not look at the taxpayer's ability to pay the tax."

Well, we can talk about the different options available for fixing these problems, right? Maybe think about the merits of further expanding the homestead exemption, or putting some teeth in the state's circuit breaker credit by making more seniors eligible and extending eligibility to non-elderly homeowners and renters?

Actually, no. What Roberts does in his op-ed, as the legislature did yesterday, is simply to take a "my way or the highway" approach, asserting that the only possible way to fix these problems is by repealing the school property tax without saying a word about why more targeted (and less costly) alternatives aren't worth thinking about.

The good news, sort of, is that Idaho voters will have a chance to cast a (purely advisory) vote on whether the legislature did a good thing yesterday. Although one wonders, if the legislature wasn't willing to listen to informed minority viewpoints within its own ranks, how seriously it will entertain the views of Idaho voters this fall. Stay tuned...

USA Today Gets it Half Right on Property Taxes

Yet another major-newspaper multi-state survey of property tax woes in yesterday's USA Today. But refreshingly, Dennis Cauchon has a pretty perceptive take on the real impact of the wave of anti-property tax legislation in the states this year:

States are raising other taxes, especially the sales tax, and spending budget surpluses to replace lost property tax revenue. That makes the trend more of a tax shift than a net tax cut.

But it's not all good. Cauchon doesn't really weigh in on the (equally important) question of whether the property tax cuts (and offsetting hikes in other taxes) we're seeing around the nation are a good thing, and allows a typically misleading statement of the problem from ephemeral Idaho Governor Jim Risch to go unchallenged. Here's the quote:

Seniors on fixed incomes, however, are especially angry about property taxes because big increases could force some to give up their homes. "It hits a vulnerable part of our population, namely the elderly," Risch says.

In a nutshell, Risch is doing what leaders everywhere from South Dakota to Florida are doing this year: correctly diagnosing a problem and coming up with a solution that's got previous little to do with solving that problem. It would have been nice to see at least one critical perspective on whether there's a better way of achieving tax breaks for fixed-income seniors. (Hint: there is.)

Risch's claim doesn't withstand the least bit of scrutiny: he wants to protect the elderly, so he's going to... repeal the school property tax for all homeowners, businesses, utilities and vacation-home owners. No matter how rich, no matter where they live, no matter how old (or young). For Caddyshack fans, the Risch approach mirrors Bill Murray's method of dealing with gophers on an exclusive golf course: dynamite the place.

States Take Varying Approaches to Back-to-School Time

It's back to school time, and in the coming weeks you'll see school buses in your neighborhood and playgrounds full of kids. This is an expensive time for parents, and states are taking a variety of approaches to cushioning the blow of those pesky back-to-school purchases. Here’s a brief overview:

Sales Tax Holidays: As discussed in this earlier post, sales tax holidays are little more than political smoke and mirrors, offering minimal tax cuts with maximal publicity. Maryland’s controversial five-day sales tax holiday started on Wednesday. The Baltimore Sun has an interesting take on this gimmick.

Income Tax Reductions: Minnesota offers an income tax break for qualifying families who have children in school. The K-12 Education Subtraction and Credit can be used to offset the cost of books, tutoring, and required school supplies. For more on the credit, click here.

User Fees: Some policymakers may point to user fees as an alternative way to soften the back-to-school blow compared to funding education adequately through the tax code. However, user fees are regressive and aren’t based on ability to pay. Here's an interesting article detailing the back-to-school costs for one Kansas family. Proponents of adequately funded schools and fair taxation should take notice and give this funding trend an F.

The three approaches above offer a wide variety of policy alternatives for lawmakers looking to assist families. However, only Minnesota’s income tax credit and subtraction offers targeted, long-term, and fair tax assistance for families with children in school.

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

New Thrills in Property Tax Administration

A perfect property tax assessor would have wings. The most daunting task facing a local assessor is to figure out how much every property– whether it’s a home, a business or a farm– is worth, and that can be hard to do just by walking around a property. As a Philadelphia tax administrator points out in yesterday’s New York Times, "if you have a dog, or a locked fence, we may not be able to get into your backyard to see something you’ve built."

The obvious solution is to get a bird’s eye view– and that’s exactly what many local property tax administrators are now doing. The city of Philadelphia has hired a company called Pictometry to fly a plane over the city once a year, taking enough low-altitude photographs to get a complete picture of the city’s tax base, which can then be converted into computer-accessible images. Lee County, Florida makes their Pictometry-generated photo database accessible on the web; try it here. (click on "pictometry online at left; free registration required)

The system does the hard work formerly done by a tax assessor on foot, by identifying visible changes in the way a property looks from the air (maybe a new garage, or a new wing of a house, or a new cell phone tower). By comparing new photographs with old photographs, the program can actually come up with an automatic list of properties that appear different from year to year, which assessors can then inspect to see what the difference is.

The annual cost for the city of Philadelphia? About $100,000 a year. One can assume, although the article doesn’t say, that the annual cost for a smaller jurisdiction would be a lot less.

If $100,000 seems like a lot, think of it as roughly the cost of two full-time assessors– neither of whom would likely have wings. Every tax has administrative costs, and the big cost item for the property tax is just figuring out how much things are worth in an environment where property owners are constantly improving their properties without telling their local tax administrator anything about it.

If this approach seems creepily intrusive, remember that the alternative is having a living, breathing assessor poking around your property every year. And the goal of this technology is a good one: a properly functioning property tax should start out by getting a precise estimate of what every property is really worth. Failing to do so makes a property tax less fair. Period.

At a time when few states measure their property tax base very accurately, and when some states are actually contemplating taking steps to intentionally make them even less accurate, local governments using Pictometry and similar technologies are taking an important step toward a fairer and more adequate property tax.

Direct Democracy and Tax Policy: Lessons from the States

2006 is shaping up to be another important year for direct democracy in the states, with ballot initiatives piling up in all the usual places. And tax changes (usually bad ones) are once again a big part of the mix. California voters will decide whether to hike the cigarette tax by $2.60 a pack to fund health care, and whether to impose a new tax on oil producers. In Oregon, a cleverly regressive high-end income tax cut will face the music. Meanwhile, South Dakota voters will have the opportunity to enact not one but four new tax cuts, and will weigh in on policy areas as diverse as property tax caps, cell phone taxes, video lottery and the cigarette tax.
We'll have more details on these initiatives in coming months (including a detailed look at the emergence of TABOR initiatives). But whatever happens this fall, it would be nice if lawmakers (and voters) took a good long look in the mirror and thought carefully about whether arcane tax policy matters are best decided by a vote of the people.

Funding Transportation Infrastructure: Issues and Options

For many years, states have relied on taxes on gasoline and diesel fuel to build and maintain highways. The predictability and stability of the gas tax revenue stream made gas taxes very attractive to lawmakers. In addition, fuel taxes are linked with road use: People who drive more than average create more wear and tear on the roads, but they pay more in gas taxes towards the upkeep of the roads. Fuel taxes also help take into account the negative externalities that driving a car produces. For example, people who use more gas produce more pollution, but pay higher gas taxes.

However, the growing cost of gas makes many state policymakers reluctant to increase gas taxes even as needs increase. As the Center for Budget and Policy Priorities points out, increased gas prices create extra burdens on state budgets. Since most state gas taxes are fixed amounts and not a percent of the sale price, like a sales tax, higher gas prices do not increase gas tax revenues. In fact, prices at the pump may lead to a decline in consumption, lowering gas tax receipts. Higher gas prices also mean states have to pay more to keep their ambulances, police cars, fire trucks, and school buses running.

The growing inadequacy and political unpopularity of gas taxes have left state governments scrambling to find new sources of revenue for highway infrastructure. Some local governments pay for road improvement and repair with local sales or property taxes. Such taxes are usually justified with the idea that local roads benefit local drivers the most, and so local drivers should pay for them. Both these taxes can help ensure enough revenue is generated to pay for the road work. These taxes can seem less "fair" to many because there is no direct link between sales and property taxes and use of the transportation system. However, these taxes are usually only implemented for a specific project, and are not a long-term solution.

One option under consideration in Indiana and other states are toll roads. Currently, twenty-four states maintain toll roads, and seven states plan to implement toll roads for the first time in the near future. Toll roads have long been unpopular with many motorists for increasing travel costs. However, tolls are linked with road use: only the motorists who choose to use the toll road will be force to pay the tolls that finance the construction and upkeep of the road. Since all toll roads work on a project-by-project basis, however, they do little to address the state's long-term funding needs .

As the inadequacy of gasoline taxes becomes clear, the demand for adequate and fair transportation funding grows louder across the country. But this hasn't deterred some Illinois Republicans from calling for a suspension of the state gas tax to help counter high gas prices. This proposal is quite costly, with a price tag of at least $100 million, which represents the bulk of the Illinois transportation budget. In a state with a growing structural deficit, now is not the time for gas tax gimmicks. Only a combination of revenue sources holds the promise of stable, sustainable, fair, and adequate funding for state transportation needs.

Senate Hearings Expose High-End Tax Avoidance

The recent news that Mick Jagger and the Rolling Stones earned $150 million in worldwide last income year—and paid just 1.6 percent in taxes—has prompted a wave of "Gimme Shelter" jokes in the media. But as a new report released by a Senate subcommittee makes clear, the Stones’ tax scheme pales in comparison to the high-end tax avoidance underway on our side of the Atlantic.

In an August hearing, a group of Senators led by the fabulous Carl Levin (D-Mich.) and Norm Coleman (R-Minn.) released a report showing that a small group of wealthy Americans are colluding with unsavory tax professionals to shift as much as $1 trillion to offshore accounts in the Cayman Islands and other tax havens. The report pegs the annual cost to U.S. taxpayers of these tax schemes at up to $70 billion.

The rogue’s gallery of tax-avoiding witnesses included Robert Wood Johnson, owner of the New York Jets football team, and television producer Haim Saban. Saban, who achieved notoriety for his "Mighty Morphin’ Power Rangers show, owned up to paying tax advisers $50 million to realize $1.5 billion in tax cuts.

Testifying at the Senate hearing, University of Michigan Professor Reuven Avi-Yonah noted that "if the political will existed, . . . we could close up the tax havens overnight or within a week." He’s right. In fact, both Avi-Yonah’s testimony and the Levin-Coleman report list the steps we ought to take.

In a nutshell, we need to break down the veil of secrecy that hides these tax cheating schemes, by expanding IRS enforcement capabilities and forcing disclosure by the tax-haven countries. In addition, we should clarify the tax code so that transactions whose primary purpose is tax avoidance are automatically treated as illegal shams. With as much as $70 billion a year of our money at stake, such action is long overdue.

The Boston Globe's always-sharp editorial page hits this one on all cylinders here. Other good coverage is from the San Antonio Express-News and the New York Times.

Alaska: BP Shutdown Reveals Frailty of Tax System

Fingers are (correctly) being pointed at British Petroleum (BP) in the wake of news that BP's Prudhoe Bay, Alaska oil pipeline is structurally unsound. BP's decision to shut down production is driving up gas prices on the west coast, but the single biggest casualty of the shutdown is probably the state of Alaska itself. As Jim Maule at MauledAgain has noted, Alaska Governor Frank Murkowski has imposed a hiring freeze to help deal with the daily $6.4 million revenue loss the state has endured for each day of the pipeline shutdown. The Alaska Center for Public Policy blog has initial reactions from one state Senator.

The obvious lesson from this experience-- that you want a little diversification in your state's tax system-- is not a new one for Alaska policymakers. After all, they have lived with a tax system that's 90% based on oil production ever since they repealed their income tax (the only state ever to do so) following the discovery of oil in (wait for it) Prudhoe Bay almost 30 years ago.

Lawmakers are aware enough of the imbalances in the system that every few years when oil prices go south, Alaska lawmakers engage in a little navel-gazing over whether enacting a statewide income or sales tax (Alaska is one of only two states that have neither) would be a good thing. But oil prices have a way of rebounding, and so lawmakers have been able to ride out the tough times.

The result is a schizophrenic tax system in which (as is true of other oil-dependent, low-tax states states like Louisiana) the fiscal situation always seems to be either overflowing with surplus revenues or else going to hell in a handbasket.

As recently as 2004, Alaska was still in the "hell in a handbasket" phase. In a report issued that year, Citizens for Tax Justice took a hard look at the revenue-raising options that were being considered by state lawmakers and found that only one-- enacting a personal income tax-- would make the tax system less unfair.

By comparison to most other states, Alaska is still sitting on top. The state's budget reserve would be the envy of any other state in the union, and the oil revenues are still flowing strong. But more so than in any other state, Alaska public services are at the mercy of the oil industry. When the supply of (or demand for), Alaska's gonna have to come up with a new way of paying for public services.

Can We Impose a Windfall Profits Tax Just on BP?

Discussion of a windfall profits tax has died down over the last few months in Washington, but might crop up again in the near future in the wake of new revelations that oil giant BP doesn't appear to care that much about maintaining their pipelines.

BP has enjoyed $31 billion in profits since the beginning of 2005. This isn't news-- after all, these record industry-wide profits are what drove Congress to hold hearings on a windfall tax to begin with. What's news this week is that BP is clearly not plowing these profits back into their infrastructure. BP has admitted not checking the pipelines for degradation as often as they're supposed to.

So where's the profit going? By one estimate, BP has plowed $22 billion into stock buybacks since the beginning of 2005. That's good for BP executives and shareholders, but (as it turns out) not so good for American consumers who just saw our domestic oil supply shrink by 8% as a result of BP's inept maintenance.

A big part of the reason why the Senate backed away from the windfall profits tax idea earlier this year may have been the perception that the industry was going to use these profits to reinforce their infrastructure-- and obviously a sound oil extraction infrastructure is a thing we need as a nation. But if a company as profitable as BP can't find time to prevent their most important domestic pipelines from falling apart, it's time to start asking these questions again.

And in an era when the federal government is controlled by folks who clearly don't believe in the government's regulatory role, it's also time to start asking questions about why the federal regulatory apparatus can't hold BP's feet to the fire in a proactive way to prevent such disastrous supply interruptions from happening. Just another reminder that the federal government has an important role to play, and that an unthinking deregulatory stance can have huge costs.

Cigarette Taxes in the News Again

A bullet was dodged this week when a ballot initiative in Missouri to increase the cigarette tax by 80 cents failed to garner enough signatures to make the November ballot. Many proponents of these increases argue that they are an effective way increase health care funding, which is a laudable goal. However, cigarette taxes are a poor choice for states looking for long-term stable funding for health care.

Since taxes on cigarettes are levied on a per-pack basis, revenues from cigarette taxes decline sharply over time. General sales taxes, in contrast, do not face this problem, since such taxes are calculated as a percentage of the sales price of a taxable item. This means that when inflation drives prices up, sales tax revenues will automatically increase, but cigarette tax revenues will not: a 25-cent-per-pack tax will always yield the same amount of tax revenue for each pack. The only way for the amount of revenue generated by cigarette taxes to increase without lawmakers increasing the per-pack tax is for smoking rates to increase, the opposite of the law’s goal.

More importantly trends show that cigarette consumption rates are on the decline. This is good news for state health care systems. Unfortunately, this declining base will result in less revenue each year being available for health care. A shrinking tax base makes a poor choice when looking to fund health over the long haul.

Finally, cigarette taxes are very regressive, forcing low-income smokers to pay a much higher percentage of their income in cigarette taxes than high-income smokers. A 2005 policy brief by the Institute on Taxation and Economic Policy showed that cigarette taxes are ten times more burdensome for low-income smokers than for the wealthy. But this doesn't stop lawmakers and voters from trying to find sustainable revenue this way.

In Indiana, Governor Daniels vowed to introduce legislation to increase the state’s cigarette tax when lawmakers return in January. This year, a ballot initiative in California put Proposition 86 on the ballot. Proposition 86 would increase the price of cigarettes in that state by 13 cents a cigarette, increasing average pack prices to $6.50. All three proposals are to be commended for trying to increase funding for health care. However, voters and legislatures in all three states would do well to increase tax revenues in a way that is both reliable and fair.

Days are Numbered for Michigan's Single Business Taxes

Despite objections from Michigan Governor Jennifer Granholm, both Houses of the Michigan Legislature voted to repeal the state's Single Business Tax (SBT) on December 31, 2007.

The Single Business Tax brings in about $1.9 billion dollars into the state's coffers and is the major tax levied on businesses in the state. The tax accounts for one-fifth of the entire state budget.

The current SBT battle has quite a history. The SBT was set to repeal at the end of the 2009. Governor Granholm vetoed legislation that would have accelerated the repeal because replacement revenue wasn't identified. She even introduced her own revenue neutral plan in 2005 that wasn't well received. A citizen initiative accelerating repeal was approved for the November ballot. However, voters won't have the opportunity to vote on this issue because of the Legislature's actions yesterday and the Governor has no veto power over the decision because the issue was already approved for the November ballot.

The sheer magnitude of a repeal this large is quite overwhelming. One-fifth of the budget pie is a pretty big piece, right? So you'd think that legislators with any regard for future needs, economic development and an understanding of the consistency that businesses need when deciding where to locate would at least have proposals on the table for how to make up this lost revenue. Sadly, as reported in this article, Michigan lawmakers are currently debating some plans, but few specifics have been made public. There's even debate about how much of the $1.9 billion should be replaced. Lawmakers appeared to have done the easy part - cutting taxes on business, but the really hard part - figuring out how to replace that revenue is just around the corner.

The Michigan Chamber of Commerce appears to be celebrating the SBT repeal as a victory, Standard and Poor's has another opinion entirely. A preliminary S&P analysis released by the Governor said,

"The repeal of the $1.9 billion tax creates a structural imbalance for fiscal 2008 that exceeds any one year imbalance that the state has faced in the prior recession."

The agency said the magnitude of the revenue loss and political uncertainty "cloud the likelihood of a true and timely structural solution."

Let's hope other state's don't follow in Michigan's footsteps and repeal or alter their own business taxes in such a flawed, thoughtless way.

Mississippi: How Not to Talk About Property Tax Reform

It's a familiar story around the nation this year: home values are going up dramatically, and long-term residents on fixed incomes are worried that they'll have to sell their homes because they can't afford to pay higher property taxes.

This story is being told, up to a point, in Mississippi by the Jackson Clarion-Ledger right now. The article's author interviews two elderly residents of Lakeview, a town that was pretty much obliterated by Hurricane Katrina. Both homeowners express the same basic concern: that as fixed-income seniors, they simply don't have the means to pay a rapidly rising property tax bill.

The only remedy discussed in the C-J article is a tax cap. A bill introduced this past year would have capped the growth of residential property taxes at 3% a year. This is the classic "bait and switch" fostered by anti-tax advocates: identify a problem everyone can agree with (taxing fixed-income seniors out of their homes) and come up with a solution that benefits even the wealthiest (and youngest) homeowners. The C-J article's failure to discuss other articles is regrettable, but probably just reflects the absence of an informed debate among state policymakers about more targeted alternatives. Too bad.

The "Race to the Bottom" in Film Tax Credits

Most people agree that state governments ought to be given plenty of freedom to design their own tax systems. Yet this freedom has an unfortunate consequence: states often use their tax systems to compete against each other in ways that leave everyone worse off. As a result, a growing number of good-government advocates are struggling to reconcile their belief in state and local sovereignty with a desire to prevent governments from harming themselves and each other with tax incentives. Every day, it seems, there's a new example of how state tax competition is draining state coffers while complicating tax codes and pushing businesses to make investments they wouldn't otherwise make.

Today's example is from the film-making industry. With the advent of state tax breaks for movie production, "Hollywood" is rapidly becoming more a metaphor than a place, with film production companies accepting tax incentives to film in otherwise not-especially-attractive places. This article from the Raleigh News and Observer purports to trace the history (and recent successes and failures) of North Carolina's tax break for film-making.

The article's author, Craig Jarvis, says that North Carolina has historically been a popular location for filmmakers, but that tax incentives in other states are directly responsible for reducing the popularity of the Tarheel State:

For the past two decades, the state has ranked third in film, TV and commercial revenue, with an average of $300 million pouring in every year. Now one of the most film-friendly states cannot compete in a marketplace that relies on escalating incentives.

What's striking about the article is how little evidence it offers that there really has been a shift in film location decisions away from North Carolina-- and that these shifts can be attributed to more generous tax incentives offered by other states. To hear Jarvis tell it, a very real consequence of the comparatively small North Carolina credit is that "filmmakers are heading to Louisiana and South Carolina, which have passed more alluring come-ons." A strong statement--but Jarvis can offer only anecdotal proof that this is actually happening, and gives very little of that.

The one thing everyone seems to agree on is that these tax credits amount to a bribe-- and even the most ardent advocates of the film breaks seem less than proud about what they're doing. Bill Arnold, director of the NC Film Commission, describes this cross-state competition in bleak terms:

"It's gotten to be a real knock-down, drag-out fight to see who can give away the most money," Arnold said.

In another recent article, a Republican lawmaker makes it clear that she doesn't like the incentive, but believes the state really has no choice:

"Incentives are like nuclear weapons," said Rep. Carolyn Justice, R-Pender. "If everybody has got them, then you're forced to have them."

Hardly a resounding endorsement of this approach to tax policy.

A similar story from Massachusetts, where Ben Affleck has just finished directing his first movie in Boston. In this article, Affleck makes it clear that he really likes Boston, both as a place to be and as a place to film. He also hints that in the past, Boston has had a reputation as "a terrible town to film in," but doesn't say whether that has anything to do with tax incentives. I'll leave it to others with a stronger stomach to do more research on why Ben Affleck does what he does on any given day, but in this case it just sounds like he filmed in Boston because he really likes it.

Not knowing a thing about how film production works, I can imagine that there are a variety of things that the Boston city government could do to make film production easier there: making parking spots available in a crowded urban area (a thing Affleck actually refers to in the article), simplifying the process by which companies apply for permission to film, etc. Of course, taken on its own, a big-ass tax break could certainly ease the pain of coping with these other urban difficulties. But these non-tax approaches are a lot cheaper and a lot more sensible.

As is always true in the tax-incentives world, both the policies and the media coverage seem to be driven by a perception that cannot be verified-- that tax incentives influence business decisions. It would be nice to see a little more skepticism in media discussions of these tax breaks-- or, if possible, a tiny shred of proof that they actually work.

Trifecta Falls Short

In a vote that almost fell completely along party lines, the U.S. Senate rejected the so-called “trifecta bill”—an effort to link the elimination of the Estate Tax with an increase in the minimum wage and the extension of a small group of corporate tax cuts. The bill was strongly supported by the White House and is generally perceived as a major defeat for President Bush. Despite the inclusion of targeted tax breaks and the minimum wage hike, Senate Majority Leader Bill Frist was unable to win enough Democratic votes to secure passage.

An examination of the roll call vote produces some interesting information. First, Sen. Frist was able to lure Democratic Sen. Robert Byrd of West Virginia by including tax breaks and deregulation aimed at the coal mining industry. Sen. Byrd was considered a critical vote and most likely wouldn’t have supported the legislation without these incentives. Another Democratic vote for the plan was cast by Florida Sen. Bill Nelson. Florida’s high number of retirees is the likely reason that Nelson voted for repeal.

Although Sen. Frist also included targeted tax breaks for the timber industry, Washington Senators Maria Cantwell and Pat Murray ultimately voted against the legislation. Even more interesting is the nay vote cast by Sen. Lincoln Chafee of Rhode Island. Sen. Chafee is currently the target of a primary challenge from conservatives who say he is too liberal. Despite this pressure, Sen. Chafee chose to vote against fiscal irresponsibility. It seems likely that he cast this vote with one eye on the general election—Rhode Island voters overwhelmingly disapprove of President Bush and Sen. Chafee needs to distance himself from the White House.

Ultimately, no amount of political intrigue can cover the obvious: the movement to repeal the Estate Tax has been dealt a serious blow. However, the fight is not over. Sen. Frist has vowed to reintroduce the measure before the November election. Hoping that voters will ignore the fiscal implications of the Estate Tax repeal, Republican strategists hope to paint Democrats as opponents of a minimum wage hike. Hopefully this proposal will remain dead and not become an issue in 2006.

Sales Tax Holidays: Political Smoke and Mirrors

Fourteen states and the District of Columbia now hold sales tax holidays, eleven of which start this weekend. These weekend holidays allow shoppers to save money by ignoring the sales tax on selected items, usually school supplies, food, and clothing. Many lawmakers proudly promote the holidays as a way to help the poorest residents pay for necessary items. However, voters shouldn't be fooled into thinking that the holiday amounts to substantial tax reform.

Sales taxes are among the most regressive taxes levied by state governments, impacting the poor, who spend most of their income, much more heavily than the rich. The wealthy are able to save their money and spend a much smaller percent of their earnings. Any sales tax cut, then, will benefit low-income families the most. However, there is reason to believe sales tax holidays aren't effective. Many lower-income families live paycheck-to-paycheck, and may not be able to put off purchases to take advantage of the tax break. More wealthy individuals can more easily schedule their spending in order to benefit from the tax break. Additionally, we don't know whether or not stores will offer the same sale prices they would normally offer. Why would stores offer a ten percent discount if customers are coming in to save five to eight percent?

This weekend's tax holidays offers only the most fleeting relief. When the weekend is over, sales taxes will continue to push low-income families further into poverty. If policymakers want to aid low-income families, they would do better to scale back sales taxes permanently. These holidays is little more than political smoke and mirrors. For more on this topic, check out this policy brief. Not everyone is fooled by the sales tax holiday gimmick. Check out this article from USA Today.

Bill Frist's White Whale

One of the most interesting political stories in the tax world this year has been the tireless efforts of Senator leader Bill Frist to push through estate tax cuts, coupling estate tax provisions with any bill he can get his hands on. The latest such strategy is what he's calling the "trifecta bill"-- estate tax, extension of some small corporate tax breaks dubbed "extenders," and minimum wage. The trifecta bill was passed by the House of Representatives last week and is now before the Senate.

Via the Tax Prof Blog, here are strong words from Frist on what the stakes are for action on the estate tax this week:

If the Senate kills the trifecta bill, we will not return to it this year. That means no permanent death tax reform, no tax policy extenders, and no minimum wage increase. It is now or never — this week — and members should understand that. There will be no second chances. No last minute side deals. No new UCs. No other motions to proceed. Nothing.

Pension reform is obviously an important thing. And a lot of folks would say the same about minimum wage hikes. But Frist is willing to ditch both of these things if he can't get the estate tax cut he want. He gets a little bit more Melvillesque every day...

House Roll Call Vote on Estate Tax

Another day, another irresponsible vote for unfunded estate tax cuts. Here is the final roll call vote from the combination estate tax-minimum wage bill that passed the House last week.

34 Dems voted for the tax cut; 21 Republicans voted against it.

Notable defectors:
Ohio Democratic gubernatorial candidate Ted Strickland, who voted for the estate tax cut;
Tennessee Democratic Senate candidate Harold Ford Jr, who also voted for it.
Republican House member Tom Tancredo, who apparently hates the minimum wage more than he hates the estate tax.

Interesting quotes from the July 28 House debate:
Estate tax opponent Deborah Price of Ohio, says that "more than 70 percent of family businesses and family farms don't even make it through the second generation, and 87 percent don’t make it to the third" (possibly true) and that this is because of the "crippling" estate tax (not possibly true).
Ric Keller of Florida, also an estate tax opponent, asserts that "one-third of family-owned businesses are forced to liquidate because of the death tax," (see previous quote; at least these guys are all working from the same talking points) and that "the money [being taxed under the estate tax] has been tax once at the income level." (demonstrably not true for much of the assets subject to estate tax).
Zach Wamp of Tennessee (ditto), crows to House Democrats that "you have seen us really outfox you on this issue tonight. That is what we are doing today, is bringing a very crafty, smart, good-for-America, good-for-the-economy package and stil allow the minimum wage to go up."

Does anyone have any idea what study these guys are referring to to get this "1.3 of small businesses" statistic?