Talking Taxes

On Social Security, McCain Redefines "Middle Class"

2008-07-16T19:14:00.003-04:00

In an entertaining interview with the Pittsburgh Tribune-Review this week, presidential candidate John McCain makes it clear that he won't fix Social Security through payroll tax hikes. In particular, McCain argues that it's a lousy idea to increase the cap (currently $102,000) on the amount of any individual's wages that can be subject to payroll taxes in a given year:

Trib: Do you favor raising the cap?
McCain: Pardon me?
Trib: Do you favor raising the cap?
McCain: No, and I think by doing so, as Sen. Obama wants to do, you are obviously putting a very, very big increased tax on ... middle income Americans who filing jointly and in other ways will be paying a very big increase.

McCain's response here is wrong in two important ways. First, as a CTJ analysis showed a couple of years back, only about 6.5% of Americans would be affected by a proposal that simply eliminates the cap on the federal payroll tax.

But more importantly, McCain's characterization of Obama's position on Social Security is flat-out wrong. What Obama has said is that he'd allow the payroll tax to apply to an individual's wages above $250,000, which is a very different thing from simply removing the cap and taxing wages above $102,000. Here's the Washington Post's nice explanation of Obama's position:

Under current law, income up to $102,000 a year is taxed for Social Security. Obama would create a "doughnut hole" by not imposing new Social Security taxes on income between $102,000 and $250,000. His aides said income exceeding $250,000 would be taxed at a rate of 2 percent to 4 percent, rather than the 6 percent tax that people pay toward Social Security on income below the $102,000 cutoff, which is matched by their employer's paying a 6 percent tax.

And as a recent CTJ analysis points out, the Obama proposal would only affect 1 percent of Americans-- none of whom could be described as "middle class." As for the alleged "very, very big" tax increase on these middle-class Americans... well, suppose you have a "middle class" friend whose salary was $275,000 (remember, income from sources other than wages don't count toward the payroll tax, so what matters is each individual's salary). That means that under Obama's plan, he would face a tax on his wages exceeding $250,000. His income exceeds $250K by $25,000, so his tax hike would be 2% of $25,000. That would be a $500 tax hike. If this sounds like somebody you know-- and if you consider this person "middle class"-- then McCain's characterization seems apt. Otherwise, his description of the Obama plan is screamingly, almost libelously wrong.

The $500 tax hike described above certainly would count as a "very, very big" tax hike for an average middle-income family-- but, unfortunately for McCain's truthiness, there's simply no way the Obama plan would ever apply to anyone who could reasonably be considered middle-class. Period.

To be perfectly clear about the way the Obama plan would work, a two-earner married couple would not pay more tax just because their combined income exceeded $250,000. Each spouse's salary must exceed $250K to get hit by the Obama plan. And capital gains, dividends, etc., don't count toward the $250K: what matters is your salary.

One could charitably attribute McCain's false statement to fuzziness in his understanding of exactly how the Obama plan would work. One could also say charitably that perhaps "middle class" has a very different meaning in Arizona than in the rest of the nation. But a more realistic interpretation would be that candidate McCain is willfully misrepresenting the truth in the hope that scare tactics are still a good substitute for honest policy debates.

McCain on Social Security: Everything on the Table?

2008-07-16T18:32:00.003-04:00

I don't trust people whose fiscal policy platforms are built around "pledges." When an elected official says that he/she will never, ever raise taxes on anyone, this shouldn't be seen as a principled stand-- it should be understood as a cop-out, a signal that this particular elected official, when he takes office, will have checked his brain at the door. The first principle of fiscal policy should be that you put all the cards on the table, and face budget difficulties as they arise using tax changes or spending changes tailored to fit the specific budget circumstances you're facing. No pledges, no vows, just a nice rational deliberative process.

So I was impressed to see presidential candidate John McCain quoted on the New America Foundation's US Budget Blog as saying that when it comes to fixing Social Security's long-term funding imbalance,"you've got to say, 'Look, everything is on the table, let's sit down at the table.'"

Given McCain's recent tendency to vocally oppose tax increases of any kind, the natural follow-up to a comment like that is "you mean you're open to increasing the payroll tax?" Since the McCain quote came from a much longer interview with the Pittsburgh Tribune-Review, I was interested to see whether, in fact, the Trib's staff asked this follow-up question. And they did, sort of, by asking not whether McCain would support increasing the federal payroll tax rate, but by asking whether he would support a proposal that would increase the annual cap (currently $102,000) on the amount of wages that can be subject to the payroll tax in a given year. Here's the exchange:

Trib: Do you favor raising the cap?
McCain: Pardon me?
Trib: Do you favor raising the cap?
McCain: No, and I think by doing so, as Sen. Obama wants to do, you are obviously putting a very, very big increased tax on ... middle income Americans who filing jointly and in other ways will be paying a very big increase.

So the good news is that McCain isn't taking a no-taxes pledge on this point. But the bad news is that he's talking out of both sides of his mouth on this "cards on the table" approach. He tries to appear conciliatory by speaking the language of rational deliberation, then poisons the well by completely mischaracterizing the impact of a relatively tame tax hike on "middle-income Americans."

In other words, when McCain says "let's put all the cards on the table," what he really means is "let's have an honest discussion of all the ideas I agree with, and tell outright lies about the rest of them." Is this better than a "no new taxes" pledge? I'm not sure it is. Pretending to be reasonable is arguably even worse than just admitting you're irrational. The "no new taxes" gang is irrational at best, but at least they're honest about it.

For more details on why McCain's statement about raising the cap is wrong, go here.
You can read the whole Tribune-Review interview here.

Zipcar Popularity Leads to Taxation Dilemma

2008-06-23T16:31:00.002-04:00

What is the difference between a rental car company and a car-sharing company? That’s the question public officials and tax lawyers around the country are trying to figure out as states and cities begin to apply rental car taxes formerly applied only to companies like Alamo and Hertz onto car-sharing companies like Zipcar (formerly Flexcar). Zipcar is a national for-profit while most original car-sharing organizations were non-profit and locally based.

An article in The Wall Street Journal last Thursday details the increasing prices associated with borrowing a car for a few hours. In many cities, the cost of a 2 hour car-sharing trip has gone up between $2 and $4.

If no exemptions are granted, the fees can add up such that Zipcar loses its cost-advantage. In Philadelphia, Zipcar members must pay a 2% state rental-car tax, plus a $2-per-rental state tax, and the city's 2% rental-car tax every time they reserve a car.

This would seem to make it more difficult for the kind of low-income urban dweller who would like to be able to get around without owning a car (and avoid the associated costs of insurance, gasoline, and parking) to be able to do so. Taxes applied to each car reservation are far more onerous to Zipcar users who tend to use the cars more often than Enterprise renters, for example, rent cars. On the other hand, many rental car companies such as Hertz have begun offering hourly rates for car rentals, essentially the equivalent service of a car share company.

Public policies should be encouraging a reduction in car ownership whenever possible. There are many positive externalities associated with fewer cars on the roads including a reduction in air pollutants, less traffic congestion, and a reduced reliance on foreign oil imports. But are there specific externalities associated with joining a car-sharing service per se?

Zipcar spokesperson John Williams believes so:

"Fundamentally, we believe that car sharing is different from car rental," he said. "The question isn't so much about percentage rates as it is a question about smart policy."

Mr. Williams said that after people join car-sharing programs, "there is a behavior shift" -- they drive 40 percent fewer miles, and eventually many of them…sell their cars.

Zipcar claims that each car-sharing vehicle added to the streets removes approximately 15 privately owned cars off the streets. It also says that about 40% of its members would own a car or second vehicle if it weren’t for Zipcar. About 2 million people participate in car-sharing around the country.

That seems to imply that some particular benefit is derived from having cars placed strategically around urban areas so that most people have access to them without needing a car to get there in the first place.

There’s also added flexibility to the Zipcar program that you cannot necessarily get with rental car companies. New Jersey Transit recently partnered with Zipcar, and it allows you to reserve a Zipcar to bridge the gap between where trains can take you and where you need to go. In other words, if you live far from a train station, you can reserve a Zipcar at the train station so you can make it to all the way home.

Nearly 100 different rental-taxes have been enacted nationwide and have cost consumers more than $6 billion since 1990. Opponents claim the tax money goes to fund projects that those burdened by the tax derive no benefit from. The popularity of car-rental taxes comes from the theory that they mostly tax visitors to a given city or state, not the voters living there. However, as car-rental taxes are applied to local residents using car-sharing programs, they are no longer quite as politically palatable. Legislation was introduced last year at the federal level banning the implementation of new rental-taxes while leaving the current ones in place. It aims to rectify the unfairness of targeting a particular industry for taxation.

At the end of the day, tax treatment of car-renting vs. car-sharing businesses will likely depend on what exact services are being offered and whether they deserve special treatment in light of their environmental benefits. Localities might consider developing rental-tax exemptions depending on usage. For example, in Chicago the tax applies to daily rentals but not hourly rentals. Bostonian Zipcar users are charged a flat annual “convention center tax” but not taxed each time they reserve a Zipcar.

While Chicago’s system should prevent having to explicitly discriminate between “car-sharing” and “car-rental” companies for tax purposes, it won’t eliminate the potential to game the system. For example, business travelers might be able to take advantage of the hourly rate to complete their business in a rental car without paying the rental-tax. This tax relief wouldn’t be directed at those who need incentives not to own a car. Similarly, those who may legitimately need this tax relief will be penalized for day-rentals if they have errands that take longer than a few hours to complete.

Ultimately, any remedies for the current situation are bound to have imperfections. However, hourly rental tax exemptions are likely to ensure maximum tax-fairness and maximum positive externalities for the rental car and car sharing industries.

Nevada: Special Session Postponed (Sort Of)

2008-06-22T12:05:00.000-04:00

In the wake of news that Nevada's projected budget deficit will be larger than previously estimated, Governor Jim Gibbons has postponed the start of his special legislative session on the budget deficit from next Monday to Friday. The news isn't good:

[T]he new shortfall figure lawmakers must deal with when they convene on Friday is $250 million, more than a $243 million shortfall projected by state Budget Director Andrew Clinger. And far above the $94 million projected by legislative fiscal analysts.

A Gibbons representative made it clear that with the expanded deficit, all policy options were on the table-- except for half of them:

Josh Hicks, general counsel to Gibbons, said every type of potential budget cut is on the table for the session, from 4 percent cost-of-living raises set to take effect July 1 for state employees and public teachers, to cuts to programs. Tax increases, he said, "are not on the governor's table."

Of course, when you've already identified $900 million of spending cuts without a single tax hike, what's another $250 million? The Governor's single-minded approach to resolving the state's fiscal crisis reminds me of this exchange from the John Belushi-Dan Ackroyd classic "The Blues Brothers":

Elwood: What kind of music do you usually have here?
Claire: Oh, we got both kinds. We got country and western.

Virginia: Gilmore Allies Jumping Ship

2008-06-20T11:26:00.004-04:00

In his tenure as governor of Virginia in the late 1990s, Jim Gilmore was notable primarily for one thing: the cut in the state's "car tax" he championed. It got him elected, and it was the issue he rode throughout his governorship. And lawmakers in other states took note: cutting vehicle property taxes has been a frequent bipartisan goal of state lawmakers for the last decade now.

But, as countless Virginia observers (and a bunch of angry lawmakers) have noted since then, supporters of the Gilmore car tax cut were sold a bill of goods. It turned out almost immediately that repealing the car tax was unaffordable, since the short-term surpluses that made the tax cut seem feasible were, well, short-term. And Gilmore's tax cut has been a political football in the state's budgeting process ever since.

Now, Gilmore has decided to make another run at statewide office, and is running against Mark Warner for the US Senate seat being vacated by John Warner. And he's finding out what happens when a snake-oil salesman tries to fool the same people twice: it doesn't work.

The Washington Post reports this week that Vincent Callahan, a Republican lawmaker who was instrumental in the initial passage of Gilmore's car tax cut, is endorsing Gilmore's Democratic opponent, Warner, in this fall's race. The reason, according to Callahan: Gilmore's misleading advocacy of the car tax cut last time around.

Callahan said Gilmore, Warner's GOP opponent, misled legislators and the public about the state's finances and the cost of his signature effort to eliminate the car tax when he was governor from 1998 to 2002. 'The figures Gilmore used were so utterly erroneous and far-fetched that they were mind-boggling,' said Callahan.

Of course, revenue forecasting is often more of an art than a science. But in retrospect, there's little disagreement (from anyone except Gilmore himself, that is) that Gilmore lowballed the cost and the affordability of his car tax cut .

A Washington Post editorial noting Gilmore's razor-thin primary win over a relative nobody for the GOP nomination offers a scathing review of Gilmore's fiscal policy record:

At the heart of the Gilmore legacy was his insistence on ramming through a tax cut whose dimensions dwarfed his cavalier initial estimates, and his simultaneous approval of heavy increases in state spending, a strategy -- if it can be called that -- suggesting that Mr. Gilmore assumed that the boom times in Virginia would never end. He pursued his signature tax cut, a phased repeal of the levy on personal vehicles, even after it became crystal clear that the repeal would drain hundreds of millions of dollars from the budget and cripple state finances. He insisted on his course despite being warned -- by fellow Republicans, among others -- that it would eventually force deep reductions in spending on core state priorities including transportation and education. And he shrugged off specific, repeated and well grounded forecasts that Virginia was heading for an economic slowdown brought on by the bursting of the technology and stock market bubble -- a slump Mr. Gilmore simply denied.
In Mr. Gilmore, Virginia had its very own Herbert Hoover. "State government is in sound financial shape," he declared sunnily in August 2001, even as state lawmakers from both parties predicted a $500 million revenue shortfall in the commonwealth's $25 billion budget -- about 10 times Mr. Gilmore's own projections and, as it turned out, itself an underestimation of the state's actual woes. Mr. Gilmore's allies
sometimes argue that no one could have foreseen the economic effects of the Sept. 11 attacks, which occurred four months before he left office. True enough, but also irrelevant: The problem had swollen to major proportions well before the attacks, and Mr. Gilmore ignored it.
He did so in part by budgetary gimmickry and sleight of hand of the sort seldom seen in Virginia, with its stodgy custom of fiscal prudence. When it became plain that the state's revenue growth had hit a wall, a condition that Mr. Gilmore himself had said would preclude a further rollback of the car tax, he proposed a novel solution: conjuring revenue by borrowing against a one-time legal settlement with tobacco companies. That scheme, which encapsulated Mr. Gilmore's poor judgment and fondness for budgetary trickery, elicited groans from Republican and Democratic lawmakers alike.
Today, Mr. Gilmore innocently states that on leaving office in 2002 he bequeathed a balanced budget and $1 billion in reserves. But the balanced budget was a fiction that papered over a yawning deficit with shenanigans such as requiring retailers to prepay their sales tax and employers to prepay their withholding tax. And the reserves, for which Mr. Gilmore bears no responsibility -- they were statutorily required -- did nothing to forestall the state's fiscal crisis. It fell to Mr. Warner, who succeeded Mr. Gilmore as governor, to fix what quickly mushroomed to a nearly $4 billion problem.

Wow.

President Bush Supports a Tax Hike

2008-06-20T10:40:00.002-04:00

And you thought the day would never come: earlier this week, President Bush signed into law a bill that (gasp) increases federal taxes. The bill, HR 6081, known as the "Heroes Earnings Assistance and Relief Tax Act," creates or extends a host of special tax breaks for military members and their families, which in itself is a move no sane member of Congress would oppose. But heretically, the bill pays for its tax cuts by closing an existing tax loophole.

The tax break in question, which Talking Taxes discussed in detail a few months back, allowed KBR, a former subsidiary of the Halliburton company, to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees were working for a Cayman-Islands based "shell company."

Just as tax breaks for the military have no enemies (the House voted unanimously on this one), the KBR payroll tax dodge had no friends. So for any head of state not guided by the "no new taxes" mantra, signing this bill would be a no-brainer. But in this case, we'll call it a pleasant surprise.

Now, as the NWLC's Joan Entmacher asks, why can't we get Congress and the President to apply the same logic to the egregious "carried interest" tax break for hedge fund millionaires?

Nevada: Tax Hikes in Special Session Possible

2008-06-19T11:22:00.000-04:00

The Reno Gazette Journal reports that tax increases may be on the agenda for next week's special session of the Nevada legislature. Among the candidates, according to Assemblywoman Sheila Leslie, D-Reno, is raising the business payroll tax and hiking the hotel tax, popularly known as the "room tax."

For those who've followed Governor Jim Gibbons' membership in the dwindling crowd of state executives who are adhering to "no new taxes" pledges, this isn't terribly exciting news because the harsh political realities of the state suggest it doesn't matter what tax hikes the legislature discusses:

Gov. Jim Gibbons has said he would stick to his election-campaign pledge of no new taxes. Democrats are a vote shy of being able to override a veto in the Assembly and are in the minority in the Senate. Lanni’s suggestion to raise the payroll tax from 0.63 percent to 1.23 percent and generate $246 million annually won’t go far in the special session, Senate Majority Leader Bill Raggio, R-Reno, said.“I am aware of it and have also heard from him on that and my indication is that this is not the time to start talking about raising taxes,” Raggio said. “We are in tough times and businesses are hurting and in this special session, it is something that we can’t even consider.”

Of course, depending on the outcome of the ongoing brouhaha over the size of Nevada's budget deficit, Democrats may ultimately find it easier to override a gubernatorial veto. And it's always possible that Governor Gibbons will back away from his pledge and start evaluating the state's fiscal jam in a non-judgmental way.

But don't hold your breath.

Alabama case contests discriminatory property tax restrictions

2008-06-19T10:47:00.002-04:00

In a court case filed earlier this year in Alabama, lawyers for several rural schoolchildren and their parents hope to demonstrate that Alabama’s regressive tax code unconstitutionally disadvantages children in poor, rural counties by limiting the ability of localities to raise a reasonable amount of revenue with which to fund education. The plaintiffs’ approach in this case involves a thorough accounting of the history of Alabama’s property tax, with the intent of demonstrating that these policies were purposely enacted to destroy the ability of counties to pay for African Americans’ educations with money raised from wealthier white landholders. If this approach proves itself effective, the requested remedy is a mandate requiring the governor and legislature to work together to rewrite Alabama’s property tax law in such a way as to make it non-discriminatory.

Though there may be reason to question the use of the courts in securing tax policy reform, what is interesting about this case is the way it demonstrates the unsavory original intent behind many of Alabama’s property tax limitations. The district court hearing the case conceded as much in an earlier case when it stated that “constitutional provisions governing the taxation of property [in Alabama] are traceable to, rooted in, and have their antecedents in an original segregative, discriminatory policy”.

According to the plaintiffs’ official complaint, following Reconstruction, Alabama’s white elites exploited widespread racial resentments in order to gain enactment of their favored regressive tax policies. In the post Civil War period, the tax base, which had been focused on the slave trade, was redirected onto land. But when blacks were enfranchised, wealthy whites who owned significant tracts of land in the “Black Belt” feared that if blacks were granted local autonomy, they would vote to raise property taxes (which would hit hardest those well-off enough to afford significant amounts of property) in order to support their own education. Though the idea of funding public services for the poor with money drawn from more fortunate members of society is hardly controversial today, at the time the prospect of privileged whites having to pay for the education of “inferior” African Americans was extremely unsettling. Limiting the amount of tax that could be levied on property thus became a top priority.

One of the earliest manifestations of this sentiment can be founded in the 1875 Redeemer Constitution. Caps on the rate of property taxation were implemented, largely in order to protect wealthier whites from tax increases in predominately black localities. At the time, and for some years after, manipulative assessment schemes served a similar end.

Later, in 1891, the Apportionment Act explicitly allowed for funds to be transferred from black to white schools. This removed any impetus for whites to increase property taxes to fund their own schools, and made property tax caps even more useful.

Subsequent to these policies came the adoption of the 1901 Alabama State Constitution, still in effect today, which the plaintiffs claim was created with the explicit goal of “disenfranchising blacks and maintaining white supremacy” in the state. That claim seems relatively uncontroversial, as the Constitution established a poll tax, as well as literacy and landowning requirements for voting that kept African Americans effectively disenfranchised and segregated from the rest of society until the 1960s. With blacks disenfranchised, the constitution also established a referendum requirement for all local property tax changes.

In addition to the disenfranchisement of blacks was a solidifying of state-level control of local tax issues. The plaintiffs describe state intervention into local property tax policy as an important “fall-back provision for guaranteeing the maintenance of white supremacy in black majority counties”. Unlike some county governments, the state was certain to maintain a white majority of legislators.

Although discriminatory voter laws, segregation, and inconsistent property assessments were eventually struck down in court in the 60s and 70s, the crippling effects of other Alabama tax laws contained in the state constitution continue to this day. In response to a federal district court ruling that struck down the irrational assessment system that had been used in Alabama for decades, the Alabama legislature passed a “Lid Bill” amendment that was ratified by voters in 1972. The amendment (Amendment 325) established fair market value assessment ratios for all kinds of property (30% for utilities, 25% for other business property, and 15% to residential, farm, and forest lands) and imposed an absolute lid on all ad valorem taxes of 1.5% of fair market value. To see why “split roll” property taxes of this type are a poorly targeted way to shift the tax burden from residents to businesses, see this policy brief from the Institute on Taxation and Economic Policy (ITEP).

A second Lid Bill in 1978 lowered the property assessment ratio to 10% for residential, agricultural, and forest land and measured value not as “fair market value” but rather on the land’s “current use.” Requiring land to be taxed on the value of its current use results in a huge tax break for wealthy landowners and speculators. As the court brief explains, “Seventy percent of Alabama’s land mass is forest land, but due to the 10% assessment ratio and current use provisions of the 1971 and 1978 Lid Bill Amendments, forest land contributes only 2% of all property tax revenue.”

To add yet another layer of unfairness, the Lid Laws revoke local autonomy by requiring a lengthy three stage process if a locality wishes to raise property taxes. First, the locality's commission or council must vote to request that the legislature pass a local constitutional amendment that would raise the locality's property taxes. Then the state legislature must approve the constitutional amendment, with at least 60 percent of both chambers voting in favor. Finally, a majority of the locality's voters must approve the amendment in a referendum. As the icing on the cake, if any member of the Legislature objects to the amendment, then it is sent to a statewide vote (and thus, most people voting on it will not even be subject to the locality’s property taxes). These extremely cumbersome requirements not only undermine local control but also impede the state legislature from promptly dealing with more important state business.

Unlike the debates that had taken place in the late 1800s and early 1900s, the discussion of whether to enact the 1970s Lid Laws was much less openly racist. But with George Wallace, a famous segregationist, in the office of the governor, race was certainly a visible issue. Given the history of Alabama tax policy, it’s not at all surprising that the plaintiffs conclude that,

There is an historical pattern of the racial motives behind the property tax provisions in the Alabama Constitution: There is a direct line of continuity between the property tax provisions of the 1875 Constitution, the 1901 Constitution, and the amendments up to 1978.

But aside from the existence of racial biases in the intent of Alabama tax law, what is more useful to point out is the existence of anti-poor (and as a corollary, anti-black) biases in the effect of the law.

The confluence of anti-tax provisions in effect in Alabama makes obtaining sufficient revenues from property taxes nearly impossible. Alabama property taxes are the lowest in the nation as a share of personal income. According to the court brief, in 2003, Alabama spent $5,908 per K-12 student, compared with a national average of $7,376 per student, making it the fourth lowest ranked state. The correlation between property taxes and school spending is no coincidence and it has serious negative consequences for Alabama schools, and in turn for the state’s long-term economic growth. Many school buildings are old and crumbling, and some are so overcrowded they have been forced to use trailers for overflow classrooms. Alabama is among the bottom ten states in writing scores with 76% of 8th graders writing below grade-level.

But a look only at property taxes and school funding does not provide a view of the full picture. Simply put: low property taxes are not the same thing as low taxes overall. Due largely to unusually high sales taxes and an almost-flat income tax, lower- and middle-income Alabamians actually end up paying a very significant amount of their income in state and local taxes. According to ITEP data, the poorest 20% of Alabama residents (earning less than $16,000 a year) pay about 11.2% of their income in state and local taxes under 2008 tax law. That’s well over two times the percentage paid by the richest 1 percent, or those with average incomes of more than $999,400.

A large contributor to this outcome is the entrenched preference for sales taxes in Alabama’s tax code. Sales taxes are exempted from the referenda requirements in place for raising property taxes, so many localities rely on these to fund schools. Sales taxes run as high as 11% in some parts of Alabama and according to ITEP estimates, the bottom 80% of taxpayers pay over five times as much in sales taxes as they do in property taxes. Sales taxes are also notoriously vulnerable to economic slowdowns. Making matters worse for Alabama’s sales tax is that it is littered with numerous needless exemptions for various goods and services (each of which contribute to the need for such high sales tax rates in the state) while groceries continue to be subject to the tax. Grocery taxes hit the poor the hardest since such a large portion of a poorer family’s income goes to paying for groceries. Alabama is one of only two states where sales tax is fully applied to groceries.

Alabama also has a seriously flawed income tax code. Up through 2005, Alabama required a family of 4 to start paying income taxes on $4,600 of income. This threshold was raised to $12,600 in 2006, but it’s still the fourth lowest in the nation (and a family of four is considered poor if they made less than $19,961 in 2005). Its higher tax brackets kick in at such low income levels (Almost 70% of Alabama taxpayers paid at the top rate in 2006) that the wealthiest 20% of Alabamians actually manage to pay out less of their income in income taxes than the middle 20%. This is in large part because Alabama is one of only seven states that allow a full deduction from state income taxes of federal income taxes paid. Since the wealthy pay much more federal income taxes than the poor and middle class, this sharply reduces the effective tax burden of the state income tax on the wealthy.

How can this be changed? Much of the problem lies with Alabama’s constitution, which has kept Alabama’s tax code among the most regressive in the nation. (Incidentally, the 1901 constitution was only ratified by rigging the vote in Alabama’s Black Belt – the referendum actually lost outside the Black Belt where there was no vote rigging). Entrenching tax policy in the state constitution is never a good idea as it makes it far too difficult to adjust the law to confront new challenges. A movement away from this process would be a great first step.

The legacy of tax unfairness is inexorably linked to the legacy of racial injustice in Alabama. The intentional racial bias in Alabama’s tax system may be less visible today, but effects on low-income Alabamians are still very plain. Aside from all the legal and historical arguments raised by this court case, one thing is clear: the solution proposed by the plaintiffs – that the Governor and legislature work to enact serious reforms to Alabama’s tax system – is absolutely necessary. Alabama property taxes are the lowest in the country and K-12 and higher education have both noticeably suffered as a result. High sales taxes and an essentially flat income tax exacerbate this imbalance. It’s time for Alabama to break away from its humiliating past and enact a tax system designed with 21st century considerations in mind.

Connecticut Gas Taxes: Playing Politics with a Serious Crisis

2008-06-13T15:37:00.003-04:00

The Connecticut House and Senate each approved a bill early Thursday morning that adds to the state’s existing $150 million deficit by cancelling a scheduled increase in the state’s tax on wholesale earnings from gasoline sales. Governor Rell is expected to sign the measure. The bill prevents what would have been a 0.5% increase in the petroleum wholesale earnings tax, which industry lobbyists are claiming would have increased prices at the pump by about 5 cents.

The estimated cost of this bill has been pegged at $25 million. It may at first seem odd that Connecticut lawmakers have decided to make cutting taxes a top priority when the state is facing a budget deficit and numerous counties have been forced to scale back vital public services whose benefits almost certainly outweigh their costs. Even in the face of these serious budgetary issues, one of the first reactions from Democratic House Speaker James A. Amann was that “We didn’t raise taxes, so we’re pretty proud of what we’ve done.”

What’s going on here? Why is restricting revenues such a priority when it couldn’t be more obvious that state and local governments need more funds to provide the services Connecticut families have come to expect?

The answer: It’s an election year! Republican legislators, outnumbered 44 to 107 in the House and 13 to 23 in the Senate, have opted for a strategy of supporting viscerally appealing, though often fiscally irresponsible plans designed to gain some positive publicity and win votes in November. The majority of those plans have been ignored by the Democrats in power (for the most part with good reason), though with gas prices as high as they are, the Democrats decided not to take the political risk associated with appearing uninterested in the effects of high fuel costs on Connecticut families.

This isn’t at all surprising. Many state lawmakers across the nation have latched on to the headlines being generated by high fuel prices by proposing gas tax reductions much better suited for winning votes than for actually helping anybody in need. This plan in Connecticut is no different.

Even if we put aside our skepticism of the petroleum industry’s figures and accept their estimate that this bill will prevent a 5 cent increase in the price of gas, few observers could seriously suggest that avoiding this increase will do anything to improve the financial situation of Connecticut families. During the brief debate that occurred earlier this year over a proposed suspension of the 18.4 cent federal gas tax, that plan was heavily criticized for only providing the average driver with a $30 tax cut. The Connecticut bill would save drivers less than a third of that amount, though it would play a noticeable role in driving the state government millions deeper into debt.

Well aware that this bill would only provide a negligible tax cut for the average family, one legislator insisted, in typical election-year fashion, that it is important to “let our citizens know that we are very concerned about what they’re up against”.

That’s what makes this whole debate so discouraging. The problem is not just that Connecticut lawmakers are shamelessly hunting for votes – it’s that in the face of a serious crisis for lower-income families, lawmakers have decided that “letting our citizens know we’re concerned” is more important than actually doing something meaningful to help them.

Even if Connecticut legislators wished to avoid a needed restructuring of their state’s regressive tax system, this does not change the fact that much better options exist for providing real assistance to families hurt by high fuel costs. Instead of offering across-the-board tax relief that benefits both Connecticut’s wealthiest, as well as its poorest families, a targeted low-income gas tax credit of the type enacted in Minnesota could have distributed more gas tax relief to lower-income families at a similar cost. Alternatively, Connecticut could have given consideration to enacting a modest Earned Income Tax Credit (EITC) or a meaningful low-income, refundable property tax circuit-breaker. Admittedly, an EITC or circuit-breaker would cost more than a gas tax cut or gas tax credit, but if legislators are genuinely “concerned”, wouldn’t it be worth it to find the money somehow? Until legislators readjust their priorities from winning votes to improving the lives of those struggling to make ends meet, Americans shouldn’t expect any relief beyond the kind of poorly targeted and gimmicky tax cut passed in Connecticut.

Economic Stimulus RX: More State Spending

2008-06-01T15:54:00.004-04:00

With new Commerce Department data confirming that the US economy is growing at a level well below historical averages, policymakers are asking what else they can possibly do to jump-start the nation's economic engine. In today's New York Times, Louis Uchitelle points out that Congress has, so far, ignored one important tool in our collective economic toolbox: "chanel[ling] extra federal money to city and state governments so they can sustain their outlays for the numerous programs that otherwise would be shrunk."

This argument is pretty basic-- if states have to pare back their budgets, they'll cut spending on education and transportation and will reduce state employment in these areas, so giving states emergency fiscal relief will allow states to keep these jobs-- but it isn't new. As Uchitelle points out, Keynesians have long argued that government spending can be an effective option for digging out of economic downturns. And this position has had an eloquent advocate already this year in Columbia University's Joseph Stiglitz, who argued back in January that the best federal "stimulus" plan would include:

giving money to states and localities that are facing real financial constraints. Tax revenues are going down. Property values are going down. And most states have a balanced budget framework.
So if the revenues go down, they have to cut their expenditures. And this will depress the economy. So dollar for dollar, this will stimulate the economy enormously.

The common-sense point being made by both Uchitelle and Stiglitz is that government spending, just like private spending, boosts our economy. It's a point that is too often forgotten by policymakers who (whether they realize it or not) are still in thrall to the Reaganite notion that nothing good ever came out of government. Folks in Congress who ought to know better have been falling all over themselves this year to put "extra" money in the hands of individual consumers, with the hope that they will spend it and thereby boost the economy, but have given little thought to the idea that state governments can provide a similar stimulus of their own.

There's some hope from the ongoing presidential debate, according to Uchitelle, in that at least one party's candidates are singing the Keynesian tune (if slightly off key):

The Republicans in particular are less than enthusiastic about Keynesian economics, with its use of government to rescue markets. They, and many mainstream economists, for that matter, argue that government is inefficient, bureaucratic, wasteful and unable to spend fast enough to counteract a downturn. The two Democratic candidates, in contrast, argue that a second stimulus package, if one is needed, should include federal subsidies to the states and municipalities, not to start new projects but to prevent cutbacks in existing ones.

But this idea certainly isn't a central plank of either Democratic candidate's platform. And even abstracting from these political difficulties, there's a basic policy problem that makes the Uchitelle/Stiglitz solution a hard sell: what Uchitelle breezily refers to as "extra federal money" is in pretty short supply right now. Until someone at the federal level can stomach the notion of admitting that federal taxes are simply too low to meet our needs, any federal grants to state governments will essentially be paid for by borrowing money from our creditors overseas. The federal government can absolutely come to the aid of states through a new regime of stimulative grants-- but the positive long-term impact will be less clear if this federal spending is paid for by our grandchildren.

Property Tax Relief as one Tool for Beginning to Fix the Foreclosure Crisis

2008-05-29T17:35:00.001-04:00

With any issue as visible and complex as the recent mortgage foreclosure crisis, you can expect a vast array of proposals for addressing the problem to arise. Unfortunately, at least at the federal level, many of those proposals have left much to be desired.

One of the more bizarre ideas to come out of Congress is an expansion of the “net operating loss carryback” provision. This proposal would allow companies taking a loss in either of the next two years to deduct that loss against taxes already paid at any time during the last four years (currently the deduction is limited to the previous two years). This is an inefficient and poorly targeted approach to the foreclosure problem because the deduction would be available to all companies – not just homebuilders and other housing-related businesses. It is also a troubling proposal because the breaks it provides have no strings attached to them. If there isn’t a demand for new homes, there isn’t going to be a demand for homebuilders regardless of whether or not the company gets a check from the federal government.

Another idea Congress proposed is a no-interest loan in the form of a refundable tax credit for first-time homebuyers that must be paid back over 15 years. Unfortunately, the credit will not be available to the buyer until after the downpayment has already been made, so its usefulness is seriously constrained.

Other tax changes are discussed in the link above, but overall it seems clear that Congress has missed the mark. Their collection of proposals raises one interesting question in particular: why are so many of the approaches to this crisis centered around tax cuts when nobody is arguing that the problem is a result of high taxes? As Bob McIntyre, director of Citizens for Tax Justice, recently said, “If we gave this issue to the agriculture committees, they'd probably give us farm subsidies, so if we give this problem to the tax-writing committees they give us tax breaks because that's what they do. I'm pretty sure we have committees in Congress to deal with housing.” It’s always good for politicians to be able to offer up tax cuts, though.

But while for the most part Congress’ proposals are nothing more than the result of an over-eagerness to cut taxes, another one of their proposals actually did touch on one potential solution involving taxes. Property taxes are not the cause of the foreclosure crisis, but lowering property taxes on those homes most at risk for foreclosure seems like a sensible component of any broad strategy for reducing the number of foreclosures. Unfortunately, but perhaps unsurprisingly, even Congress’ efforts at providing property tax relief aren’t tremendously helpful – an income tax cut of no more than $350 per spouse (or roughly $150 under the Senate bill) for all homeowners who do not itemize is all they could muster. Additionally, since the cut comes in the form of a deduction, it's value increases for better-off homeowners in higher tax brackets who are presumably at less risk of foreclosure.

In contrast to this meager amount of relief proposed in Congress, a bill introduced in Michigan (where the foreclosure crisis has been particularly devastating) takes works the property tax angle more aggressively (and arguably more productively) by offering a full exemption from the property tax for homeowners earning less than 200% of the federal poverty level. Homeowners earning up an income limit to be determined by the taxing district are eligible for a 50% reduction of their property tax bill. Taxpayers possessing assets worth more than an amount to be determined by each locality will be excluded from the relief, as will taxpayers whose homes are worth more than 300% of the median home price in their district.

By providing extensive relief to those least fortunate homeowners most vulnerable to foreclosure, rather than only offering more minor relief to a broad swath of taxpayers, the Michigan legislature has before it a bill much more likely of meaningfully impacting the foreclosure crisis. And by introducing a degree of progressivity into the property tax, this bill could make life just a bit easier for those individuals most likely to be impacted not only by the foreclosure crisis, but also by the recent economic slowdown in general.

Notably, this emergency bill is in addition to the state’s property tax circuit-breaker that provides tax credits to lower- and middle-income families based on the share of their income they are required to pay in property taxes. The emergency relief, then, isn’t something that even needs to be made permanent. A circuit-breaker is the preferred method for assisting those in need of relief in a normal housing market – but under the current, very abnormal housing market, this additional relief could play an important role in a broader plan designed to address the needs of Michigan homeowners.

As an interesting aside, one of the other primary benefits of this bill would be a standardization of the process for providing need-based property tax relief. Detroit has recently been plagued with reports that their “Hardship Committee”, appointed to decide who is in need of property tax relief, has been awarding tax benefits to wealthy, well-connected homeowners. The state bill would offer local committees less discretion in deciding who can see a tax reduction. This investigation into Detroit’s “Hardship Committee” by The Detroit News provides a very interesting read that discusses a stunning example of tax fairness being thrown out the window.

Maine: Any Tax is a Bad Tax?

2008-05-19T15:46:00.006-04:00

A few years ago, Maine had grand visions of providing affordable health insurance for all its uninsured residents by 2009. But five years after the creation of its Dirigo health care program, funding remains so low that even the first year’s goal of providing insurance for roughly a quarter of uninsured Mainers is very far off. The program is quite popular, especially among small businesses, but Maine simply refuses to raise taxes broadly in order to pay for it. Instead, enrollment has been capped in order to keep costs down while thousands of uninsured Mainers on the waiting list hope for an acceptable source of funding to be found.

Faced with the self-conflicting demand for better health coverage without significant tax hikes, Maine legislators earlier this year considered a fifty cent cigarette tax increase as a way to modestly expand its health program. Broad, progressive, and sustainable tax increases were still out of the question given the political climate in the state, but legislators realized they may be able to raise a smaller and less important tax. Despite being starkly regressive, cigarette taxes have become an extremely popular revenue source among states since they tend to be less controversial than hikes in income, property, or general sales taxes. But having already doubled its cigarette tax in 2005, Maine policymakers soon had to back down from this idea.

The legislature, to its credit, didn’t give up completely in its effort to find funding with which to expand health care coverage. The debate then turned toward another relatively minor tax - alcohol and soda taxes. The argument was made that these products should be taxed more heavily because of their link to higher health care costs, but the more salient reason for the proposal was undoubtedly its perceived political feasibility. Rather than making the hard decision to raise taxes broadly in order to meet the goal it set for itself five years ago, the legislature tried to take the easy way out.

But in Maine, apparently any tax increase isn’t so easy. In response to the tax hike, the “Fed Up With Taxes” coalition was formed, consisting largely of restaurant owners and other related business interests. The coalition is already collecting signatures at restaurants across the state in hopes of getting a repeal of the tax on the ballot.

Despite proceeding so cautiously in search of a revenue source that wouldn’t get them into too much trouble with the voters, the end result of this legislative session may ultimately be a failure to find any way to secure additional funding for the uninsured.

This sudden challenge to the beverage tax suggests that the blame for the lack of funding for the Dirigo health plan should not be placed on legislators – but that the root cause of this embarrassment is instead a refusal on the part of voters to take responsibility for paying for programs they believe to be worthwhile. Across the country the clear preference has been for lower taxes and better government services. These two demands cannot be reconciled, and their interaction has helped contribute to both the national debt and to the avalanche of fiscal problems at the state level.

Too often, voters unwilling to accept higher taxes point to cutting “wasteful spending” as the source of revenues from which favored programs should be enacted or expanded. While wasteful spending certainly does occur, it’s likely not of the magnitude most believe it to be, and identifying it accurately is not a simple, uncontroversial, or inexpensive process. It’s easy to blame whatever one believes to be “wasteful spending” when revenues start to fall short, but the reality is that there’s no easy solution to funding more government services.

Taxpayers either need to learn to expect less from their government, or they need to take responsibility for chipping in to pay for government services. A failure to do these things is what led to the current situation in Maine where a heated battle appears imminent over a tax hike that in the grand scheme of things is too small to substantially improve upon the health care situation in the state. If voters ever decide that they are willing to pay what is needed for government services, the result will be a climate of debate in which sensible reform of the tax system can be enacted. That situation would certainly be preferable to the current one where minor, disjointed, and often regressive tax increases at the margin have the best chance of gaining approval.

California: Smart Sales Tax Reform Isn't Dead Yet

2008-04-28T11:45:00.002-04:00

When it comes to sales tax reform, the policy answers are pretty straightforward: Unless you've got a really good reason to do otherwise, whatever people buy should be subject to tax. It shouldn't matter where you buy it (on the 'net or in a store); it shouldn't matter what color or size it is. Individual purchases should be subject to sales tax. Period.

So from a policy perspective, it's not especially surprising to see this sort of idea emerging from California: Judy Chu, the chair of the state's Board of Equalization, is recommending expanding the state sales tax base in a way that could yield up to $10 billion a year.

From state lawmakers' perspective, the main reason for doing this is adequacy. Since $10 billion is the ballpark estimate for next year's state budget deficit, anything they can find to plug that hole will be welcome.

But Chu is telling a story that's much more about consistency and fairness-- and she's right:"We tax exercise equipment, but we don't tax health club services. We tax movie rentals, but we don't tax movie admissions," Chu said.

Of course, tax reform isn't just about the policy-- it's also about the politics. And judging from recent experience in Maryland and Michigan, the politics are a lot murkier than the policy on this issue. In each of these states, recent efforts to expand the base have been almost immediately repealed. Our Tax Justice Digest takes a quick crack at explaining why reform efforts failed in these states here. For more details on how to broaden your state's sales tax base, check out our policy brief here.

Gas Taxes: When Is An 'Increase' Not An 'Increase'?

2008-03-25T17:42:00.003-04:00

Facing the clashing realities of rising transportation costs and widespread opposition to tax increases, state governments are turning to tolls, fees, and less visible local sales taxes wherever possible. But though increasing the gas tax has been perceived as political suicide by many politicians, tinkering with this traditional centerpiece of transportation funding is worth a second look. Gas taxes are intended to charge drivers for their use of public roads, and when gas tax revenues consistently fall short of the amounts needed to maintain those roadways, increasing that tax makes great intuitive sense.

Aside from all this, in most cases raising the per-gallon gas tax can boost revenues without actually “increasing” taxes in the traditional sense. This paradox, where a “tax increase” may not actually be a “tax increase” at all, arises primarily from the odd structure of the gasoline tax. Unlike traditional percentage-based sales taxes where the tax you pay is a fixed amount of every dollar you spend (typically 5-7 cents per dollar), gas taxes are levied as a fixed amount per gallon (typically 15-35 cents per gallon at the state level).

Under a traditional sales tax, as the price of goods increase, tax revenues increase accordingly. With a 5% sales tax rate, for example, the tax owed on a $3 gallon of milk is 15 cents. If after a few years milk has increased in price to $4 as a result of inflation, the tax per gallon will rise to 20 cents. This increase in taxes paid is in essence identical to what occurs when the legislature decides to increase the per-gallon tax on gasoline, but it receives none of the negative publicity. Additionally, given that inflation increases the cost of providing public services, such tax increases are in fact a necessary component of any sustainable method of financing government.

Though this problem plagues every government relying on per-gallons gas taxes, taking a look specifically at Minnesota’s recent gas tax increase is particularly illuminating. Legislators in Minnesota who were involved in the tax increase are currently taking a lot of criticism for being “tax-first liberals” unconcerned with perceived out-of-control government spending.

Using data released by the U.S. Energy Information Administration, the 2 cent gasoline tax enacted in Minnesota in 1925 was at the time equivalent to a 9% tax (when gasoline cost 22 cents per gallon). Where does Minnesota stand today now that their tax was recently increased from 20 to 28.5 cents? This may come as a shock to some, but today’s 28.5 cent tax is still the same as a 9% rate (assuming, conservatively, that gas costs $3.07 per gallon). Without the 8.5 cent hike, the effective gas tax rate would have been only 6.5%. For some perspective, Minnesota gas taxes have been levied at effective rates of 20% or more for 13 of the past 83 years, most recently in 1988 and 1989.

A similar result can be shown by examining the effects of inflation over this time period, using data from the Consumer Price Index (CPI). Adjusted for inflation, the 2 cents collected on each gallon of gas in 1925 was the equivalent of what would be a 24.4 cent tax today. By setting the rate at 28.5 cents, what the legislature has done is little different from what inflation does to percentage-based sales taxes, though inflation of course does not have to face any of the harsh criticisms currently directed at Minnesota legislators.

Data released by the U.S. Census Bureau also suggests that Minnesota’s 8.5 cent hike may not really be a tax increase by yet another measure: as a share of consumer income. While many meaningful measures exist for measuring tax changes, what has the most meaning for consumers is tax as a percentage of personal income. Data on this measure do not extend as far back, but what is clear is that a smaller portion of Minnesotans’ budgets is going to paying the gas tax than at almost any time in the last 30 years. In 1977, 0.7% of income earned by Minnesotans went to paying the gas tax. The trend since then has been steadily downward, reaching a low of 0.3% of income in 2005. The 8.5 cent hike will certainly change this figure, though not by enough to negate the overall trend. This trend can be observed in nearly every state, and it demonstrates plainly that despite numerous per-gallon tax increases across the nation over the past few decades, gas taxes have become a less important component of taxpayers’ daily budgets and daily lives. If transportation is to continue to be adequately funded, the portion of taxpayers’ budgets devoted to its funding it will have to rise.

Summing up, it should be clear that states are justified in regularly increasing their per-gallon gas tax rates. Doing so is necessary for maintaining transportation infrastructure, and doing so should, in reality, be relatively painless since inflation is always hard at work minimizing and eventually negating the impact of such increases.

Social Security Reform, KBR-Style

2008-03-07T08:33:00.003-05:00

In case you thought the dearth of Halliburton-related scandals in the news lately meant that the company's leaders were regaining their moral compass-- fear not. Yesterday's Boston Globe breaks the story of how Kellogg Brown & Root (KBR), until last year a subsidiary of Halliburton, is avoiding hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees are working for a Cayman-Islands based "shell company."

According to the Globe, KBR has made a special arrangement to avoid paying taxes on about 10,500 of its American employees who are working in Iraq on various reconstruction programs. The way it works: KBR recruits people to work on reconstruction-related projects. But when the workers get their first paycheck, they see that it's not coming from KBR, but from a KBR subsidiary, Service Employers International Inc. (SEI). The Globe's Farah Stockman quotes several KBR hires who had no idea they were working for SEI until they landed on the ground in Iraq.

Why such deception? Because unlike KBR, SEI is not based in the United States. SEI's corporate home is the Grand Cayman Islands. (Legally, anyway--- SEI has no actual offices in the Caymans, just a mailing address.) And while KBR employees working in Iraq would be subject to the 15.3 percent payroll tax for Social Security and Medicare (half of which is paid by the employer, the other half of which is paid by employees), SEI employees don't incur federal payroll tax liability, because they're not working for a US-based company.

While KBR isn't releasing information on SEI employees' pay, the Globe's Stockman estimates a ballpark average pay of $63,000 for their 10,500 Cayman-based workers. At 15.3 percent, this would mean SEI is avoiding about $101 million in payroll taxes every year. And if this has been going on throughout SEI's 5-year stint in Iraq, that's more than $500 million in revenue that won't be shoring up the Social Security system.

The good news, according to Stockman, is that virtually none of KBR's competitor companies for Iraq reconstruction contracts have been pulling the same shenanigans:

Other top Iraq war contractors - including Bechtel, Parsons, Washington Group International, L-3 Communications, Perini, and Fluor - told the Globe that they pay Social Security and Medicare taxes for their American workers.
"It has been Fluor Corporation's policy to compensate our employees who are US citizens the same as if they worked in the geographic United States," said Keith Stephens, Fluor's director of global media relations.

The bad news is that the US Defense Department apparently knew about KBR's malfeasance four years ago, in 2004-- and didn't do anything about it. Pentagon auditors told the Globe they were OK with KBR's offshore shenanigans because the tax savings "are passed on" to the US military.

You'd have to know a lot more about the bidding process for reconstruction contracts to know whether this is true. Since labor is a big cost for these contractors, the ability to reduce these costs by 15 percent would clearly make it easier for KBR to underbid its competitors. But would they underbid by the full 15.3 percent, or by just enough to make sure they get the bid? Take a wild guess.

Now, if KBR is shortchanging Social Security and Medicare trust funds by $500 million, we should be upset about this, right? The Globe says KBR representatives breezily dismiss this argument by pointing out that "the loss to Social Security could eventually be offset by the fact that the workers will receive less money when they retire, since benefits are generally based on how much workers and their companies have paid into the system."

So, for those looking for a more creative way of subverting Social Security than John McCain's privatization plans, here it is: reduce future Social Security benefits by pretending your employees aren't entitled to them!

One glitch in this clever plan, as the Globe alertly points out, is that Medicare benefits are not reduced for those who don't contribute. So the Medicare portion of the foregone 15.3 percent tax is money that is going to have to be raised through taxes on the rest of us.

But as long as these employees figure out some other infallible way to put aside an adequate nest egg for retirement on their own, the rest is gravy, right? Well, no. As it turns out, Texas-based KBR is also avoiding unemployment taxes on these workers, when means that they'll be ineligible for unemployment benefits later on.

There's a simple solution to the whole problem, which is for Congress to pass legislation requiring companies receiving defense contracts to refrain from artificially offshoring its employees. In the Senate, John Kerry has a bill that would do just that.

McCain Backs Away From "No New Taxes"

2008-03-05T09:08:00.002-05:00

We noted a couple of weeks ago that presidential candidate John McCain appeared to be following in the footsteps of the first President Bush by making a pledge that he would almost certainly not be able to keep as President: "no new taxes." But in a recent interview with the Wall Street Journal, McCain laudably retreats from this position:

WSJ: On ABC's "This Week" on Feb. 17, in response to a question, "Are you a 'read my lips' candidate, no new taxes?" you replied, "No new taxes." Did you mean that literally?
McCain: I'm not making a "read my lips" statement in that I will not raise taxes. But I'm not saying I can envision a scenario where I would, OK? But I'm not making it a centerpiece in my campaign.
I want lower taxes. I want the family to keep more of their money.

McCain clearly wants to enact more tax cuts, of course. In the same interview, here's his prescription for getting the economy going again:

I would go very public in advocating that the tax cuts be made permanent, otherwise Americans are looking forward to a tax increase at a vulnerable time in our economy. I would call for the elimination of the AMT [alternative minimum tax]. And we absolutely need to reduce corporate tax rates, which are the second highest in the world.

But the good news is that he's not taking a blood oath that this is the only acceptable outcome. In today's political climate, that (sadly) counts as a victory for fiscal sanity.

NYT on McCain's Tax Flops

2008-03-05T08:35:00.003-05:00

Now that John McCain is semi-officially the Republican nominee for president in 2008, more attention is being paid to the important question of how he'd restructure the US tax system. As we pointed out recently, McCain's current position on extending the Bush tax cuts (he wants to) is sharply at odds with his speeches (and, more importantly, his votes) during the Bush administration's tax-cutting spree between 2001 and 2005. In short, he not only voted (sensibly, in our view) against various editions of the Bush tax cuts-- he also explained quite clearly that he thought these cuts were too tilted to the wealthiest Americans and would bust the budget. And he now claims not to be troubled by either of these concerns, despite the fact that both of these concerns remain quite accurate.

In yesterday's New York Times, Elizabeth Bumiller surveys the inconsistencies in McCain's policy positions across a number of issues, and finds that "[H]is most striking turnaround has been on the Bush tax cuts, which he voted against twice but now wants to make permanent." Here's Bumiller's take on McCain's shift:

In May 2001, Mr. McCain was one of only two Republicans...to vote against President Bush’s $1.35 trillion 10-year tax cut. On the Senate floor, Mr. McCain said, “I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle-class Americans who most need tax relief.”
Two years later, Mr. McCain was one of three Republicans to vote against additional Bush tax cuts... because, he said then, the costs of the Iraq war were not yet known. Specifically, he said he was open to the idea of tax cuts in the future, “but not until Congress and the administration have a better understanding of the costs of war and peace.”
Later, he said he also opposed the 2003 tax cut because it, too, disproportionately benefited the rich. “I just thought it was too tilted to the wealthy, and I still do,” Mr. McCain told Stephen Moore, a member of The Wall Street Journal editorial board, in an interview published on Nov. 26, 2005.
These days, Mr. McCain says at almost every campaign stop that he wants to make those tax cuts permanent rather than have them expire, as the law stipulates, because getting rid of them would have the effect of a tax hike. He rarely mentions that he originally opposed them or that he did so in large part because he thought they were too tilted to the rich — an objection that
conservatives consider heresy.
When pressed, Mr. McCain now says he voted against the tax cuts because they were not accompanied by sufficient spending cuts, an explanation somewhat more palatable to the right. Asked last week on his campaign plane if he thought the tax cuts were too tilted to the rich, Mr. McCain sidestepped the question and replied that he preferred his own tax proposal at the time, which he said was “more tilted towards the middle class.”

We've argued before that the "flip-flop" epithet is often just silly. Consistency is often a foolish standard to impose on lawmakers in an ever-changing world, as our recent foreign policy exploits remind us-- in 2003 it was not all that hard for lawmakers to make what turned out to be the wrong choice on invading Iraq, and by 2005 it was pretty clear that those initial decisions were based on bad information stoked by a trigger-happy administration and a compliant media.

But when McCain was voting against the Bush tax cuts, we didn't need the CIA to help us evaluate them. McCain's earlier criticisms of the Bush tax cuts' fairness were based on the complete (and entirely accurate) information that was available then-- and remains available now-- about who would benefit from Bush's proposed cuts.

Even on an issue as cut-and-dried as this, however, you could make a case for why McCain's contradictory positions on the Bush tax cuts are sensible. McCain could, if he wanted to, explain that he just doesn't value fairness or balanced budgets as much as he used to, and that he now thinks we ought to pare down the size of government by any means necessary. If and when he does this, we can stop calling this a "flip-flop" and start calling it a lightning-quick, politically-aware evolution in his policy positions.

Until he does so, however, this seems like a case in which the "flip-flopper" label might fairly be applied.

Colorado Takes Business Tax Reform in a Refreshing Direction

2008-02-29T16:58:00.001-05:00

There’s usually good reason to view proposed tax breaks for business with a bit of skepticism. Countless tax preferences granted to businesses lack any economic or policy justification, often instead being the result of the hard work of business lobbies or simply the nagging paranoia many legislators have of their state evolving into an “unfavorable” environment for business.

A recent business tax cut approved by Colorado’s House Finance Committee, however, enthusiastically breaks this mold. The proposal under consideration eliminates the business personal property tax for businesses with less than $7,000 in personal property (i.e. those least able to pay) such as furniture, computers, and software. The business personal property tax has been the subject of serious criticism and reform efforts across the country for quite some time, most recently in Arizona, Florida, Idaho, Maine, and Utah.

One of the primary complaints of those involved in these movements has been that the business personal property tax is too complicated. Calculating one’s tax involves taking account of every item used in the operation of the business, and then determining the item’s current value from fairly complicated depreciation tables. For larger businesses that have sufficient staff to undertake this process, the burden may be only a minor inconvenience. For small businesses, however, the costs associated with figuring out what one owes can easily exceed the actual tax bill. The government faces a similar hassle in reviewing the lengthy tax returns submitted by small businesses, often with gains in revenue of no more than $50 or $100 per return for businesses of the size that will be benefited by this proposal.

Colorado has taken a well-targeted approach to reducing the problems faced by small business (as well as government itself) as a result of this tax. By exempting businesses possessing less than $7,000 worth of property from paying, the state will have reduced the number of businesses subject to the tax by about 30,000. Not only will this save the government a lot of hassle, but by targeting the tax relief to businesses with the smallest amount property, only those that were paying the smallest amounts anyway will be affected. This is the reason that the price tag of the reform is quite low, at $2.6 million annually statewide with $600,000 of that picked up by the state. The cost is also kept low by the fact that the $7,000 exemption does not apply to businesses with more than $7,000 of property – large, likely more profitable, companies will see no windfall benefits as a result of this legislation as they must continue to pay taxes on even the first $7,000 of property they possess. And finally, as government tax agencies see their workloads decline significantly they will have more resources available to scrutinize the returns of those larger businesses that actually pay significant amounts in property taxes.

But the issue here is not a concern for most states. About ten states currently do not tax any business personal property, while most others have exemptions much higher than Colorado’s current $2,500. Nonetheless, if this proposal becomes law the state will deserve much credit for deciding to approach a business tax cut in a much more responsible manner than is often the case.

Regressive Tax Hike Gains Overwhelming Support in Minnesota

2008-02-28T17:30:00.002-05:00

An unusual event took place in Minnesota this past week – support for increasing taxes was widespread enough in the Minnesota legislature to override Republican Governor Tim Pawlenty’s veto of a transportation finance bill. Unfortunately, the roughly $6 billion in transportation funds will come from a variety of regressive revenue sources, including increases in gasoline taxes, license fees, motor vehicle excise taxes, and general sales tax rates in several counties.

Also included, however, is one interesting measure designed to partially offset the disproportionate burden placed on low-income Minnesotans by the bill: a refundable gasoline tax credit. The credit, totaling $12.50 for single taxpayers and $25 for married filers, is available only to low-income Minnesotans. Though a credit this small would normally be seldom applied for, Minnesota’s generous EITC and property tax circuit breaker encourage more low-income persons to file state income tax forms than is the norm in many states. Applying for the additional $12.50 per-person credit should therefore be only a minor inconvenience for most eligible filers.

The credit does suffer from another problem, however. A credit of $12.50 per-person is enough to offset the 5 cent gasoline tax increase on only the first 250 gallons of gasoline purchased. Data released by the U.S. Department of Transportation, however, suggests that the average annual per-capita consumption of gasoline by Minnesota motorists is much closer to 500 gallons. Ultimately, while the idea behind the Minnesota gasoline tax credit is very sensible and relatively unique (and will hopefully catch on around the nation) the credit itself, as a mechanism for improving the fairness of the state's tax system, is not incredibly exciting.

The coupling of a slew of regressive tax increases with the insufficient gasoline tax credit prompted one Republican legislator to question what the bill would mean for “the little guy, the striver, the dreamer”. Though the impact on “strivers” and “dreamers” specifically is difficult to determine, the sentiment behind the statement is valid: low-income Minnesotans will be harmed by this bill.

The bottom line is this: Minnesota was justified in increasing its gasoline tax. Since gas taxes are traditionally levied on a per-gallon basis and not indexed for inflation, the real value of the revenue raised from gas taxes inevitably declines with time, leaving states with insufficient funds to maintain their transportation infrastructure unless they continually increase gas taxes to keep up with inflation. Given this reality, the gasoline tax credit enacted by Minnesota was simply too small. Preferably, the credit would have covered not only the entire gasoline tax increase, but also some of the existing (regressive) gasoline tax to which the increase was added. Aside from the gasoline tax issue, the local sales tax, license fee, and vehicle excise tax increases are regressive tax policies enacted only because they were easier to muster support for than an even higher gasoline tax increase would have been. The vehicle excise tax is especially poorly formulated - a $20 tax is levied on any vehicle bought through a retail establishment regardless of if that vehicle is worth $5,000 or $250,000. Not only is such a tax even more regressive than a regular sales tax, but the real returns on that tax, like the gasoline tax, can be expected to fall with time as inflation erodes the value of that $20 collected.

Despite its shortcomings, given political and budgetary realities in Minnesota and the obvious necessity of financing transportation, this bill should at the least be given praise as a fiscally responsible method of paying for transportation projects. At the very least, most everyone should be able to agree that the bill enacted by Minnesota is a better alternative than allowing the state’s transportation infrastructure to fall into disrepair.

Other states seeking solutions to their transportation funding shortfalls have plenty of lessons to learn from Minnesota, both good and bad.

Bush 41 Redux: McCain Says "No New Taxes"

2008-02-22T13:11:00.003-05:00

Under the best of circumstances, this year's presidential candidates have been a little bit vague when discussing their plans for tax reform. There are, of course, politically sensible reasons for the candidates' caginess: presidents don't get to unilaterally make fiscal policy, and specific tax promises can blow up in your face. To make matters worse, tax policy topic #1 this year is a real hot potato: whether each candidate would repeal all (or some of) the Bush tax cuts. So it was a bit of a shock to hear likely Republican nominee John McCain take a page out of the George H.W. Bush playbook in an interview with George Stephanopoulos last weekend:

Stephanopoulos: The number one issue right now, the economy. Senator Obama went at that on Tuesday night as well.
(Plays clip of Obama speech) I admired Senator McCain when he stood up and said that it offended his conscience to support the Bush tax cuts for the wealthy in a time of war. But somewhere along the road to the Republican nomination, the straight talk express lost its wheels because now he's all for those same tax cuts. (End of Obama clip)
Stephanopoulos: He says basically you've sacrificed your principles for the sake of the nomination.
McCain: Well, for a long time, I have said that I thought the tax cuts ought to be made permanent. For a long time back, I said, look, we're going to have spending restraint the way that Reagan did when he restored our economy when it was in the tank, thanks to then President Carter's mismanagement of the economy. And we entered into a great period of prosperity in America. Spending restraint is why our base is not energized. Spending restraint is why we are having to borrow money from China. And we've got to have spending restraints in my view. But to impose on the American people what essentially would be a tax increase of thousands of dollars per family in America is not something I think - well, I'm sure would be bad for the economy of this country.
Stephanopoulos: So on taxes, are you a "read my lips" candidate, no new taxes, no matter what?
McCain: No new taxes. I do not - in fact, I could see an argument, if our economy continues to deteriorate, for lower interest rates, lower tax rates, and certainly decreasing corporate tax rates, which are the second highest in the world. Giving people the ability to write off depreciation in a year. Elimination of the AMT. There's a lot of things that I would think we should do to relieve that burden, including, obviously, as we all know, simplification of the tax code.
Stephanopoulos: But under no circumstances would you increase taxes?
McCain: No.

Whether he intended to or not, McCain went well beyond the scope of the original question here. He won't repeal the Bush tax cuts-- but he also said that he won't increase any other taxes.

Given the breadth of this extraordinary promise, a few follow-up questions are in order: did he really mean to issue a blanket "no new taxes" pledge, or was he still referring just to the Bush tax cuts? Does "loophole closing" count as a tax hike? What if loophole closers are combined with other tax cuts in a revenue neutral package?

Under any interpretation, though, McCain's pledge brings up an important question for his potential supporters: what good is "straight talk" if you can't back it up? The Fort Worth Star-Telegram's Jack Smith explains why McCain's pledge probably isn't worth the paper it was probably written on here.