April 30, 2009

Illinois EITC Expansion: "Welfare?"

The debate over how to resolve Illinois' looming budget deficit has, so far, been an unusually gratifying one. A brand-new governor with little political capital to spend has made a gutsy (and, in our view, basically correct) decision to push for an increase in the state's personal income tax, which is bar-none the least fair in the nation and among the very lowest as well.

There are, of course, things missing from the governor's plan. Eliminating income tax exemptions and sales tax exemptions would make the tax base more sustainable (and would reduce the pressure to increase tax rates). But in the short run Quinn's doing what is needed to make ends meet and has picked a quite fair way of doing it.

If there's one quite legitimate beef with the governor's plan as proposed, it's that there's not sufficient attention devoted to low-income tax relief. Which is why it's great to see the editorial board at the Springfield Journal-Register coming out in favor of an expansion of the state's Earned Income Tax Credit. The SJR's (correct) rationale:
This kind of credit is especially valuable to low-income working families in Illinois, where the poorest one-fifth of Illinois families spend an average of nearly 13 percent of their earnings in state and local taxes while the wealthiest 1 percent of Illinois households spend less than 6 percent of their incomes likewise.
All true. The underlying point here, unstated by the SJR, is that the EITC is valuable because it's an income-tax based credit that is refundable, meaning it can be used not only to offset income taxes but to offset sales, excise and property taxes paid by low-income families as well. And the main reason why the poorest Illinoisans pay such a huge chunk of their incomes in tax is because of these non-income taxes.

So you've got to charitably assume that it's because the SJR editorial doesn't explain this point clearly that half a dozen commenters on the SJR editorial make the boneheaded assertion that the EITC constitutes "welfare" because folks who get it have "zero tax liability" and are therefore getting "free money." One commenter, who claims to work at the Illinois Department of Revenue, has this to say:
I work at Revenue. Under the current system, many people pay no tax and still get a refund of their EIC on their state return. This is a form of welfare. People are getting money from the state that is not theirs, and they did nothing to earn it.
This tells me only that it's possible to work for the Department of Revenue and understands precisely zero about how the EITC works. It's based on earned income. If you have a job and a salary, you get the EITC. The more you earn, the more you get. So to say that EITC recipients "did nothing to earn it" is quite possibly the single most breathtakingly wrong thing one could ever assert about it.

It's important for people to understand that refundable income tax credits play a critical role in helping to reduce the unfairness of state tax systems overall, and that they shouldn't be understood as applying only to income taxes. But it's equally important for people to get that the EITC is a work incentive, and that work incentives respond to... work. A generation of "welfare reformers" who've worked diligently to create work incentives for low-income poverty relief would put their heads in their hands and quietly weep (or pull their hair out in despair) at the notion that one can "do nothing to earn" the EITC.

And, I suppose, the fundamental underlying lesson of all this is that we should really just never even bother reading the 'comments' section of web-based newspapers articles.

April 07, 2009

Georgia Lawmakers Swap Income for Property Taxes

Who knew Georgia lawmakers were such fans of the property tax? Only a year after giving serious consideration to a plan that would have repealed most local property taxes in the state, the state General Assembly has ratified, and sent to Governor Perdue, a budget plan that would provide a 50% exclusion for capital gains taxes that's estimated to cost north of $340 million a year, and pay for it by eliminating the state's $20,000 property tax homestead exemption (technically $8,000 of assessed value, but Georgia homes are valued at 40% of market value for tax purposes).

Paring back the property tax break, known as the Homeowner Tax Relief Grant or HTRG, isn't the dumbest idea you'll hear this week, but that's primarily because the capital gains plan takes that coveted spot.

A recent ITEP report gives the skinny on why state capital gains tax breaks are a misguided tax strategy in general, and the arguments presented therein all apply to Georgia. But there's an extra layer of absurdity to this strategy in the Peach State-- Georgia already allows a very generous capital gains break, and it's targeted to the group most lawmakers would say most need capital gains breaks: the elderly.

In 2008, a Georgia taxpayer aged 62 or older can deduct $35,000 of "retirement income" from her taxable income. This can include pension benefits, but can also include a full $35,000 of capital gains. This is on top of the regular exemptions and deductions available to all Georgians, mind you. And a married couple, both of whom are over 61, can deduct $70,000 of retirement income.

Bottom line is that it's fairly hard to be a senior in Georgia and pay any capital gains tax at all. So who benefits from the cap gains cut included in the budget? Very rich people. And not that many of them. A new ITEP analysis released today shows that 77 percent of the benefits from the capital gains proposal would go to the wealthiest 1 percent of families, and that the poorest 80 percent of the state's income distribution would collectively see less than 1 percent of the tax cuts.

The second-dumbest component of the Georgia plan is repealing the HTRG. Done correctly, this would be an OK move: smarter people than I have argued correctly that there are better approaches to targeted property tax relief than a state-funded homestead exemption, and that a targeted "circuit breaker" credit could provide more relief to fixed-income homeowners and renters at a lower cost than the HTRG.

But the legislature's action last week doesn't count as "done correctly." They've simply pulled the rug out from under local governments, forcing them all to choose either to continue to provide the homeowner exemption at their own expense or else increase property taxes on most Georgia homeowners.

Getting to this point in the budget process took a lot of difficult and painful decisions-- which makes it all the more crazy that the HTRG got yanked to pay for something as frivolous as a capital gains tax cut.

The good news is that the budget is not yet law, because Governor Perdue hasn't signed it. And there's some indication that he's concerned about the fiscal implications of the cap gains cut. Here's hoping he throws some cold water on the legislature's drunken tax-cutting binge.

April 03, 2009

Why Does Blanche Lincoln Hate the Estate Tax So?

The chart above probably answers the question asked by the title of this post. But we're getting ahead of ourselves.

If there was an "endangered species list" for tax policies, the federal estate tax would have been on it for the past fifteen years, starting when the anti-tax gang cleverly re-labelled it the "death tax." The gradual repeal legislation (which would be phased in between 2001 and 2010) passed at the behest of President Bush in 2001 didn't help matters, of course. But for those of us who think the estate tax plays a vital rule in preventing the concentration of economic (and, as important, political) power in the hands of a few elites, it was heartening to see the Congressional tax writing committees taken over by Democrats, and then to see the White House occupied by Barack Obama. The policy question, it seemed to most sensible folks, was how much (if any) of the Bush tax cuts that had already taken effect would be allowed to remain. The cuts that had not yet taken effect when Obama took office, of course, would never take place.

So how did we get here, with a Democratic Senate approving more estate tax cuts?

It was bad enough when Obama, even as a presidential candidate, signaled that he thought the best "reform" option for the estate tax was to make permanent most of the Bush administration's cuts in the estate tax rates. As a December 2008 Citizens for Tax Justice analysis of Obama's plan noted,
President-elect Barack Obama has proposed a change that would prevent the estate tax from disappearing in 2010, but which would also unnecessarily cut the estate tax below the level itwould reach in years after 2010 if Congress simply does nothing.
Put another way, Obama's first estate-tax-related act as President was not to reject the Bush administration's estate tax cuts, but to allow even more of them to take effect at the beginning of 2009. Even estate tax proponents whose reform ambitions were limited to "first, do no harm" were disappointed by this stance.

And now, at at time when the federal government faces deficits unrivalled since World War 2, Democratic Senator Blanche Lincoln is actively arguing that Obama's cuts aren't enough. The Lincoln proposal would drop the top estate tax rate to 35 percent and exempt the first $10 million of an estate's value from tax.

For Lincoln to view this as a priority, she has to somehow think that the 2009 rules Obama has allowed to take effect-- which exempt the first $7 million of a married couple's property from tax and then apply a rate structure with a top rate of 45 percent-- are just too onerous.

One has to ask the question: who are these guys with estates worth over $7 million that she's so worried about?

A look at the history of Arkansas estate tax collections (that's the chart at the beginning of this post, reprinted below) gives a hint. For much of the last 20 years, Arkansas estate tax collections have been pretty flat, hovering between $10 and $30 million a year. But in fiscal 1996, the state collected just under $120 million in estate taxes. While the state is (understandably) not telling what the source of the single-year bump was, it's generally understood to have been largely due to the death of Wal-Mart co-founder "Bud" Walton in 1995.

Given this history, and given the recent track record of the Walton family in pushing for estate tax repeal, Lincoln's opposition to the estate tax becomes more understandable-- but still remains profoundly disappointing.

Does Lincoln really have such a chronic case of "tin ear" that she's willing to make a high-profile stand for further estate tax cuts in the era of Madoff/AIG bonuses/etc? Apparently so.