Correct Diagnosis, Wrong Cure

David Hahn, the Democratic candidate for governor in Nebraska, wants to reform the state's property taxes. Hahn was recently quoted as saying "The unfairness in our property tax system is obvious and worsening ." Hahn should be congratulated for recognizing the unfairness of the property tax system in Nebraska. However, Mr. Hahn's proposed fix is a package of property tax changes , including a $50,000 homestead exemption that could eventually grow to $100,000. This budget-straining, poorly targeted $100,000 exemption is a poor solution to the state's property tax inequality troubles.

The fundamental inequality of the property tax is rooted in the regressive nature of that tax. Since home values are a much bigger share of middle-income family's total wealth than higher-income families, property taxes require these low-income families to pay a much larger share of their earnings than higher-income families must pay. Property tax savings that are targeted to low and middle-income families will do much more to fix the inequality of the property tax system than would the proposed $100,000 exemption, which would be given to middle class and wealthy taxpayers alike.

One such targeted solution to property tax inequality in Nebraska is a circuit-breaker. Just like electrical circuit breakers protect against electrical overload, property tax circuit breakers protect against property tax "overload". Circuit breakers work by preventing property tax payments from exceeding a given percent of a homeowner's income (for more information on circuit-breakers, check out this ITEP policy brief). David Hahn should be applauded for opening up a dialogue on property tax fairness in Nebraska. Any serious public debate about property tax equality, however, must include discussion about property tax circuit breakers.

Al Gore's Pollution Tax

Former Vice President Al Gore has suggested that pollution taxes should replace payroll taxes, stating that "[p]enalizing pollution instead of penalizing employment will work to reduce pollution". This proposal is initially startling. The average American might ask, "Can pay payroll taxes just, like, disappear?" or "Will the cost of gas have to triple?"

These and other issues related to the proposal have been discussed in the blogosphere with interesting results. Responding to Ezra Klein, Nicholas Beaudrot explains that increasing the taxes on all products that create CO2 emissions, including gasoline, would appear to be a noticeable change but would not seem outrageous. The price of gas, for example, would increase by $1.20 a gallon, which would still leave gas cheaper in the U.S. than in Europe. In isolation, a tax hike of that amount would seem like political suicide for anyone who proposed it. But it's difficult to see how people would respond if it was coupled with the elimination of payroll taxes, which sounds like an awfully dramatic boon for most workers.

But before considering the political feasibility of the proposal we should ask ourselves if it makes sense as a matter of public policy. The first question is whether such a change in the tax structure would be progressive or regressive. The answer is that Gore's proposal could be regressive unless crafted carefully to avoid being so.

The payroll tax is a regressive tax for several reasons. For Social Security taxes, the same percentage is taken from everyone's paycheck, regardless of how much they make - up to a limit. Employees and employers each pay Social Security taxes equal to 6.2 percent of wages up to $94,200. A person making much more than that amount therefore pays a smaller percentage of her income towards Social Security taxes than a middle- or low-income worker. (Employers and employees also each pay 1.45 percent of wages towards Medicare, without a limit on taxable wages, and employers pay limited taxes to fund Unemployment Insurance). Wealthy people are also more likely to have other forms of income besides wages (whereas low- and middle-income workers often do not recieve any income other than wages) further shrinking the percentage of overall income that wealthy people sacrifice towards payroll taxes.

But gas taxes might be more regressive than payroll taxes. Sales taxes are generally regressive, particularly when they apply to things that most people need (like food, clothes or gasoline) and that people cannot really do without. Sales taxes take a larger percentage of income from the poor and middle-class than the wealthy, who are able to place a much larger fraction of their income into savings and investments rather than consumption.

The second question to ask is how abolishing the payroll tax would affect the programs it was designed to support, Social Security and Medicare. One point made by Max Sawicky is that political support for these programs is founded on the idea that they are "social insurance" programs that working people "pay into." That sense of an earned entitlement would be lost if Social Security and Medicare become just another program funded by sales taxes (although they would have the distinction of being the first federal programs funded by sales taxes, not to mention sales taxes targeting CO2 emissions).

Perhaps the most troubling aspect of the proposal is that it would base the funding for our two most important social programs on a revenue source that would be inherently unstable. The point of the tax would be to reduce CO2 emissions - meaning the base of this tax would shrink if it was successful, requiring either an increase in the tax or benefit cuts for the programs. The President's effort to partially privatize Social Security failed largely because people feared replacing a secure program with "risky private accounts." Any proposal that makes the programs more risky is entirely counter to their purpose, which is to offer people greater security.

Sales Tax Base Expansion and Taxing of Business Inputs

As our economy changes from goods to a service based economy tax structures will eventually adapt to this change. Here’s an ITEP policy brief about sales tax base expansion and applying the sales tax to services. This concept was also highlighted in this editorial in the Roanoke Times.

Most economists generally agree that a policy to expand the sales tax base should try to limit the amount of business inputs that could potentially be taxed. Inputs are items or products that businesses use in production of their goods or services.

Here are some reasons why many economists offer a word of caution about taxing business inputs:

1) Putting a sales tax on business inputs can mean that by the time a product gets to the buyer, several layers of tax have been added to the price - this multi-layering of tax liability doesn't really happen with other taxes (property or income). Having multiple layers of tax will certainly cause shifts in consumer behavior. For example, if specific services/products that company X uses to create a product are taxed, but company B can create that same product without having to buy products that are taxable the price could vary greatly between the costs of those two products.

2) If certain states tax business inputs and others don't this could potentially (and probably would) distort the choices that businesses make when deciding where to locate.

3) Taxing business inputs could cause changes in how companies operate internally and thus impact their ability to compete (again, these changes are less likely to happen with other types of taxes). For example, if a state decided to tax accounting services - a larger, perhaps older company could figure out a way to include accounting services "in house" and avoid paying a sales tax, whereas a smaller company won't have this flexibility and will need to pay a sales tax on those services. So taxing business inputs could really put some companies at a larger disadvantage compared to others.

Expanding the sales tax base to include services is certainly an important step for policy makers who are interested in modernizing a state's tax structure. However, it's important to also carefully consider the impact this expansion could have on business and consumers.

Gas Tax "Buffer Zones" in Kansas?

The Kansas legislature's Joint Tax Committee is considering a proposal to create a series of gas tax "buffer zones" around the state's perimeter. The zones are intended to prevent the loss of gas tax revenue to neighboring states. Of the four states that share a border with Kansas, only Nebraska currently has a lower gas tax, allegedly prompting some motorists to cross state lines to fill up.

The proposed buffer zones would allow any gas station in a "border town" to lower their gas tax to within one cent of that of the neighboring state. Supporters of the proposal argue that it is better to gain some revenue from the reduced gas taxes in these "buffer zones" than to lose all gas tax revenue to a neighboring state.

What the proponent of this bill fail to see is that these zones will merely move the gas tax border further inside Kansas. If these buffer zones become reality, instead of having to cross the border into another state to get cheaper gas, Kansans will be able to simply drive into a border town. No one knows how many commuters currently cross state lines to save money on gas taxes, making predicting revenue gain or loss extremely difficult. Ultimately, this flawed proposal creates administrative hassles while merely shifting, not solving, the problem.

Taxing Talk from Mark Warner

Former Virginia Governor and presidential hopeful Mark Warner says presidential candidates should not "alienate the rich" by complaining that, well, all the benefits of Bush's tax breaks go to the rich. As CTJ recently pointed out, it is, in fact, only the richest one percent of Americans that will benefit from President Bush's tax and fiscal policy once you consider the debt burden that every American will have to pay off eventually.

Nonetheless, Warner argues that Americans all aspire to be in the richest 1 or 2 percent one day and therefore don't mind that tax cuts benefit that group.

The only problem is that this is simply not true. The Gallup Poll has asked Americans each year whether they think particular classes of people pay "too much" or "too little" in taxes or "their fair share." The polling shows that over the past ten years 63-68 percent of people have felt that "upper-income people" pay "too little" in taxes. (And this year, 70 percent felt that corporations pay "too little.")

Now one would have to concede that people give very contradictory answers to questions that are worded a little differently and it's hard to figure out exactly where the voters are. The Gallup Poll also shows that about half of those surveyed said their taxes were too high in each of the past few years, but over 60 percent also have said that the taxes they pay seem "fair." Other polling shows that people will respond favorably to the Bush tax cuts but then when asked if the tax cuts are worth the cuts in spending and budget deficits that follow, the majority answers in the negative.

Perhaps the real lesson is that public opinion on this issue is fairly malleable and that voters may quickly change their answer to a question if presented with new information.

As has been pointed out in the American Prospect's blog, the real consequence of Warner's position may be very little. He seems to be saying that if he were President he would not try to repeal the Bush tax cuts but let them expire as they are scheduled to at the end of 2010. So really he's quibbling about two years of tax breaks. Which means anti-tax crusaders are going to tar him as a "tax-and-spend" candidate anyway, so what exactly is he trying to accomplish with these remarks?

Utah: A Missed Opportunity for Income Tax Reform

Earlier this week, the Utah legislature became the latest deliberative body to confuse "tax reform" with "tax cuts." Lawmakers started out firmly in the reform camp over a year ago with refreshingly honest discussions of the value of broadening the tax base, simplifying tax rules, etc.-- and ended up with this mess in Tuesday's special session. The bill, passed by both houses on Tuesday and signed by Governor Huntsman yesterday, does two things:

1) it slightly expands the tax brackets in the state's regular income tax structure (a needed reform since about 70 percent of Utahns currently pay at the 7 percent top tax rate). Starting with the 2006 taxes Utahns will file next April, a married Utah couple can have taxable income of $11,000 (up from $8,800 or so) before they have to pay at the top rate. And the top rate itself goes down a bit, from 7 to 6.98 percent.
2) it creates an optional flat-rate tax of 5.35 percent that applies to a much broader, virtually loophole-free income tax base.

The first part of this plan is a nicely progressive, if miniscule, tax cut that reserves the biggest breaks for middle-income Utahns.

The second part is a neat idea that got implemented in a silly and counterproductive way-- and that accrues almost entirely to the best-off residents of the Beehive State. The wealthiest 1 percent of Utahns will enjoy 72 percent of the benefits from the optional flat tax, according to ITEP's estimates.

Bottom line: last week Utah had one income tax. This week it has two.

As the Utah Association of CPA's pointed out last week, turning the state's income tax into two income taxes will make a complicated income tax even more complex-- all the more dispiriting given that an initial goal of the legislature's reform efforts was simplifying the tax code.

The sad thing is that there were some very good income tax reform ideas floating around the legislature all year-- and that the ones that got incorporated into this week's bill were done in a way that's almost worst than the original law.

Rule #1 for income tax simplification is: get rid of tax loopholes. Look for unnecessary deductions and exemptions and repeal them. Then you can lower the tax rate on everyone without putting a big, unaffordable hole in your budget. Broader base= lower rate.

Tax writers in the legislature absolutely understood this, which is why throughout the year there was always a salient active bill that would have eliminated loopholes by making the state's income tax base equal to federal Adjusted Gross Income (a figure you can take from the first page of your federal income taxes).

A federal AGI-based tax could have knocked at least a page off of the Utah income tax forms, making life a lot easier for all Utahns.

Of course, a pure AGI tax includes no tax relief for low-income working families at all, so many working families would unavoidably get screwed by a switch to an AGI tax if the tax rates were anywhere near current law's rates. And the state's legislative leadership has said repeatedly that it didn't want tax reform to generate any "losers" at all. So to avoid imposing tax hikes on poor Utahns, earlier versions of this plan included a single tax credit designed to eliminate income tax liability for low-income families. For example, under one version every married couple would have gotten a $1000 tax credit, plus $100 for each kid. And the credit would phase out at higher income levels.

But the low-income credit costs money-- money that the Utah legislature was far more interested in doling out to upper-income families. So they found a second way to avoid generating "losers"-- making the new AGI-based tax optional.

So what will tax season look like for Utahns next year? For virtually all low- and middle-income families, it will look exactly like it did this year. They'll wade through the same array of forms and instructions they did this past April.

For upper-income Utahns, the story will be different. A bunch of them will want to see whether the flat-tax alternative is better for them, so they'll calculate their tax both ways. In the end, 3 or 4 percent of them will find that it's actually worthwhile. So a bunch of people will jump through a new hoop for nothing, and a tiny group of the wealthiest Utahns will get a windfall.

Tax simplification should make life easier for the low- and middle-income families who are most likely to be filling out their tax forms themselves. What Utah has done is to make things easier for a small group of folks who almost certainly weren't doing their own taxes to begin with-- and almost certainly won't be doing taxes themselves next year.

It's a disappointing outcome for those of us who thought the legislature was serious about "tax reform" rather than simply pushing through more tax cuts.

Indiana: Legalize It?

Indiana State Senator Robert Meeks is the latest state leader to voice his support for legalizing video gambling in the state. In the past week, two state newspapers' editorial boards have issued tepid endorsements of the Meeks proposal. The Lafayette Journal and Courier's lukewarm endorsement starts (and ends) with the premise that Hoosiers have already fallen from grace, so a little more gambling can't hurt:

Hoosiers decided the moral questions about gambling in 1988, when they approved a lottery referendum with a 62 percent majority...And we have a hard time seeing the difference between video gambling and gambling in the lottery, bingo, raffle tickets and the office pools for NCAA men's basketball.

This is true, up to a point: gambling has always been with us, and probably always will be. But the sensible position the Journal-Courier staff take-- that gambling already exists illegally, so the state should be regulating it and skimming a bit off the top--is, inevitably, NOT the position that state lawmakers will ultimately take on any expanded gambling. Lawmakers will see it as a cash cow, and will milk it for all it's worth-- basically encouraging Hoosiers to gamble more than they otherwise would.

The editorial board of the Fort Wayne News Sentinel is even less enthusiastic, but comes to the same conclusion:

[T]he state long ago got in more than waist-deep, and legalizing the video games would be barely a drop more in that vast ocean of gambling. The state should consider the option of treating this vice like other vices, such as smoking and drinking. The state doesn't have to promote or encourage them, but it does recognize that they exist and taxes and regulates them accordingly.

Same problem here: tax-averse lawmakers will ultimately see this as the least controversial option for raising revenues, and will absolutely try to "promote or encourage" its citizens to roll the dice if it will help them pay for education.

Of course, this isn't state lawmakers' fault-- they're human, and want to keep their jobs. Inevitably they'll learn to rely on gambling to supplant more controversial (but less unfair) sources such as the income tax and property tax.

Is the IRS Chilling Free Speech by Churches and Nonprofits?

Many Americans probably have no idea that there are tax rules that affect whether or not a church or a nonprofit organization can support a political candidate or party, and many would ask how the IRS ever got in the business of policing political activity by these entities. The truth is that it makes sense for the IRS to do this to a degree because most churches and nonprofits enjoy tax-exempt status granted by Congress through the tax code. It would be entirely against our constitutional traditions to have the federal government subsidizing (through the tax code) organizations that support particular candidates. Such a tax subsidy would essentially amount to the use of public money to help a particular party to stay in power.

But what exactly is the behavior that should be prohibited? This question has become controversial in the last couple years.

On one side there are those who feel that some nonprofit entities, particularly churches and religious organizations, are taking the taxpayers for a ride by using their tax-exempt organizations to support certain candidates. Americans United for Separation of Church and State is sending letters to 117,000 churches to warn them that they could lose tax-exempt status if they use their resources to support particular candidates. The group says that the conservative Christian organization Focus on the Family has asked for volunteers from churches in key battleground states to implement voter drives and to distribute voter guides. Focus on the Family claims these voter guides are non-partisan, a claim that Americans United finds hard to swallow.

On the other side of the debate are those who fear that the freedom of nonprofits and churches to speak out on issues that are important to them is being curtailed. A report issued by OMB Watch in July found that the IRS has created a great deal of uncertainty in its efforts enforce laws designed to keep tax-exempt non-profits from engaging in partisan activities. OMB Watch argues that clearer rules are needed to determine what activities are allowable to ensure that non-profits do not feel pressured by the IRS to give up their constitutional rights.

According to the report, no violation was found in 64 percent of the investigations of 501(c)(3) organizations carried out in 2004. Only 58 entities were found to have engaged in partisan activity (out of more than a million tax-exempt entities) and in only three of those cases were the violations serious enough to cause the IRS to revoke tax-exempt status. Nevertheless, the lack of clarity in the IRS's rules about, for example, the difference between partisan campaigning and issue advocacy, could have a chilling effect on churches and organizations that have opinions on political issues.

It's also worth noting that it is not clear whether the IRS's enforcement harms conservative or liberal causes more. Focus on the Family is conservative, but BNA reported that All Saints Episcopal Church in Pasadena is being investigated by the IRS after its pastor make speeches opposing the war in Iraq during the 2004 election. However, at the time that investigation first made news, the executive director of Americans United did point out that a pastor in Arkansas who gave a sermon more clearly praising George W. Bush and criticizing John Kerry was not investigated by the IRS.

Other types of progressive nonprofits are also at risk. After spending almost two years investigating whether the NAACP should lose its tax-exempt status as a consequence of criticizing President Bush, the IRS dropped the case just last month. OMB Watch hailed the decision as an indication that nonprofits can be assured that their freedom of speech does not disappear during this election season. This investigation was particularly troubling because documents obtained by the NAACP under the Freedom of Information Act imply that the IRS began its investigation at the behest of Republicans in Congress.

OMB Watch certainly has a point that the rules and standards regarding political speech and activities are currently too vague. The rules say that 501(c)(3) organizations are "absolutely prohibited" from intervening in elections on behalf of or in opposition to any candidate, but uses the facts and circumstances to determine whether this occurs. The IRS also begins an investigation if it has a "reasonable belief" that a violation has occurred.

In a 1964 free speech case involving the definition of obscenity, Supreme Court Justice Potter Stewart declined to define hard-core porn but merely said, "I know it when I see it." Hopefully, we'll get a better definition of political activities that are prohibited for tax-exempt entities.

Election Year Gimmicks in the Buckeye State

Taxes are a huge issue this year in Ohio.

Republican gubernatorial candidate Ken Blackwell says he wants to "put his foot on the accelerator of tax reform.'' Yet, many in Ohio are hoping Blackwell will keep his foot away from the tax issue altogether. Especially given that many believe tax reform already happened in the form of 21% "across the board" income tax cuts and a corporate tax overhaul.

Blackwell has also come out as a strong proponent of instituting a 3.25% flat tax and has promised to take 1.8 million people off the tax rolls too. Specifics about his plan are murky, but flat taxes aren't based on people's ability to pay and are inherently unfair. Let's hope Ohio voters see through this ploy.

Legislators seem to have the November election on their minds too. In a move that highlights election year gimmicks, Ohio legislators sitting on the Ways and Means Committee voted 17 to 1 to accelerate the phasing in of 21% across the board income tax cuts. If this plan is passed through the legislature these regressive and expensive tax cuts will be fully phased in by 2008 instead of 2009 as currently scheduled.

The regressive cuts do little to help low and middle income families, and speeding up these tax cuts will leave an even larger hole in the state's budget. For more on the regressive nature of these tax cuts, read this release by Policy Matters Ohio.

Florida: "Save Our Homes" Tax Shift Enrages Floridians

Florida residents and businesses continue to feel the heat from the state's ill-named "Save Our Homes" property tax cap, which restricts the growth in taxable property values to 3 percent a year for all owner-occupied homes. The Bradenton Herald talks to a Sarasota County Commissioner, Jon Thaxton, who diagnoses the problem expertly:

"Back when 'Save Our Homes' was first proposed, it was sold to the public as a way to help poor little widows who were fighting to keep their $65,000 homes that they purchased 40 years ago," Thaxton said. "But that's not what's happening for the majority of those benefitting from Save Our Homes. Let's just say, if you own a small cabin and a $1 million home, which one are you going to apply for the homestead exemption? The 3-percent cap is the same."

A property tax break that gives all owner-occupied homes the same tax cap is going to result in a mammoth tax shift toward everyone else. "Everyone else," in this case, means businesses, renters, and those owning vacation homes-- none of which benefit from the 3 percent cap. For these guys, "Save Our Homes" represents a big tax hike. Thaxton nails this one too:

"[A]bout 75 percent of the properties in Sarasota County were able to take advantage of the homestead, which allows a 3 percent cap on property tax increases. So, 75 percent of the property owners in Sarasota County are reasonably happy. It's the other 25 percent of the people that we are hearing from. And we are really hearing an earful because they are getting hit hard."

Kudos to the Herald for printing this very sensible take on what ails the Florida property tax. Now if the state can just start focusing on a sensible alternative...

Earmark Reform Is on a Bridge to Nowhere

The Republican Congress has a problem. It needs to explain to the American people how the GOP, which advocates smaller government and controls the White House and both chambers of Congress, increased federal spending and the federal deficit massively over the past six years. Their solution: Blame the budget process. Surely the rules that govern how Congress appropriates money are causing funds to be sent to strange places for no apparent reason, like the $320 million for the "bridge to nowhere" that was to be built to connect a small Alaskan town of fewer than 9,000 to an island with a population of fewer than 50. That particular embarrassment, resulting from an earmark inserted into the transportation bill last year, was one of the incidents that sparked a wider call for changes in the budget process.

One such budget process initiative is "earmark" reform. There isn’t exact agreement of what an earmark is, but most people think of it as an expenditure slipped into a bill by a lawmaker to direct spending to a particular entity or to a particular project, rather than leaving control of funds in the hands of the President and executive branch bureaucrats. This usually means bringing federal spending to the lawmaker’s district. It is true that earmarks have run amok since Newt Gingrich and his crew stormed into the Capitol 12 years ago. The number of earmarks has increased from 4,100 in 1994 to 14,200 in 2004.

But earmark reform, as well as other budget process initiatives, is dying and its mainly due to the Achilles heel of the conservative movement: their addiction to tax breaks. Congress cannot agree on commonsense measures that would treat tax breaks targeted towards special interests just like all the other goodies that are dished out to special interests. There is no logical reason to distinguish between a targeted tax break for say, widget manufacturers that will cost $100 million a year from a direct subsidy to widget manufactures at the same cost. Both cost the American taxpayers the same amount of money. If the federal government cuts someone’s taxes by $100 million a year, that’s $100 million a year that must be picked up somehow (in higher taxes or cuts in services) by everyone else, just as if that $100 million was given out as a direct spending subsidy.

So it would be rational for lawmakers to include targeted tax breaks in their definition of "earmarks." They would then be subject to the same process changes, which at very least should include publicly listing the names of the Representatives or Senators who requested the particular items to be inserted. But anything that resembles a speed bump along the way to cutting more taxes is more than the Republican leaders can stomach. They proposed that a tax break be considered an earmark only if it benefits just one person or entity. Language to this effect was included in the lobbying reform legislation (which is currently stalled in a conference committee) and in a proposal to change the House rules regarding earmarks.

Even some Republicans find this language ridiculous, particularly the members of the House Appropriation Committees which do all the spending. Mind you, this isn’t necessary out of principle on their part. They’re essentially just mad because they have to bear the pain of budget process reform while the House Ways and Means Committee, which writes the tax break bills, does not. But the standard advocated by the appropriators is also laughably weak. They would include in their definition of an earmark any targeted tax break that benefits fewer than a hundred people or entities. So a program that benefits 5,000 poor children in Oregon would be an earmark that requires greater transparency but a tax break targeted at the hundred richest Oregonians would not be.

Earmark reform is only one of the budget process reform initiatives being swallowed up in this controversy over whether to treat tax expenditures like direct spending. The House passed a bill giving the President a watered down version of a line-item veto after much debate over the issue (and after settling on the preposterous one-beneficiary standard). After the Senate passed a bill last week to create a public database tracking federal spending, Senator Lautenberg (D-NJ) suggested expanding the database to include targeted tax breaks — and it will be interesting to see how GOP Senators respond.

Earmarks should be brought under control because they facilitate the sort of corruption (i.e. Duke Cunningham and Jack Abramoff) that cause Americans to lose faith in their government. But we shouldn’t for one second buy the idea that any budget process reforms will cure the Republicans’ addiction to deficit-spending. According to the Center on Budget and Policy Priorities, half of the federal deficits are caused by the tax cuts enacted under President Bush and a third are due to security and military spending (which undoubtedly includes some earmarks but has grown more because Iraq and the war on terrorism).

We’d be foolish to believe the budget process reform initiatives advocated by the GOP will reduce the deficit or that they’ll even reduce earmarks for that matter. To give one example of how toothless these proposals can be, the House rules change being debated would only apply to earmarks on bills reported out of committee. Earmarks in a floor amendment, like the one funding the controversial Alaskan bridge, would not be affected. So after all this sound and fury, the reform we’re discussing wouldn’t even prevent the very abuse that started the debate. Now that’s a debate that’s on a bridge to nowhere.

Sloan Bemoans "Holey" Deficit Math

The always-excellent Allan Sloan has a good overview of the Bush administration's budget-deficit hijinks in today's Washington Post. Sloan highlights the sleight-of-hand used by the Bush administration to make the nation's budget deficit seem smaller than it really is: once again this year, we're "borrowing" more than a hundred billion dollars from the Social Security Trust Fund-- robbing future retirees of the Social Security benefits they're entitled to under current law. A detailed history of the Bush administration's Social Security shell game can be found on CTJ's website here.

Sloan points out usefully that there are conditions under which the Administration's fuzzy math actually makes sense, but also make it clear that these conditions do not currently hold:

I readily concede that if you want to measure the deficit's effect on financial markets, using $260 billion makes sense. After all, that's how much the government is borrowing from "public investors" such as banks, foreign governments and you and me. But if you want to see how much deeper the fiscal hole is getting for taxpayers present and future, which is how I think we should measure the deficit, you have to include the almost $300 billion of trust-fund IOUs.

As is so often true in tax policy debates, the glass-half-full folks in Congress and the Bush Administration are distorting the truth this way because they think they can get away with it. But if enough sensible observers like Sloan blow the whistle on the "holey math" we're being fed, those holding the purse strings will eventually have to report our fiscal situation honestly. Thanks to Sloan for once again focusing the public's attention on this issue.

EITC Gains Ground

Nineteen states, the District of Columbia, and the federal government currently offer an Earned Income Tax Credit, or EITC. Now, it looks like Michigan is about to join their ranks. The EITC, first enacted on the federal level in 1975, is a tax credit that reduces the taxes that low-income working families pay. In many states the tax credit is based on the federal credit and refundable. The credit also acts as a wage subsidy for very low-income workers. During the past thirty-one years the EITC has expanded and it's a popular tax policy tool that has enjoyed broad-based bipartisan political support.

Because the EITC is targeted to low-income individuals, it provides less expensive tax relief for state governments especially when compared to broader-based tax cuts. In fact, Sharon Parks of the Michigan League for Human Services called the EITC the most successful anti-poverty tool in the country. Lawmakers in Michigan should be applauded for proposing this sensible and effective tax reform. For more information on the EITC, click here.

Arkansas: Consistency, Hutchinson Style

Is there such a thing as an informed tax debate in gubernatorial elections? As we've documented in previous coverage of Florida and Ohio, residents of those states better look elsewhere. Well, Arkansas is about to elect a new governor, too-- and the debate there isn't much fun to watch, either.

At issue is whether the state should be taxing groceries under its general sales tax. Republican gubernatorial candidate Asa Hutchinson is making much of the "inconsistency" allegedly shown by his general election opponent, Mike Beebe, on this issue. It turns out that Beebe has changed his mind not once but twice in the past six years on the food tax issue. According to the Hutchinson narrative, Beebe first supported food tax repeal in 2000, then opposed it in 2002, and now supports it again as a candidate for governor in 2006.

Sounds like an unforgiveable flip-flopper, eh? Well, this simple narrative omits some crucial details that actually make Beebe's alleged waffling seem like a sensible response to changing circumstances. The food repeal measure Beebe supported in 2000 would have made up most of the (large) revenue loss from exempting food by hiking other taxes. If done right, such a plan could achieve tax fairness without sacrificing the important goal of revenue adequacy (that is, being able to pay the bills on time). So it's easy to see how an advocate of cutting the food tax could do what Beebe did in 2000.

When anti-tax advocates tried to push through a ballot initiative two years later to repeal the food tax-- this time with no offsetting tax increase whatsoever--Arkansans across the political spectrum recognized that the state simply couldn't afford such a big tax cut at the time. Most people knew that the legislature was, very soon, going to have to deal with a state court case requiring the legislature to come up with more than $600 million in new tax revenues to adequately fund K-12 education. Once again, Beebe's stance (opposing the tax cut) seems quite sensible for someone who wants to see affordable food tax cuts.

Four years later, the state has been largely successful in meeting the state court's mandate for adequately funding education. And with that fiscal sword no longer hanging over lawmakers' heads, food tax repeal looks a lot more doable. So once again, Beebe's alleged "flip flop"-- he now supports food tax repeal-- looks pretty sensible.

One observer in Arkansas makes this distinction a lot more gracefully than I have here. And some would probably argue that this sort of stump-speech rhetoric is not worth debunking. But it seems to me that anyone describing Beebe as a flip-flopper on the food-tax issue is either being intentionally misleading or is simply too obtuse to evaluate more than one facet of fiscal policy at a time. Tax fairness and tax adequacy are two entirely different things-- and Beebe's record on this issue reflects a clear interest in both of them.

Another Setback for TABOR Advocates

TABOR advocates have been busy this year, promoting spending tax cap voter initiatives in Maine, Michigan, Montana, Nebraska, Nevada, and Oregon. Although the name of the initiatives is changes from state to state, the idea is the same: limit government spending increases to the increase in population plus inflation. The idea was first implemented in Colorado in 1992, with predictable results: underfunded schools and highways. In fact, according to a report by The Bell Policy Center, Colorado‚’s funding under TABOR for K-12 and higher education and public health ranked last or next to last compared to peer states. By 2002, Colorado's budget deficit had soared to 9.2%, making it the third worst in the nation. In November of 2005, the people of Colorado told Denver they'd had enough, and voted in a five year suspension on TABOR. But that hasn't stopped TABOR true believers from trying to expand the program to other states.

Now, business has joined the fight against TABOR. Kiplinger is already warning us to "Expect businesses to mount pitched battles to defeat such [TABOR] initiatives in Maine, Michigan, Montana, Nebraska, Nevada,and Oregon". The article goes on to explain the business community's to TABOR: "Companies fear that a lack of state spending on services and infrastructure will make it impossible for them to attract talented employees[...]". The Tulsa Chamber of Commerce has joined the fight against TABOR in Oklahoma, saying that the measure was a failure in Colorado and predicting that TABOR would be a "train wreck" in Oklahoma. Most damning of all, the Denver Chamber of Commerce has called their state's TABOR provision "a proven failure", and warned other states not to make the same mistake. Every day across the country the chorus of voices opposing TABOR grows louder and louder. Expect TABOR advocates to have a tough time at the polls this fall.

Hurricane Katrina and Local Taxes

Here's an interesting fiscal angle to life post-Hurricane Katrina for the Gulf Coast region:

One year after Hurricane Katrina devastated the Gulf Coast, people across the region are still coming to terms with the impact that the storm had on residents, services, infrastructure, and even local tax bases. Some localities have experienced an immense growth in their sales tax revenues during the past year because residents of New Orleans and other Katrina-torn towns have relocated to other cities. Local governments are waiting to see how their population changes before deciding if it's necessary to change their local tax rates as a result of the influx of Katrina victims.

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