Talking Taxes

Nevada GOP Gubernatorial Candidate: Scrap the Caps

2010-01-30T12:54:00.001-05:00

GOP gubernatorial candidate Mike Montandon is making his views on Nevada property tax reform known-- and so far they all seem quite sensible.

As reported by the North Lake Tahoe Bonanza, Montandon thinks:
(1) it's absurd that Nevada remains the only state that values real property for tax purposes based on depreciated value (which depends primarily on how old your house is) rather than market value;
(2) the "tax caps" enacted a few years ago, which restrict the amount by which a property's tax liability can increase each year to 3 percent for residential properties, were (and remain) a bad idea;
(3) property needs to be valued in a systematic and professional manner. (Right now, as is becoming increasingly clear, different localities are using different standards of valuation.)

Caveats: I'm paraphrasing, and things #1 and things #3 shouldn't be that controversial anyway.
But saying thing #1 amounts to repudiating the big property tax cuts Nevada enacted in 1981 to head off a Proposition 13-style tax revolt, and that takes some guts-- even if it's obviously correct.

It's to be expected, maybe, that a guy coming from a local government background (he was mayor of North Las Vegas) will have a critical stance toward state-imposed constraints on local taxing authority, but still. Bottom line is that Montandon is saying precisely the things that ought to be said about Nevada's past, and hopeful future, property tax changes.

Can Louisiana Double Its Gas Tax?

2009-12-22T21:44:00.001-05:00

In January, Louisiana lawmakers will be hearing a lot about exactly how big that state's transportation funding shortfall is, as a committee releases the findings of a long-term study of this problem. But House Transportation Committee Vice-Chairman Hollis Downs (R) gave a sneak preview yesterday.

Louisiana needs $750 million per year in new revenue to address road and bridge needs, the vice-chairman of the House Transportation Committee said Monday.

To put this in context, Louisiana raises a bit less than this annually from its entire gasoline tax right now. So if the money were all coming from own-source gas tax revenues, Louisiana would have to more than double its gas tax to meet its needs.

Of course, the state's transportation funding doesn't really work that way. The feds kick in a fair amount, and state vehicle fees, tolls and general fund revenue fill in the gaps. But the size of the annual gap still should give pause to any Louisiana lawmakers who think they've got a budget surplus.

Hawaii: A Budgetary Shell Game, or Just Train Robbery?

2009-12-22T16:31:00.002-05:00

This week Hawaii Governor Linda Lingle released the outline of her budget proposal for next year. It's not a pretty picture: the two most prominent tax policy changes in the Lingle plan are a money grab from county governments and a money grab from... the future.

It's true: following up on a similar threat last year, the state would simply stop allocating revenue from the "Transient Accomodations Tax," as the Hawaii hotel tax is known, to counties. The law says that just under half of all TAT revenues should be allocated to the counties. Under the Lingle plan, the state would simply not do that next year, and would instead keep the money to help balance the state budget. Of course, this would leave counties with a budgetary hole of their own, which they'd have to patch by either hiking property taxes or cutting spending. A great deal for the state, and it's only a bad deal for those Hawaii residents who live within a county. Which is to say, all of them.

House Ways and Means Chairwoman Donna Mercado Kim thinks this is actually a pretty good policy. How, you ask? Here's the money quote:

It's a re-occurring pot of money, which is good.

That's right. Once you've taken the counties' lunch money in one year, you can go right back and do it again as long as you want! This isn't really what advocates of sustainable taxation have in mind when they urge states to find recurring (as opposed to one-time) revenue sources...

The second half of the Lingle budget's tax plan amounts to sending an IOU to next year's budget. Under Lingle's proposal, any income tax refunds due as a result of April filings wouldn't be paid until after the next fiscal year begins on July 1. That way, these refunds don't count towards this year's budget. Who are the losers under this plan? Well, anyone who's owed a refund when they file their 2009 taxes, since these guys will basically be asked to give an interest-free loan to the state until July 1. And more fundamentally, whichever legislators are around to deal with the mess during the next fiscal year, since really all this move does is to put part of this year's budget deficit in a box and mail it to next year.

Not the most inspirational stuff.

Study in House "Extenders" Bill Would Provide Valuable Info on Many Tax Breaks

2009-12-09T16:50:00.008-05:00

Earlier today, the House of Representatives passed its most recent version of the "Tax Extenders" package (H.R. 4213). The "tax extenders" consist of about 50 temporary tax provisions that, as their name suggests, need to be extended every 1-2 years to prevent their expiration. While multiple theories exist as to why these provisions aren't simply made permanent, it is clear that relatively little thought has been given to their effectiveness in promoting the multitude of goals for which they've been supposedly been enacted. The House bill seeks to remedy this problem by requiring that the Joint Committee on Taxation (JCT) conduct studies of each of these provisions using 10 different criteria explained in the bill's language. Addressing each of these 10 criteria would provide valuable insights into these provisions' worth. The full list is quoted below, though items #3, 4, 7, and 10 are of particular note:

(1) An explanation of the tax expenditure and any relevant economic, social, or other context under which it was first enacted.

(2) A description of the intended purpose of the tax expenditure.

(3) An analysis of the overall success of the tax expenditure in achieving such purpose, and evidence supporting such analysis.

(4) An analysis of the extent to which further extending the tax expenditure, or making it permanent, would contribute to achieving such purpose.

(5) A description of the direct and indirect beneficiaries of the tax expenditure, including identifying any unintended beneficiaries.

(6) An analysis of whether the tax expenditure is the most cost-effective method for achieving the purpose for which it was intended, and a description of any more cost-effective methods through which such purpose could be accomplished.

(7) A description of any unintended effects of the tax expenditure that are useful in understanding the tax expenditure’s overall value.

(8) An analysis of how the tax expenditure could be modified to better achieve its original purpose.

(9) A brief description of any interactions (actual or potential) with other tax expenditures or direct spending programs in the same or related budget function worthy of further study.

(10) A description of any unavailable information the staff of the Joint Committee on Taxation may need to complete a more thorough examination and analysis of the tax expenditure, and what must be done to make such information available.

The importance of Criteria #3, 4, and 7 should be obvious -- they attempt to directly address the core issue of these provision's value. But criteria #10 is also of great importance. If the JCT is unable to conduct a thorough study because of a lack of available data, how could lawmakers be expected to meaningfully evaluate these provisions' worth? If the mandate for this study is included in the final "Extenders" bill, any recommendations provided under criteria #10 should be taken very seriously.

Ultimately, the inclusion of this study in the final "Tax Extenders" package would help to pave the way for eliminating any "extenders" that are failing to live up to their original billing. This result should be especially welcome in 2010, when Congress is expected to consider tax reform more broadly in the context of the expiration of the Bush Tax Cuts. For this reason, the Senate should be sure to include this study in their version of the Extenders bill as well.

Finally, as somewhat of an aside, the criteria laid out in this proposed study may also be of use in contemplating a more fundamental overhaul of our government's "performance evaluation" infrastructure, as was proposed in a CTJ report just a few weeks ago.

For more on the Tax Extenders package in general, check out this coverage in CTJ's Tax Justice Digest.

Louisiana: Can Property Tax be Too Low?

2009-12-09T09:05:00.003-05:00

In Louisiana, the answer is probably "yes, they could."
An excellent editorial in the Daily Advocate notes that the ten lowest-property-tax counties in America in 2006-2008 (for residential property) were all in Louisiana. The main reason for this is pretty straightforward: every owner-occupied home in Louisiana receives an exemption for the first $75,000 of home value. In practice, this amount covers something close to half of all properties in the state.
The topic is being raised right now because there are active proposals to increase the homestead exemption. As the Advocate editorial correctly notes, the impact of this would be a

shift of tax burdens directly onto owners of business and commercial property. It also would shift more of the property tax burden onto renters, rather than homeowners; renters pay property taxes through their monthly checks to landlords, without benefit of a homestead exemption.

This isn't an argument that Louisiana's homestead exemption actually needs to be reduced. But it certainly makes a good case that further increases ought to be the last thing on state policymakers' minds at this time.

Louisiana Tax Amnesty: A $303 Million Success?

2009-11-30T09:09:00.000-05:00

The count is in: the recently-ended Louisiana tax amnesty brought in $303 million in revenue for the state.
The lion's share of the money-- $277 million-- was paid by delinquent businesses, with individuals ponying up the remaining $26 million.
This result raises three interesting policy questions.
1) Was the amnesty, taken on its own, a good deal for the state? Amnesties are often driven by the need to get revenue immediately at any cost, and all too often the result is that states agree to give up all penalties and interest if delinquent taxpayers just pay the original balance. The problem with this, of course, is that the delinquent taxpayers are essentially getting an interest-free loan, and the state is not getting what they're legally due. In this particular case, the deal apparently was that if you settled up in full, you got to keep half of the interest that was due. This is less costly than what a lot of states have done. It still does, however, carry a cost to the state. Verdict: Could have been worse.
2) What to do with the money? More than half is going to shore up specific funds: the rainy day fund and a "coastal fund." The rest, more controversially, is going to pay for health care. If this is controversial, it's because it's using what is arguably a one-shot revenue inflow to pay for what is clearly an ongoing expenditure. Put another way, finding a dollar bill under the cushions of your couch can help buy you dinner tonight, but then it won't help you tomorrow night. Gov. Jindal is arguing explicitly that at least some of this revenue should be thought of as ongoing, because they're bringing taxpayers back into the system. But the official verdict will come from the Revenue Estimating Conference. Verdict: thumbs up for shoring up rainy day fund, but don't pat yourself on the back for solving the health care funding problem just yet.
3) What are the implications for successful enforcement of the tax laws? A main argument against amnesties is that if folks know they're coming, they'll be less afraid to avoid taxes in the first place. This will be a problem if Louisiana continues to do amnesties, but is not clearly so yet. The really interesting question is what you can infer from the huge different between the amount raised from businesses ($277M) and the amount paid by individuals ($26M). Does this mean that businesses are cheating more? Alternative plausible explanations: businesses pay proportionally more of Louisiana taxes to begin with than do individuals (although this really can't explain the huge difference), or that the individuals who owe the most aren't taking advantage of the amnesty simply because they can't afford to, even with half the interest given back.

The $303 million yield of this amnesty will certainly help the fiscal situation in the short run. But Louisiana policymakers should take this opportunity to think strategically about what this success means for future amnesties-- and, more importantly, what it tells them about where they need to focus their normal enforcement efforts.

Federal Home-Buyer Tax Credit Prompts Cheating

2009-08-08T00:07:00.003-04:00

In today's Washington Post, Kenneth Harney reports evidence that some people are falsely claiming the new federal income tax credit for first-time homeowners.

Two quick thoughts.

First, the question of whether incentives for first home purchases are a good idea. Gonna say no: The benefits aren't necessarily going to buyers-- in some markets, sellers will just increase their asking prices to factor in the value of the credit. Moreover, plenty of better-off people who are getting this credit simply don't need it, and the lower-income folks who DO need a tax credit to be able to afford purchasing a home-- well, maybe they're not quite ready to own. Brings to mind Michael Bloomberg's quote RE the silliness of corporate tax incentives:

Any company that makes a decision as to where they are going to be based on the tax rate is a company that won’t be around very long. If you’re down to that incremental margin you don't have a business.

Same deal with first-time homeowners: if it really takes a tax credit to make this doable for them, what does that say about their ability to pay monthly mortgages in the long run?

Second point here, more on Harney's topic: why should the IRS be burdened with administering this pig? Kudos to them for doing it, but if it's gonna be someone's job in the US government to check that someone claiming to be a first-time homebuyer really is one, why not someone at HUD rather than IRS? Let the IRS guys collect the revenue-- and let Housing guys decide who needs help with their housing expenses.

Why Won't the Obama Administration Accept Taxing Employer-Paid Health Premiums?

2009-06-16T20:58:00.005-04:00

Barack Obama's fiscal policy platform as a presidential candidate was hardly a profile in courage, but he had his moments. This, however, was not one of them:

"For the first time in American history, [John McCain] wants to tax your health benefits. Apparently, Senator McCain doesn’t think it’s enough that your health premiums have doubled, he thinks you should have to pay taxes on them too. That’s a $3.6 trillion tax increase on middle class families. That will eventually leave tens of millions of you paying higher taxes. That’s his idea of change."

This was a fairly unprincipled thing to say, and begged the question: why shouldn't employer-paid health care be taxed? Obama never gave us an argument for this beyond the idea that it would be a "middle class" tax hike. In the end, you got the sense that he was saying this not because he believed it would be a bad idea to tax employer benefits, but because it was a good soundbite for him and allowed him to blur the distinction between the stereotypes of the tax-happy Dem and the tax-averse Republican.

One could hope that a year later, when the full extent of our fiscal crisis had become more apparent, the Obama administration would be able to quietly tiptoe away from this position. And Obama has indicated his openness to the idea of taxing employer paid health care like the income it is. But then along comes V-P Joe Biden on Meet the Press last Sunday:

MR. GREGORY: Will the president sign a bill that taxes healthcare benefits for employees?
VICE PRES. BIDEN: We made it clear we do not think that is the way to go. We think that is the wrong way to finance this legislation.
MR. GREGORY: So if the bill comes with that...
VICE PRES. BIDEN: But--no, no, no.
MR. GREGORY: ...the president wouldn't sign it?
VICE PRES. BIDEN: I didn't say that. I said when the bill is going to come, this is the most--this is going to be one of the most comprehensive changes in law since Medicare in the beginning. We'll have to see what the whole bill says. But we made it clear we do not believe you should be taxing, taxing the benefits that people receive through their employers now.

Once again, though, the question is: why take this position? Is there a principle behind it?
There's an easily-stated and compelling rationale for the opposite stance, treating employer-paid health care as taxable income: as Citizens for Tax Justice noted in a 1996 report, it's hard to see "why a person who pays cash for insurance should be taxed more heavily than another person who gets insurance as a fringe benefit (and accepts lower cash wages)."

Put more concretely, if worker A earns $50,000 a year and buys her own health insurance, while worker B gets $45,000 of salary and $5,000 of employer-paid health insurance, the two workers' incomes should be thought of as basically identical. But our tax system gives a preference to the worker who's accepted some of her income in the form of employer-provided health insurance.

The fact that Obama and Biden aren't making principled arguments the other way doesn't mean such arguments don't exist, of course. The best argument I've heard against undoing this tax preference has to do with the inequities between similarly situated workers that would result. Two workers for competing firms in the same industry can have very different health care premiums, depending entirely on how old and frail their co-workers are. The quality of care they personally receive can be identical-- they can even go to the same doctor--but one's employer-paid health premiums will be higher because his co-workers are more likely to be sick.

Under this scenario, taxing employer-provided health benefits could result in the same sort of tax inequity we see in the current system. To which the most obvious response is that these inequities would certainly be less widespread than the inequities of the current system. Add to this that taxing employer-paid health benefits would provide a clear incentive for employers to offer more competitively priced benefits and this argument (which, to be clear, Biden has not even made) becomes not at all compelling.

A variety of other arguments can be made that should give us pause before rushing into paring back the existing tax break: some have to do with equity, while others have to do with the potential administrative difficulty of valuing health benefits for tax purposes. Howard Gleckman summarizes some of these arguments here, in a thoughtful read.

But at the end of the day, the most compelling argument either way is an old and simple one borrowed from the 1986 Tax Reform Act: income is income. Whether it's capital gains or pensions or unemployment benefits, the presumption should be that all types of income are taxed in the same way. Failing to do so introduces economic distortions, encouraging employers to pay their workers in the form of more lightly-taxed forms of income. Those who benefit most from these distortions will yell loudest when they're taken away-- but that shouldn't blind us to the fact that it was wrong to enact them in the first place.

Georgia: Perdue Vetoes Capital Gains Tax Cut

2009-05-11T23:50:00.003-04:00

A big tax fairness gain in Georgia today: after thinking on it for a few weeks, Governor Sonny Perdue has decided to veto legislation that would have cut the state's income tax on capital gains. The proposed tax cut, which the legislature had approved at the same time as a bill ending state funding for a property tax credit for homeowners, would have done little or nothing for most middle- and low-income Georgians. Viewed in combination with the property tax legislation, moreover, the combined effect would have been a tax hike on middle-income folks and a tax cut at the top! ITEP's analysis has details.

Opponents of the capital gains cut argued that the cap gains cut was essentially being paid for by the repeal of the homeowner property tax credit. While this isn't technically true, it is essentially correct: the legislature made the politically-odd choice to repeal a popular homeowner tax break not because they wanted people throwing bricks thru their windows, but because they needed the money to balance the budget. And they needed more money because of their zeal for cutting cap gains taxes.

The "Think Progress" blog is already arguing that Perdue's decision constitutes a repudiation of supply-side policy. This is wishful thinking, or else just a rhetorical cheap shot. Perdue's veto message says pretty clearly (to my eyes) not that capital gains tax cuts don't work, but that they take more than one year to work:

Georgia is constitutionally required to maintain a balanced budget: for every dollar in decreased revenue, we must correspondingly cut expenditures. We cannot deficit spend as the federal government does, even if those deficits generate economic growth in the long term.

In other words, in a deficit environment, when the goal for the state has to be to make things balance in the current year, he's saying it's impossible to push a tax cut unless you can pay for it immediately. Cap gains tax cuts will still grow the economy, he's saying-- it's just that the growth will happen outside the single-year budgetary window. National anti-taxers don't need to get nervous-- Perdue is not rejecting supply-side principles. He's simply operating within a political framework that doesn't recognize that sometimes supply-side policies need a big canvas to work on in order to be effective. A reeaalllly big canvas.

Having said that, I'll take the outcome. The cap gains bill was a real threat to the income tax (and to the fairness of the tax system), and repealing the property tax break is hardly all bad. Of course, using the lost revenues to enact a new "circuit breaker" property tax break would be a great thing. But the important first step is to recognize that the existing property tax credit is a big, fat, untargeted, unaffordable thing, and the legislature has done that.

But it's not over-- the cap gains fight, after all, is NEVER really over. Secretary of State Karen Handel (who clearly has no interest at all in higher office) had this to say:

While I appreciate the Governor’s position that the tax cuts included in the bill would have made balancing our state budget even more difficult, I believe that the economic benefits to our state would have outweighed these concerns.
Now is the time for us to cut taxes in order to help grow jobs and ignite our economy.

Taken at face value, Handel is saying one of two things here: either (1) Perdue is wrong because the cap gains cuts actually would have grown revenue immediately, offsetting the revenue loss, or (2) silly budget deficit rules don't matter and we can ignore them. Neither position speak well for Handel's abilities to manage a budget if she ever decides she'd like to hold a higher office than she currently does

Another feather in the cap for the Georgia Budget and Policy Institute, which got editorial attenion statewide for its criticisms of the capital gains cut.

Illinois EITC Expansion: "Welfare?"

2009-04-30T08:50:00.002-04:00

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.

Georgia Lawmakers Swap Income for Property Taxes

2009-04-07T18:13:00.002-04:00

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.

Why Does Blanche Lincoln Hate the Estate Tax So?

2009-04-03T18:44:00.008-04:00

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.

Will Special Tax Breaks Be More Closely Scrutinized Under the Obama Administration?

2009-03-17T13:38:00.006-04:00

Buried in President Obama’s recently released budget blueprint were four little-noticed and perhaps unexciting sentences that could signal the coming of a major change in the way the executive branch thinks about, evaluates, and reports on tax expenditures:

The Administration will fundamentally reconfigure the Program Assessment Rating Tool. We will open up the insular performance measurement process to the public, the Congress and outside experts. The Administration will eliminate ideological performance goals and replace them with goals Americans care about and that are based on congressional intent and feedback from the people served by Government programs. Programs will not be measured in isolation, but assessed in the context of other programs that are serving the same population or meeting the same goals.

While the term “tax expenditure” isn’t explicitly included in this brief preview of things to come, a recently issued statement from Citizens for Tax Justice makes clear that meaningfully implementing the promises made above will have to involve shining a bright light on government programs hidden within the tax code.

For the uninitiated, the term “tax expenditure” essentially refers to tax laws that focus more on encouraging a specific activity or rewarding a particular group of people, rather than on trying to improve the efficiency, simplicity, or fairness of our tax system. Put another way, these provisions more closely resemble non-tax, spending-like programs than they do principled tax policy. Special tax breaks for capital gains income, research and development activities, mortgage interest payments, and retirement and health benefits all fit this billing. Altogether, there are more than 160 tax expenditures in our tax code (the precise number varies somewhat depending on the definition you use), and recent estimates peg their total size at upwards of $800 billion annually.

Even though most tax expenditures don’t constitute smart tax policy, it can at times be sensible to administer these programs as tax policies in order to piggyback on the IRS’ existing distribution structure. More often, however, these items are unwisely grafted to the tax code merely as a way to protect them from the annual scrutiny of the appropriations process, or to cash in on the widespread popularity of reducing taxes while simultaneously being able to re-direct government resources toward favored objectives.

Regardless of why these items ended up in the tax code, there’s a clear need to evaluate their effectiveness in achieving the goals for which they were enacted. Have the lower tax rates for capital gains and dividends income encouraged investment? Has the mortgage interest deduction resulted in a higher rate of home ownership? These kinds of questions deserve much more rigorous and visible consideration inside government than they have received in recent years.

Fortunately, if the President is sincere in his promise to assess programs “in the context of other programs that are serving the same population or meeting the same goals”, the OMB’s “Program Assessment Rating Tool” (PART) will have to be expanded and re-worked in a way that allows for the consideration of precisely these types of questions. How, for example, could one ever hope to evaluate any U.S. health care policy without considering it in the context of the $160 billion subsidy for health insurance given through the exclusion of employer provided health care? Likewise, what kind of housing policy analysis could ever ignore the $90 billion given to homeowners via the mortgage interest deduction? But as things stand today, this is exactly how the Program Assessment Rating Tool is used.

As the Citizens for Tax Justice statement pointed out, the push to include tax expenditures alongside other programs in the performance review process has received significant attention in the recent past. Unfortunately, however, up until this point its merits have not been enough to propel it past the political obstacles. In writing about the very specific language calling for tax expenditure performance reviews that was included in the Senate report accompanying the 1993 Government Performance and Results Act (GPRA), one observer pointed out:

Clinton’s Treasury Department, of which I was a part from 1998 to 2000, was unenthusiastic about performing these evaluations, reasoning that a comprehensive evaluation of tax expenditures would necessarily raise serious objections to measures enthusiastically advanced by the Administration … Although the menu of favorite tax expenditures changed when President Bush took office, the Office of Management and Budget has not published any new tax expenditure analyses

- Len Burman. “Is the Tax Expenditure Concept Still Relevant”. National Tax Journal. September 2003.

In order for real reform to occur, President Obama’s very visible push for greater government transparency will have to outweigh the coldly political calculations that have made for “politics as usual” up until this point.

Evaluating the National Retail Federation's "Tax Holiday" Idea

2008-12-24T12:32:00.002-05:00

Yesterday the National Retail Federation published an open letter to President-to-be Barack Obama urging that come January, Obama's stimulus package should including a national "sales tax holiday," three ten-day periods in 2009 during which states that normally collect sales taxes on retail purchases would stop collecting them.

A new Citizens for Tax Justice report takes the shine off this idea a bit, noting a few fairly important reasons why a tax holiday might be not the right answer for America at this time.

Among them:

As with state sales tax holidays, it's hard to know whether the benefits would go to consumers or retailers.
To the extent consumers would be better off, the savings would go to even the very best-off families. No effort could be made to target these savings to families hit hardest by the current downturn.
Even if Congress likes the idea, that's not enough to implement it. Every state with a sales tax would have to pass legislation to make this work. And then every retailer in these sales-tax states would have to train workers and program computers to stop collecting state sales tax (but keep collecting local sales tax) during the holidays.
Since the first proposed tax holiday would take place in March, the immediate effect of such a plan would be to... encourage people to spend less money right now, and wait until March. Which is an odd feature in a stimulus plan.

The CTJ report is here.

Why Virginia Won't Hike Its CIg Tax

2008-12-20T09:35:00.004-05:00

Earlier this week, Virginia Governor Tim Kaine proposed doubling the state's cigarette tax from 30 to 60 cents per pack. Once upon a time, this would have been a pretty substantial hike. But with the wave of cigarette tax hikes nationwide over the past decade, this proposal would best be described as bringing Virginia's tax more in line with what the rest of the states currently do. As the Campaign for Tobacco-Free Kids reports, the nationwide average cig tax is now $1.19 per pack.

The Republican-led House quickly announced that it was having none of this. Their reason? Economic development:

[Virginia House Speaker William] Howell and [U.S. House member Eric] Cantor argued that a cigarette tax hike would send the wrong signal to other states, which might be more inclined to raise their cigarette taxes. That could lead to job losses in the tobacco industry, especially in Virginia.

The most obvious response to this rationale is that they're trying to close the barn door after the horses have gotten out. State lawmakers have looked--and continue to look, right now-- to cigarette taxes as their favorite source of new tax revenue for years now. The idea that other states are waiting for the official sanction of tobacco-producing states before further jacking up their cig taxes is pretty far-fetched.

But the more interesting question is why Howell views the tobacco industry as the most vital component of Virginia's economic development strategy going forward. (To say nothing of why Cantor, who after all is a member of the US Congress, not Virginia's legislature, is weighing in on this point.) Tobacco consumption has been falling for decades nationwide. Not just on a per capita basis either-- we're just collectively purchasing fewer and fewer smokes every year, as public knowledge of the immense healthcare costs associated with smoking increases.

It's a dying industry, a relic of the past. So why should Virginia, a state that has enjoyed a real technology boom over the past decade, want to reinforce the role of this industry in its economy? The Washington Post's Pete Earley has a disheartening, but probably apt, answer: because Virginia lawmakers got paid to think this way. As Earley notes, virtually every member of Virginia's tax writing committees in the House and Senate regularly take campaign contributions from the tobacco industry. You don't have to be a Rod Blagojevich for these contributions to have a subtle influence on how you think and vote on economic policy issues.

At a time when we're contemplating spending billions of dollars to prop up the US auto industry, it's hard to get too sniffy about efforts to keep the Virginia tobacco industry going. But as Virginia confronts a major budget deficit, every dollar of tax revenue not collected from the tobacco industry is coming from somewhere else. And by refusing to consider hiking the cigarette tax on economic development grounds, Virginia lawmakers are basically asserting that any other interest that could be taxed-- whether it's manufacturers, small retail businesses, or individual wage-earners and consumers-- are less vital to Virginia's long-term economic growth than are tobacco farmers. And it's hard to see any other explanation for this backwards approach to economic development than campaign contributions. As the late, great Mark Felt apparently never really said, "follow the money."

New York's "Soda Pop" Tax Proposal

2008-12-19T11:15:00.002-05:00

New York Governor David Paterson unveiled his budget proposal this week, and one proposed tax hike is drawing a lot of attention: a plan to introduce a new tax on sales of soda pop. The 18 percent tax-- which would be on top of the existing state/local sales tax, generally about 8 percent-- would also apply to sugary juice drinks.

Paterson clearly thinks this is a good idea because it's supposed to raise half a billion dollars a year. Nicholas Kristof thinks it's a fantastic idea, but for an entirely different reason: he thinks it will get people to stop drinking so much soda. Kristof goes so far as to call it "a landmark effort that, if other states follow, could help make us healthier."

With no apparent irony, the New York Times reports that

State officials projected that the tax would raise $404 million in the fiscal year that starts in April, and $539 million in the following fiscal year, but said the proposal was primarily a public health measure.

Of course, if the yield of the tax goes up, that means that people are drinking more sugary sodas, not less. So this thing is either going to be a budgetary savior for the state, or it's going to make people healthier by encouraging them to spend less on soda pop. You can't have it both ways.

So what's the real answer? The Times' Clyde Haberman has a clear-eyed view:

Make no mistake, the last thing that government wants is for everyone, right this minute, to stop smoking, boozing, gambling and downing those nutritionally empty supersweet sodas. Too much money is at stake. By absolutely no coincidence, the New Yorkers who pay these particular taxes tend to be those who can afford them the least. Poor people spend disproportionately on smokes, booze and unhealthy soft drinks, not to mention on the prayer that God will drop everything else and shower lottery millions on them.
These are “habits that are more common among those who have the least amount of political power,” said Andrea Batista Schlesinger, executive director of the Drum Major Institute for Public Policy, a liberal but nonpartisan research center in New York. “To do something in the most politically efficient way is to tax or hike the fees of those who have the least power,” she said.

Folks like Kristof aren't wrong to want to discourage people from doing self-destructive things. But they're absolutely wrong to think that lawmakers' motive in proposing things like the soft drink tax is to improve public health. They're doing it because it's politically easier than the true tax reforms that could help keep New York's budget balanced years down the road.

PNC Bank: Next in Line at the Bailout Trough

2008-11-18T21:54:00.003-05:00

In the wake of revelations that Wells Fargo Bank stands to reap $20 billion in federal tax cuts from a probably-illegal tax giveaway imposed on us by departing leaders in the Bush Treasury Department, the most obvious question was which other large corporation would be next in line to cash in on this particular tax break. The answer: PNC, which just bought Ohio-based National City Bank.

As with the Wells Fargo case, the generosity of the tax break leaves one dumbfounded. As the Cleveland Plain Dealer asks:

How can PNC pay $5.6 billion for National City and get back more than $5 billion in tax breaks?

It's a rhetorical question, of course: the Plain-D guys know that this tax break exists because of clever back-room maneuvering by Bush Administration Treasury officials. The short explanation: 20 years ago, Congress passed a law (as part of the justly-celebrated Tax Reform Act of 1986) that prohibited banks from buying loss-ridden banks as a tax dodge. While lobbyists pushed hard for Congress to undo this change for, well, the next 20 years, they were unsuccessful-- until the Treasury Department decided to change the law themselves by issuing a notice saying that they've changed their interpretation of the law. Oversimplying a bit, Treasury officials have taken a law that says "this tax scam is not allowed" and basically crossed out the "not".

Plenty of people are now paying attention to this anti-democratic outrage, not least among which are the members of Congress who view the creation of absurd tax breaks as their domain alone. (They're right, for better or for worse.) But the real question remains: what can be done about this?

An incoming Obama Administration can (and should, if all else fails) simply rewrite the administrative regulations. Again resorting to a gross oversimplification, this means un-crossing-out the "not" mentioned above.

Alternatively, tax writers in Congress (who are peeved that Treasury usurped their authority on this one) could pass a law preventing banks from using this made-up loophole going forward.
A stickier issue is whether anything can be done to take away the tax breaks already claimed by Wells Fargo and PNC. If their purchases of unprofitable banks were driven by the tax break, it may seem unfair to take the tax breaks away retrospectively, but there's enough unfairness to go around: Wells Fargo got a tax break that Citigroup didn't, entirely because Wells Fargo tried to buy Wachovia right after Treasury's announcement-- and Citigroup had the bad luck to make its acquisition bid right BEFORE Treasury's announcement. Ain't nothing fair about that.

It would probably be best for Congress to tackle this one head on, even as it deals with allegations that the direct bailout costs (the much-ballyhooed $700 billion) are being doled out indiscriminately. Let's hope they do!

Wells Fargo Tax Giveaway (Finally) Attracting Some Notice

2008-11-11T11:35:00.003-05:00

Better late than never?
The truth of this saying may be tested in coming weeks, as lawmakers and regulators grapple with the question of how to fix an under-the-radar corporate tax break for a few large banks (the federal tax cut for Wells Fargo alone has been estimated at over $20 billion, and the new tax break overall could cost US taxpayers $140 billion) that seems to have been approved without Congress agreeing to it.

A Citizens for Tax Justice report from last week outlines the story:

When one company buys another company that has tax losses, the law prevents the acquiring company from using the purchased company’s tax losses. There’s a very sensible reason for this rule: to ensure that companies don’t purchase other companies simply as a tax dodge.
But a little-noticed September IRS administrative ruling creates a specific, temporary exemption from this rule for banks acquiring other banks whose tax losses are attributable to bad loans.

It's not that often that a new tax cut gets implemented without Congress ever lifting a finger, but that's what happened when the Bush Administration's Treasury officials decided to reinterpret an existing law in a way that would cut taxes dramatically for a few well-off banks. Senator Charles Grassley, who's accustomed to being at the steering wheel (or at least in the car!) when the tax policy express hits the road, is very angry about it, although he's stopped short of saying that the Administration's move is illegal.

Yesterday's Washington Post has a detailed story discussing how this came about, and today's Los Angeles Times has this story noting that the state if California stands to lose a couple of billion dollars of its own corporate income tax revenue to boot.

This is obviously an important issue for Congress-- the bailout was unpopular enough before it became widely known that it was being hijacked to benefit a few big corporations, so Congressional tax writers have a real incentive to clean this mess up in a way that makes it clear the bailout ultimately benefits America's economy, not a few fat cats.

But, as Citizens for Tax Justice notes in its analysis of the problem, this is also something state lawmakers need to worry about:

Because states with corporate income taxes almost universally base their corporate taxes on federal rules, federal tax cuts for corporations generally result in state tax cuts as well. When affected states have rules making it difficult to enact tax increases (as istrue of California, whose budget deficit is already in the billions of dollars), state governments find themselves practically unable to avoid costly corporate tax cuts they never wanted... At least eighteen states that tax corporate profits will likely take a hitfrom the new IRS ruling—and any state that taxes the profits of financial companies is at riskof helping to fund the next bank that chooses to purchase another financial company.

With state budgets already going up in flames, this is a problem state lawmakers don't need. Stay tuned...

Tax Cuts, As We All Know, Increase Revenues??

2008-10-10T15:12:00.010-04:00

One of the most difficult tradeoffs policymakers have to make is in the level of taxes to collect vs. the level of services to provide. High taxes are generally politically unpopular, though if accompanied by a strong mix of valued government services, they are often considered to be worth the price. In contrast, a government that collects relatively little in taxes may be popular among its citizens come tax time, but the meager level of government services that comes with low taxes is rarely celebrated. Of course, since the federal government is free to run a deficit, sometimes this tradeoff can be delayed, as current spending can be paid for with higher taxes (or significantly reduced spending) at a much later date. Nonetheless, the tradeoff can never be avoided entirely. None of this is controversial.

Enter John McCain. According to Senator McCain,

"tax cuts, starting with Kennedy, as we all know, increase
revenues".

If true, the Senator from Arizona has found a way around one of the most dreaded problems facing our lawmakers. No longer must we weigh the pros and cons of higher taxes vs. better services. No, in McCain's world, lower taxes and better services are a natural pair. In fact, according to McCain, the tradeoff between taxes and services that policymakers have wrestled with for centuries is not only unnecessary, but also nonexistent:

"historically, when you raise people's taxes, guess what, revenue goes down". - Senator John McCain

Lower taxes aren't just the easy way to get more revenue - they're actually the only way!

The Laffer Hypothesis: Show Me The Money?

If only it were that easy. What McCain is referring to is the infamous "Laffer Curve", or "Laffer Hypothesis". Under this hypothesis, it is asserted that U.S. tax rates are so high that investment and overall economic activity has been greatly stifled. So stifled, in fact, that since individuals and businesses are paying so much of what they earn to the government, the incentives to take risks and work hard have been effectively removed from the economy – as a result, markedly less taxable economic activity is being than would otherwise be the case. With less taxable activity, there is less tax revenue. Under these extreme circumstances, lowering tax rates should actually boost economic activity to the degree that tax revenues will increase.

Unfortunately for McCain, the evidence against the Laffer Hypothesis is staggering, and few if any serious economists believe the hypothesis to be applicable to the U.S. tax code in its current state. The Department of the Treasury authoritatively showed this to be the case in this 2006 report. That report shows that in each of the four years following the 1981 and 2001 tax cuts, revenue markedly declined. In contrast, following the 1993 tax increases, revenue increased. Simple as that. It seems that the tradeoff does in fact exist: if you want more money to go to funding government services, you're going to have to pay more in taxes. This really shouldn’t be all that surprising.

Not Just No Revenue ... No Growth, Either!

While the Treasury report just cited is more than enough to refute the Laffer Hypothesis on its own, there is also a wealth of literature examining the hypothesis’ premises. Specifically, that literature looks at the merits of what is known as “supply-side economics”, or the school of thought that cutting taxes for businesses and wealthy investors (the “suppliers”, as opposed to the “consumers” in the economy) will markedly improve economic growth. In the American political landscape, this rationale for tax cuts has been equally if not more important than the issue of what will happen to government revenues.

Unfortunately, however, this rationale has been proven to have little if any merit. Ironically, not only have so-called “pro-growth” and “pro-investment” tax cuts been demonstrated to be incapable of raising revenues, they have also been shown (at least in their most recent manifestations) to be incapable of promoting growth or investment. The Center for American Progress (CAP) and the Economic Policy Institute (EPI) recently teamed up to add to the body of literature on this point with their report, "Take a Walk on the Supply Side: Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth".

In their report, CAP and EPI find that investment growth, as well as overall economic growth, were much stronger in the years following the 1993 federal tax hike, than in the years following the 1981 and 2001 tax cuts. Numerous other indicators suggest a similar finding: median household income, wages, employment growth, and of course, the federal budget, were all in much better shape following the 1993 tax hike than during either of the periods that followed "pro-growth" tax cuts.

Of course, tax policy isn't the only determinant of economic performance. But if the supply-side argument has any merit, we shouldn’t have seen the economy surge so dramatically following "anti-growth" tax hikes, and fizzle in an equally dramatic fashion in the wake of "pro-growth" tax cuts. At the very least, we would have expected these opposing sets of tax policies to have brought these three periods closer into line with each other. Simply put, when the supply-siders got their chance in 1981 and 2001, they failed to produce results, and dug the nation deep into debt.

Backed by the Politicians, Refuted by the Experts

But aside from all the empirical evidence regarding the Laffer Hypothesis (the CAP/EPI report, as well as another EPI Report from Harvard Economist Jeffrey Frankel already cover that ground more than adequately), the other important point for today’s debate is what to make of various politicians' inexplicable belief in this thoroughly disproved hypothesis. The allure of putting more money into the taxpayer's pocket (via tax cuts) while at the same time putting more money into the government's coffers (through increased economic activity and the associated higher tax revenues) is apparently irresistible, as evidenced by the following quotes taken from Frankel's paper:

"The increase in revenues should be financed not by new and higher taxes, but by lower tax rates that would produce more money for the government by stimulating higher earnings by corporations and workers"
- President Ronald Reagan

"Some in Washington say we had to choose between cutting taxes and cutting the deficit. That was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring. That's what's happened"
- President George W. Bush

"The deficit would have been bigger without the [2001] tax relief package"
- President George W. Bush

"It's time for everyone to admit that sensible tax cuts increase economic growth, and add to the federal treasury"
- Vice President Cheney

More quotes of a similar vein can be found in Frankel's paper. Also contained in that piece are valuable quotes directly from each of these administrations' chairmen of the President's Council of Economic Advisers. The statements of these highly trained economists reflect a remarkably different opinion on the Laffer Hypothesis:

"The height of supply-side hyperbole was the 'Laffer curve' proposition that the tax cut would actually increase tax revenue because it would unleash an enormously depressed supply of effort . [this has been] proven to be wrong"
- Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan

"Although the economy grows in response to tax reductions, it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity"
- Glenn Hubbard, chairman of the Council of Economic Advisers under President George W. Bush

"Subsequent history failed to confirm Laffer's conjecture that lower tax rates would raise more tax revenue. When Reagan cut taxes after he was elected, the result was less tax revenue, not more"
- Greg Manikew, chairman of the Council of Economic Advisers under President George W. Bush

The conflict between these two sets of quotes reflects deep divisions between the politicians and the experts with which they surround themselves. John McCain fits this pattern perfectly. Since McCain is not President (at least not yet), he does not have his own Council of Economic Advisers to refute his wild claims regarding tax cuts. He does, however, have Douglas Holtz-Eakin as his Senior Policy Adviser. Holtz-Eakin is a Princeton-trained economist and former head of the Congressional Budget Office. He also is on record as explicitly rejecting the Laffer Hypothesis.

But McCain isn't taking Holtz-Eakin's word for it. Aside from the quotes from John McCain cited earlier, further deference to the Laffer Hypothesis from the McCain camp has been evidenced by the candidate's choice of Arthur Laffer, the chief proponent of the Laffer Hypothesis, as one of the campaign's special economic advisers.

This whole asinine situation brings to mind McCain's previous admission that "the issue of economics is something that I've never really understood as well as I should". Perhaps, given his inadequacies in the subject area, he would be better off deferring to those who do understand it. More “pro-growth” tax cuts targeted to the most fortunate members of society, like McCain’s, are the exact opposite of what is needed.

Florida: The Case of the Missing Tax Break

2008-08-19T16:08:00.002-04:00

In the past year, Florida lawmakers (and voters) have ratified a couple of measures designed to reduce property taxes, by forcing local government tax rates downward and expanding homestead exemptions. So one would expect homeowner taxes to "drop like a rock" (to steal a phrase from Governor Charlie Crist) in the wake of these changes, right?

Well, no. As the Pensacola News-Journal's Michael Stewart points out, for many homeowners part of the tax savings from the previously enacted tax cuts is getting eaten up by an arcane "recapture rule." In a nutshell, the recapture rule says that if a home's market value falls, its assessed value will still rise by up to 3 percent.

If this rule sounds screwy, it's not-- or, at least no screwier than the "Save our Homes" tax break that is entirely responsible for it.

Here's the problem: since 1995, Florida has had in place a cap on the amount by which a home's assessed value can grow each year. It's 3% or inflation, whichever is less. This cap is known popularly (and with a touch of drama) as "Save Our Homes."

Of course, when market values are growing and the assessed value is not allowed to grow along with it, the result is a gap between what a home is really worth and what the tax system says it's worth. This gap is an inequity-- it takes the tax system further away from being fair and measuring things properly. The recapture rule is designed to undo this inequity. Simple as that.

An example: suppose you bought your house in 1995 for $100,000. Between 1995 and 2006, your home value doubles to $200,000. A properly functioning tax system would take account of the fact that your home is worth a lot more. But Florida's tax system only allows your home's value to grow at 3 percent a year. At this rate, the assessed value of your home in 2006 would only have risen to $138,000.

So in this example, your home is worth $200,000 and the tax system is treating it as if it were worth $138,000-- the tax system is basically pretending one-third of the value of your home doesn't exist. And all you've done to "deserve" this tax break is to not sell your house. Doesn't matter if you're rich or poor. Doesn't matter who you are, just that you didn't sell your house.

If you treat this $62,000 as basically an unearned, incorrect tax giveaway, then a mechanism that reduces the size of that giveaway seems like a good idea.

And that's what the recapture does.

Palm Beach County Appraiser Gary Nikolits knows this perfectly well, which is why it's a laughably political move when he writes a letter to the governor expressing shock that this sort of thing could happen. As Stewart reports:

“Can you imagine the outcry when they open their (tax notices) in August to find that while their market value may have decreased, their taxable value increased?” Nikolits stated in the letter.

Nikolits (and other appraisers around the state) have plenty of reason to be politically nervous about the impact of the recapture rule, but that doesn't make this rule wrong.

Put another way, anyone who thinks the recapture rule is "unfair" has got it exactly backwards. The true "unfairness" is in the Save Our Homes break, which creates a huge gap between market value and assessed value. The recapture rule is a perfectly acceptable way of mitigating that unfairness.

This lesson holds true, of course, in any other state that has similar caps on assessed value. Caps inherently create inequities, and require mechanisms like the Florida recapture to help reduce these inequities. Complaining about the recapture process amounts to missing the forest for the trees. That means you, Michigan!

Illinois: Shortest Special Session Ever?

2008-08-13T09:44:00.002-04:00

Yesterday the Illinois legislature held what was scheduled to be a one-day special legislative session on education funding. The goal, in theory, was to come up with new money for pay for the state's chronically-underfunded education system.

But, as it happened, the session lasted all of 20 minutes in the state House, and not much longer in the Senate. And all the legislature agreed on was that they probably shouldn't get a pay raise at this time.

Why the sham special session? The short answer: Governor Rod Blagojevich called the session with very clear ideas about which solutions are permissible-- and which solutions are forbidden. The former camp includes privatizing the state's lottery; the latter camp includes, well, just about every sensible tax reform one might wish to enact. Blagojevich has maintained in the past, and reiterated in advance of the special session, that increasing the state's low, flat-rate, loophole-ridden income tax is not an option he will accept. This is especially absurd given that, as some brave observers have noted, lawmakers could make the Illinois income tax fairer and more sustainable without increasing tax rates at all.

It's no wonder, then, that state lawmakers see no particular point in holding a special session: if the governor plans to veto any income tax hike, why should lawmakers take the political risk of enacting one?

Check out the weekly updates from the Center on Tax and Budget Accountability for ongoing info on the state's budget crisis.

Cutting through the Tax Rhetoric Clutter

2008-08-12T11:30:00.004-04:00

Some great fact checks have recently been run by several news organizations and watchdog groups decrying the distortions of Obama's tax plan in several advertisements run by the McCain campaign.

First from FactCheck.org and Newsweek:

A TV spot claims Obama once voted for a tax increase "on people making just $42,000 a year." That's true for a single taxpayer, who would have seen a tax increase of $15 for the year – if the measure had been enacted. But the ad shows a woman with two children, and as a single mother, she would not have been affected unless she made more than $62,150. The increase that Obama once supported as part of a Democratic budget bill is not part of his current tax plan anyway...

The TV ad claims in a graphic that Obama would "raise taxes on middle class." In fact, Obama's plan promises cuts for middle-income taxpayers and would increase rates only for persons with family incomes above $250,000 or with individual incomes above $200,000.

And on separate Spanish and English-language radio ads:

A Spanish-language radio ad claims the measure Obama supported would have raised taxes on "families" making $42,000, which is simply false. Even a single mother with one child would have been able to make $58,650 without being affected. A family of four with income up to $90,000 would not have been affected...

The [English-language] radio ad claims Obama would increase taxes "on the sale of your home." In fact, home-sale profits of up to $500,000 per couple would continue to be exempt from capital gains taxes. Very few sales would see an increase under Obama's proposal to raise the capital gains rate.

Lots more analysis from FactCheck and Newsweek here (under "analysis").

Really, this graph from the Urban/Brookings Tax Policy Center analysis is probably one of the best illustrations of the presidential candidates' tax proposals because it illustrates the stark difference in priorities.

Sen. Obama's tax relief is overwhelmingly focused on the lower and middle brackets while raising taxes on the wealthy (over $250,000). Sen McCain's tax plan is sharply regressive, lowering taxes the most in percentage terms for the wealthy and the least for lower and middle-income brackets.

And how will the candidates' respective proposals affect the federal budget deficit? The Washington Post ran an analysis under the misleading title "Obama's Tax Plan Would Balloon Deficit, Analysis Finds." While the article does discuss an interesting debate over whether it's better to evaluate a spending proposal against a budget baseline (assuming current fiscal policy remains unchanged) or just compare proposals to one another in terms of their effect on the national debt, the headline will leave a misleading impression for casual readers who do not delve into the details of the article. This is because it's actually the case that if all McCain's tax proposals were implemented, they would balloon the national debt significantly more than Obama's proposals.

As Media Matters for America notes:

The article stated in its third paragraph that "[a]ccording to a recent analysis by the nonpartisan Tax Policy Center, Obama's tax plan would add $3.4 trillion to the national debt, including interest, by 2018." The 10th paragraph stated that "[a]ccording to the Tax Policy Center, McCain's tax plans would increase the national debt by at least $5 trillion over the next 10 years."

So not until the 10th paragraph of the article did the Post see fit to tell its readers that McCain's plan is actually worse for the national debt. There's some "fair and balanced" journalism.

Tax Foundation Debunks Anti-Obama Tax Smear

2008-08-01T17:12:00.002-04:00

You don't have to have a thousand unread messages in your inbox to believe that sometimes email is a bad thing. An example: apparently an anti-Barack-Obama screed has been circulating via email that lists a dozen of Obama's alleged tax proposals, all of which (in the email) amount to taxing basically every American. Each of these proposals makes it sounds like he's going to go after everyone's firstborn son.

But as the Tax Foundation helpfully points out, basically every assertion made in this email is false.

Some of the assertions in the email ("Obama would tax all capital gains on home sales at 28 percent") can't possibly be reasonably construed from anything Barack Obama has ever said or written. In other words, it's not a matter of some knucklehead doing his best to understand Obama's plan and just mis-interpreting it. Somebody went out and just lied-- made up a bunch of the nastiest stuff they could think of about Obama and called it the truth.

Hard to say how far afield this email has traveled. A quick Google search on specific phrases within the email reveals that it can be found on some very entertaining websites. For example, next time you find yourself poking around on "forums.gunbroker.com," you can find the email here. The Iowa John Birch Society is all over it too. While it's distressing to see it posted approvingly anywhere, the good news is that each of these web forums allows readers to comment, and sensible folks have already pointed out that the email in question is completely unsubstantiated.

More pernicious is a website with the harmless-sounding name www.before-you-vote-2008.info/ that has posted the offending email in its entirety, in apparent approval of its contents right here. As long as this idiot wants to keep shelling out $20 a year to own this web domain, he can leave the anti-Obama email in all its unexamined glory as long as he wants.

Of course, in the end, if any American voter reads the anti-Obama email and believes it uncritically, that's their fault for being lazy. And one could optimistically hope that no one would be that lazy. But the underlying problem is that tax policy is complicated enough that it's not all that easy to verify or (as is universally true in the case of this email) disprove assertions about candidates' tax plans.

And even if people don't explicitly believe the specific assertions made in the email, the theory animating the sender was probably that if you tell a lie enough times about someone, it does affect your perception of them-- even if you don't explicitly believe it's true.

Someone I respect greatly, who is nonetheless a pessimist about human nature, once gave me the following metaphor for how elections are won and lost: presidential campaigns are like a picture window. One party has a red magic marker and the other candidate has a blue magic marker. Every time the Republicans run an ad, they're putting a red dot on the window, and every time the Dems run an ad they're putting a blue dot on the window. If, on election day, there are more blue dots than red dots, the Democrats win.

If my friend's metaphor is wrong, then this scurrilous anti-Obama email doesn't matter. But if he's right, maybe it does.

Which is why the Tax Foundation deserves kudos for taking the email apart point by point and showing that it's full of lies.

Taxing Amazon.com Complicated by Tangled Forest of Tax Laws

2008-07-24T15:08:00.002-04:00

Should states be able to collect state sales tax on internet purchases and catalogue sales that cross state lines? That’s the issue that’s currently confronting state governments around the country desperate for revenues in these poor economic times. In theory, it is grossly unfair for a purchase that is made online to be taxed less than an identical item purchased at a “bricks and mortar” store (individuals are technically subject to use tax on their internet purchases but it is almost impossible to enforce). But in practice, taxation of remote sales falls victim to legal barriers as well as decentralized tax policies.

To this day, a company in question must be benefiting from the services which the state provides in order to be subject to sales tax levies. The Due Process clause has been interpreted for tax liability purposes as meaning the state must “give something for which it can ask return.” The Supreme Court has ruled that taxation of remote retailers is unconstitutional unless they have nexus or a physical presence within the state’s boundaries. But in the era of widespread e-commerce, the lines between a physical and virtual presence are blurring. Companies that buy and sell goods within a state are making use of that state’s infrastructure whether or not they physically own operations in the state.

The most recent Supreme Court decision to address this issue, Quill Corp. v. North Dakota in 1992, upheld previous limitations to the circumstances under which the state may collect taxes from a remote retailer. According to the Court, the Dormant Commerce Clause prevents states from placing undue burdens on interstate sales which was violated by North Dakota’s sales tax of Quill Corporation. Tax laws are so complicated and widely divergent between the 7,400 tax jurisdictions in the U.S. that the Court ruled it unreasonable for retailers to have to account for all the technicalities. It’s important to mention, however, that many observers including the chief executive of Netflix note the improvements in tax software in recent years have dramatically reduced the practical complexity of accounting for different tax policies.

Legal realities haven’t kept states from trying to tap this potentially large revenue source, upwards of $18 billion per year according to an estimate from the University of Tennessee. An organization of more than 20 states known as the Streamlined Sales Tax Project (SSTP) created in 2000 has been trying to streamline their tax codes enough so that determining tax liability is less burdensome. This will help convince Congress to change the law and allow states to tax internet sales, bypassing the Court decision. It’s probably fair to say they’ve only had limited success so far. This is due both to the difficulty of adopting a commonly accepted definition of taxable goods and services that doesn’t benefit some states while disadvantaging others and the difficulty of getting such a bill through Congress.

Thus presents the Amazon.com dilemma. Its “wholly owned subsidiaries” own thousands of square feet of distribution facilities in several states according to the Wall Street Journal. Although they are legally separate, there is a debate as to whether they constitute a nexus. It’s fairly common practice for companies to establish “shell companies” to take advantage of tax loopholes that allow them to expand operations without expanding tax liability. Several states, including Texas, are reviewing whether Amazon’s in-state operations should really be exempt from taxation.

Unfortunately, the prospect for expanding the tax base has dimmed as the State Board of Equalization in California has ruled that entities that refer customers by links to Amazon do not trigger nexus under California law. This is true even though the sites benefit financially from their relationship with Amazon, garnering a percentage of the sales made from the sponsored links.

New York has already passed a law requiring remote retailers to collect sales tax on purchases made in the state which Amazon has challenged, saying it unfairly targets Amazon. Amazon has a number of affiliates and advertisers that benefit financially from Amazon sales within the state (other companies such as Overstock.com cut ties to its New York affiliates rather than have to face sales tax liability). New York law states that companies that enter into financial arrangements with Amazon are considered Amazon vendors for sales tax purposes. The question is whether they are acting as agents of Amazon or whether they are primarily out for their own financial interests. It will be up to the courts to decide whether affiliates trigger nexus in New York or whether it’s back to the drawing board for advocates of equal tax treatment of e-commerce.

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.