Tax Foundation - Tax Foundation's "Tax Policy Blog"

Issues with CBO Numbers on Waxman-Markey Cap-and-Trade Bill

Thu, 09 Jul 2009 00:00:00 EDT

There currently exists a talking points war on the issue of numbers between proponents and opponents of the Waxman-Markey cap-and-trade bill that has passed the House of Representatives. Proponents (typically those on the left) are citing a CBO study that showed the impact would not be as regressive as some might imagine and that it would only cost the average household $175. Opponents (typically those on the right) of Waxman-Markey have cited studies like that done by Tax Foundation economist Andrew Chamberlain, which concluded that the average household would pay over $1,000 from a typical cap-and-trade bill.

So what's going on?

First, the Tax Foundation study, which serve the basis for the cap-and-trade calculator here, is not based upon Waxman-Markey. It was written well before Waxman-Markey was even brought up. The Tax Foundation study is a measure of the gross burden from cap-and-trade and did not model any specific piece of legislation that included proposals like energy rebates to selected groups chosen by Congress. Congress can spend the money from cap-and-trade revenues however it wants.

Second, the CBO study adjusts the 2020 carbon emissions allowance value based upon a GDP ratio as opposed to a price level ratio. Specifically, CBO calculates the $91.4 billion market value of allowances in 2009 levels by calculating the market value of allowances in 2020 and then multiplying that 2020 amount by the ratio of GDP in 2009 to GDP in 2020. It does not adjust to 2009 levels using CPI. I guess CBO's idea is to measure the relative impact of the allowances on the overall economy in 2020 and apply that to 2009. The CPI adjustment approach and the GDP adjustment approach will differ to the extent that real GDP is projected by CBO to grow from 2009 to 2020. (This assumption, along with the rebates and overall level of allowances, is one of the determining factors of the now-famous $175 per household figure.)

Finally, regarding the question of how CBO distributes the overall costs to households, it was a bit odd to discover that CBO makes a rather unrealistic economic assumption that was written into Waxman-Markey. CBO's report says this:

"It would also include about $14 billion in allowances given to companies that distribute electricity and natural gas, with instructions to pass those benefits on to residential customers."

Mandating that the savings accuring to a company from this "subsidy" be passed along to consumers is impossible without forcing these utility companies into a long-term economic loss position. While CBO may be assuming that this occurs however it does (just because it's in the law), a more likely scenario is that the gains from giving away these permits to companies will flow to the owners of the firm than end-use consumers. The end result is that the distributional effects of Waxman-Markey will be more regressive than CBO estimates. (This has nothing to do with the $175 per household average, which is an average of all households. This has to do with the distribution of the burden.)

Oregon Legislature Enacts Slew of Tax Hikes, Including Millionaires Tax

Thu, 09 Jul 2009 00:00:00 EDT

The new tax laws passed by the Oregon legislature and awaiting the governor's signature are "short-sighted political patchwork," according to a new Tax Foundation study by Tax Foundation Researcher Jack Mountjoy and Director of State Projects Joseph Henchman. State lawmakers have added two new personal income tax rates: a 10.8% rate on singles with taxable income over $125,000 (couples over $250,000) and an 11% rate on incomes twice that high. Both are retroactive to January 1, 2009.

Read the new Tax Foundation Fiscal Fact. Read more about Oregon's tax system.

USA Today on Tourism Taxes

Thu, 09 Jul 2009 00:00:00 EDT

USA Today has a great piece by Dennis Cauchon reviewing some of the increases in state tourism taxes this year:

Taxes on travel are soaring as states and cities target the wallets of tourists and business travelers for new revenue.

Hotel taxes, car rental fees and other charges were jacked up in many states in an effort to balance budgets by last week, when the fiscal year started in 46 states.

Popular tourist destinations were hit especially hard. Among places where taxes rose:

Hawaii. The hotel room tax increased from 7.25% to 8.25% on Wednesday and will rise to 9.25% in July 2010.

Nevada. The room tax will increase up to 3 percentage points, to a maximum of 12%. In Las Vegas, the hotel tax jumps from 9% to 12%. Reno's tax was already 12% and is not scheduled to change.

New Hampshire. The tax on rooms and restaurant meals rose from 8% to 9% and was extended to include recreational vehicles at campgrounds.

Massachusetts. Cities were given authority to raise the hotel tax from 4% to 6%, in addition to the state tax of 5.7%. Taxes on eating out will rise from 5% to 6.25% statewide, plus another 0.75% if cities choose.

New York City. The city, which raised its hotel tax March 1 to 14.25%, not counting other fees, will start charging more for Internet reservations.

Tourism-related business (rental car companies, hotels, etc.) has been fighting against a national trend to foist new taxes on non-residents who have no political power within the state. From a policy perspective, this gouging of non-residents is the wrong approach to taxation. States should focus on enacting simple broad-based taxes without favoring one type of purchase or purchaser over another. Indeed, if every state taxes hotel rooms in a competitive fashion, then a race to higher rates is going on, with each state taxing other states' residents.

More California Budget Antics

Thu, 09 Jul 2009 00:00:00 EDT

It goes on for the Golden State in the Red. From the Christian Science Monitor:

While the political theater in Sacramento is intensifying — wheelchair-bound protesters rallying against cuts to social programs were arrested Tuesday and a top lawmaker has boycotted budget meetings — analysts say that legislators are probably weeks away from coming to any agreement on how to close this state’s budget shortfall.

At the center of this drama is Gov. Arnold Schwarzenegger, who is staking his political legacy on demanding a balanced budget that comes with fiscal reforms and without tax hikes.

“This is the year that we finally have to put our fiscal house in order,” Governor Schwarzenegger said Wednesday at a press conference to pitch his proposal for cuts to the state’s social welfare programs.

While Schwarzenegger says he wants to get rid of “waste, fraud, and abuse” in the state’s welfare-to-work program — which he says could save the state $753 million this fiscal year and $1.5 billion annually — Democrats say he’s mainly trying to force through reforms that he’s been trying to make for years because the end of his term is in sight.

California's new warrants (IOUs), currently being traded on craigslist and eBay, may drop sharply in value come tomorrow:

Some banks have said they will stop recognizing the IOUs come Friday. What’s more, Fitch Ratings cut this state’s bond rating just two clicks above junk status.

More Tax Foundation research and commentary on California here.

(Hat tip to Kail for the "Golden State in the Red" descriptor)

More on Surtaxes to Fund Health Care

Wed, 08 Jul 2009 00:00:00 EDT

Echoing Gerald's post earlier today on why surtaxes are a poor way to fund additional government health care spending, Chris Edwards at Cato compares how we will stack up internationally if the proposed surtaxes become law:

The chart shows that the current top U.S. personal income tax rate (including the average state rate) is 42 percent, which is the same as the average in the 30 nations of the Organization for Economic Cooperation and Development (OECD).

President Obama already plans to increase the top federal rate from 35 percent to 40 percent at the end of 2010. That would push the combined federal-state rate to 47 percent, substantially above the average of other major industrial nations. Imposing a 4-percent surtax on top would push the top rate to 51 percent, which would be higher than many nations that were traditionally more socialist than America, including France (46%), Germany (48%), and Italy (45%).

We're about to head into a national debate over whether a "public option" or Massachusetts-style mandate-and-subsidies program (estimates ranging from $1 trillion to $1.6 trillion) are appropriate fixes for the U.S. health care system, versus other options. If (notice the if there) we're going to spend that much money, or any part of it, surtaxes are a bad way to pay for it (again, as Gerald mentioned earlier). If a government program will benefit everyone in society, the cost should be borne by everyone in society, not just a few people targeted for a punitive and distortive tax hike.

New D.C. Bag Charge is a Tax, Not a Fee

Wed, 08 Jul 2009 00:00:00 EDT

From the Examiner:

D.C. Mayor Adrian M. Fenty has signed a bill that tacks on a 5-cent fee for each disposable bag leaving grocery, drug, convenience and liquor stores.

The new fee goes into effect Jan. 1.

Most of the money raised by bag fees will go toward cleaning the Anacostia River, which is polluted by 20,000 tons of trash each year. The fee is initially expected to raise about $3.5 million annually for the cleanup, with the amount shrinking as more residents use their own bags. Some money will also go toward education and providing residents with reusable bags.

The legislation also requires that the bags that are sold be recyclable and carry a message encouraging recycling.

Putting to one side the question of whether a tax on some plastic bags to fund trash cleanup for one area is wise public policy, the new charge is properly called a selective excise tax. The bill may call the charge a fee, but it's a tax. If it were up to legislatures, few things would be called "taxes," and loose definitions help deprive taxpayer protection provisions of any meaning.

A fee funds services directed at those who pay it, or pays for regulating their conduct. Taxes produce surplus revenue for general government programs. Since the latter is what is happening here (most of the trash in the Anacostia is not plastic bags, and plastic bags pollute other things), it is a tax.

Because American antipathy to taxes is so deeply rooted in our nation's history, lawmakers often seek to raise revenue in ways to avoid the "tax hiker" label even it requires calling an obvious tax a "fee." That's what's happening here. These shell games undermine transparency by making it harder for citizens to understand the cost of government.

Check out our brief in Weisblat v. City of San Diego for a discussion of the law on tax/fee distinctions.

Obama's Proposed Limitation on Itemized Deductions Is Better than Surtax

Wed, 08 Jul 2009 00:00:00 EDT

Unfortunately in Washington and in state capitals, policymakers rarely pursue 1st best policies. In fact, it's rare that we even get the 2nd best policy. So we end up having to make judgments about two or more policy proposals that are far from the ideal. (Almost every internal argument among Tax Foundation research staff comes from this.) Such is the case we are faced with on the issue of raising revenue to finance a greater role for government in health insurance.

Beyond the question of whether government should become more involved (assuming it will) is the question of how it should raise revenue. The best proposal on the table was to limit the exclusion for employer-provided health insurance. Unfortunately, that now appears to be dead. Another proposal we've seen is the one put forth by the Obama administration, which would limit the value of itemized deductions that high-income individuals are allowed to deduct from AGI. Because this proposal touches (albeit ever so slightly) the sacred cows of the mortgage interest deduction and the charitable deduction, members of Congress in both parties don't like this either. This proposal is far better than merely raising marginal rates, which gets me to the proposal that is more likely to pass out of the House: a new surtax on high-income tax returns.

According to the Bloomberg article by Ryan Donmoyer, the surtax would be similar to the one Rangel proposed in 2007 during AMT Saga, 2007 Version. That surtax would have imposed a 4 percent surtax on all AGI above $250,000, thereby raising top statutory marginal tax rates from 35 to 39 and assuming the tax cuts expire, from 39.6 to 43.6. If you add a typical state's top marginal rate, we would be in a range of the government taking about half of every next dollar that a high-income taxpayer made.

Somehow, according to the Democrats in Congress, I guess, raising taxes on the rich is okay only if you do it in one of the worst possible ways.

While the Republicans continue to attack the administration over Obama's new initiatives on health care and cap-and-trade, at least the president is tackling the revenue side of these issues in a good way. On cap-and-trade, the climate revenues proposed in his budget don't involve handouts to various industries like the Waxman-Markey bill, and his Health Care Reserve Fund doesn't plan to significantly raise taxes in a higly distorting manner like this surtax. (The "loophole" closers on international tax are questionable.)

I'll re-state my ideal proposal:

Instead of giving away $80 billion in [carbon] permits per year, why not use that as a significant down payment on your health care agenda? And then if you believe that these revenue levels from carbon permits will not be around forever, gradually eliminate (or limit) the exclusion of employer-provided health insurance by say not indexing a $20,000 threshold for inflation. This would reduce many of the transitional effects of imposing greater limitations on the current exclusion.

I'll Have Some Margarita Mix To Drink and a Packet of Lemonade Mix For Dessert

Tue, 07 Jul 2009 00:00:00 EDT

The Streamlined Sales Tax Project (SSTP) is a group of revenue officials and experts organized for the stated purpose of bringing simplicity and uniformity to state sales taxes. States can join if they agree to amend their tax codes to comply with SSTP’s rules. Since definitions often vary from state to state, part of SSTP’s mission is to come up with standard definitions for various products and services. For example, the SSTP has devised a standard definition for "candy", which is important because many states have sales tax exemptions for groceries but not candy (more on this below).

On July 2 the Streamlined Sales Tax Governing Board committee ruled that fruit-flavored cocktail mixes, such as Jose Cuervo Margarita Mix, qualify as “soft drinks” under the organization’s Streamlined Sales and Use Tax Agreement. According to the retailer that requested the rule interpretation, Jose Cuervo

contains 0% Juice. Contains no alcohol. The intended use for the product is to combine it with liquor to produce an alcoholic cocktail. The State of Illinois currently considers this and similar items to be soft drinks because they can be directly consumed as a non-alcoholic fruit flavored ready to drink beverage.

At the same time, Tax Analysts reports (subscription required) that the SSTP ruled that “unflavored, unsweetened, ready-to-drink iced tea” is not a soft drink. To me, unsweetened iced tea seems much more like a soft drink than does a margarita mix, which is used solely for making alcoholic beverages that are definitely not soft drinks. But the SSTP’s definitions rely more on ingredients than intended use, and so they have arrived at this definition. It is interesting to note that the state of Illinois reasons in a different way, saying that the mix could possibly be consumed as a soft drink and so should be considered a soft drink.

Following both of these patterns of logic I could argue that lemonade mix should be considered candy since it is made mostly of sugar and fruit flavoring and because it could possibly be consumed as candy. I don’t know who would want to open up the lemonade packet and dump it into their mouth for an intense lemon experience, but it could be done, and if we are considering only the ingredients that make up the product or only any potential use of the product then I think I have a pretty good case.

Whether margarita mix is a ready-to-drink beverage is questionable, but the bigger question is about why the SSTP has made this soft drink distinction in the first place. The only reason can be to help states implement poor, albeit uniform, tax policy. States often exempt groceries from sales taxes, but they want to make careful distinctions about what qualifies as groceries so as not to give consumers a tax break on products like soda or margarita mix. But exempting groceries from sales tax is poor tax policy and leads to economic distortions, higher tax rates, and more volatility in revenue.

Another likely reason that the SSTP has made this distinction is that soda taxes and other sin taxes levied on unhealthy products are a popular topic these days. But protecting us from ourselves or protecting society from the harm done by an individual’s sugar consumption is not a good use of the tax code. Taxes are meant for raising revenue not micromanaging people’s lives.

About the only legitimate use I can imagine for the soft drink clarification would be for food stamp programs, since states generally want food stamp participants to use the programs only for necessities and not luxuries like soft drinks. But this is not a sales tax issue. It is an issue for food stamp program administrators.

Michigan and Ohio are Not Examples of "Failed Low Tax Policy"

Tue, 07 Jul 2009 00:00:00 EDT

A curious argument we're seeing in state budget debates lately are that some of the states in the most serious trouble and typically considered high-tax states, are actually low-tax states, proving that low taxes don't work! We've seen this described of California, Michigan, and Ohio recently.

None of these states are low-tax states. For an explanation of why California is a high-tax state even though it has Proposition 13, see this post earlier today.

As for Michigan, we encountered this curious assertion from a state legislator:

If lower taxes were the sole key to a successful state, i.e., one with high per capita income and low unemployment, this decade should have been good for Michigan. In the 1990s, our state's income tax rate was 4.4%, and our main business tax, the Single Business Tax, had a rate of 2.35%. Most of this decade, we have had an income tax of 3.9%; our SBT was down to 1.9%.

In 2000, Michigan spent 9.49 cents out of every dollar in personal income on state government. Today we are spending 7.69 cents of every dollar earned on state government - a 19% reduction in overall state tax burden.

Three points. First, Michigan's admirable flat income tax isn't exactly low compared to other flat taxes. Michigan's 4.35% is below Colorado's 4.63%, Massachusetts's 5.3%, and Utah's 5%, but above Illinois's 3%, Indiana's 3.4%, and Pennsylvania's 3.07%. Second, the Single Business Tax is an awful tax, a gross receipts tax, that is enormously distorting whatever the rate is. Third, our State-Local Tax Burdens report, which calculates how much each state's residents pay in state-local taxes, finds that Michigan residents in 2000 paid 9.4% of their income in state-local taxes. In 2008, it was still 9.4%. Whomever that mythical tax cut went to, it wasn't Michigan residents.

Now, Ohio:

Four years ago, the Ohio General Assembly ap proved the biggest overhaul of Ohio's tax system in a generation. The income tax and business taxes were slashed in overall tax cuts worth more than $2 billion a year. The idea was to spur investment and jobs. As legislators meet in Columbus to decide how to balance the state budget, it's a good time to ask: Has tax reform worked?

There has been no such tax cut in Ohio. Again, our Burdens report found that Ohio residents paid between 10.3% of their income in state-local taxes in 2005 and 10.4% in 2008. As this rebuttal notes, the original writer conveniently leaves out Ohio's awful gross receipts tax enacted as part of the "tax reform" in 2005 and myriad local income taxes. As we said last month:

True, Ohio will soon have no corporate income tax. But it has something even worse: a gross receipts tax, called the Commercial Activities Tax (CAT). This pernicious tax hits the receipts of profitable and unprofitable companies alike, and pyramids through the chain of production, distorting price signals. Essentially all public finance experts revile such taxes, and they hit business activity hard. The CAT is probably worse than the tax it replaces, and for the moment, Ohio businesses have to pay part of both of them.
Second, while the state has been reducing its high income tax rates to a medium top individual income tax rate, Ohio also has a lot of local income taxes. The rates and brackets are numerous and complex (the state rates go to the thousandth of a decimal point, and there are 5 brackets below $40,000, for instance).

We can certainly debate whether or not low tax policy is best for the certain economic and budgetary situation. But claiming that California, Michigan, and Ohio are low-states states is just not true.

(PS, even if low taxes didn't work, does that necessarily mean that high taxes will?)

San Francisco Considering Local Beer Tax

Tue, 07 Jul 2009 00:00:00 EDT

From the San Francisco Chronicle (below the story about California lending Joe Montana and a questionable business associate $47 million to build low-income housing):

Local labor is working to put a "per drink" booze tax on San Francisco's November ballot.

Board of Supervisors President David Chiu tells us the big question is whether the supervisors "can do the homework" in time to make the ballot deadline.

Last month we noted a separate proposal for a San Francisco local cigarette tax.

Pittsburgh's experience with a local drink tax hasn't been too great. As we noted with that tax proposal:

Why should alcohol and car rentals be targeted as the only possible other sources of local tax revenue? Why not tax potato chips or ketchup or even Steelers merchandise? Why not put every consumer item in a hat and pick out one item to impose a heavy tax upon? Those may sound like ridiculous targets, but they're just as legitimate as arbitrarily picking alcohol.

If the argument is that alcohol imposes negative external costs on Allegheny County, then the tax should be levied based upon the alcoholic content, not the retail price of the item. Suppose it is Tequilla Night at the bar and drinks are only $2 while a beer is $4. There is going to be a lot more alcohol consumed in that Tequilla shot than in a beer, but by the logic of this bill's supporters, the beer will be hit with a larger tax. If alcohol consumption is a negative externality, then the tax should also apply to liquor store sales.

A final problem with this tax is the obvious issue of border shopping. A tax that is levied merely at the county level rather than at a state or federal level is much more likely to lead people to shop outside the taxing jurisdiction. This is especially true for those living right on the county line.

Politicians need to stop targeting single items for taxation (or possible taxation), despite their political appeal, and those citizens who believe in individual liberty need to ask these policymakers to explain why they want to target alcohol. Do they want to bring prohibition back? If they say no, then ask them what tax rate they would prefer and make them justify that amount on that specific item.

California is Not a Low-Tax State, Despite Proposition 13

Tue, 07 Jul 2009 00:00:00 EDT

Joel Kotkin at Forbes wonders what killed California's economy:

It took some amazing incompetence to toss this best-endowed of places down into the dustbin of history. Yet conventional wisdom views the crisis largely as a legacy of Proposition 13, which in effect capped only taxes.

This lets too many malefactors off the hook.[...] To the surprise of many prognosticators, the state government did not go out of business. It has continued to expand faster than either its income or population. Between 2003 and 2007, spending grew 31%, compared with a 5% population increase. Today the overall tax burden as percent of state income, according to the Tax Foundation, has risen to the sixth-highest in the nation.

See our State-Local Tax Burdens rankings here. That California remains one of the highest-tax states in the country is a crucial point undermining the "Proposition 13 caused it all" thesis. That and a time lag of several decades. Other than property taxes, essentially every other California tax is among the highest of the states.

As we noted last month:

California is a high tax state. They are sixth highest in state-local tax burden as a percentage of state income. The sales tax is the highest state rate in the country even before the recent 1% increase, and numerous county rates keep them in the top 5 of state-local combined rates. Their individual income tax top rate is the second highest in the country, eclipsed only recently by Hawaii, and is sixth highest in the country in terms of collections. The corporate income tax is one of the highest in the country and sixth highest per capita in collections. Even the gas tax is the third highest in the country and the state Lottery has the fifth highest implicit tax rate in the country. Only on property taxes is California "low": 28th highest in collections per capita.

The Tax Foundation's annual State Business Tax Climate Index evaluates tax structures for business-friendliness, and the 2009 edition ranked California 48th, or third worst. The individual income tax ranked second to last, corporate income tax ranked 45th, and sales tax ranked 43rd. (Property tax structure was a bright spot, ranking 15th in the country.)

With these comparisons, and the enormous growth in state spending, it's hard to say that California's problem is insufficient taxation. Ultimately, California voters need to decide whether they are willing to pay the taxes to fund the programs they want. The tax system prevents this from happening now, due to the state's overreliance on taxing capital gains, corporations, and high-income earners. Most Californians rightly think additional spending is a free lunch that they won't have to pay for.

Read more Tax Foundation research and analysis on California here.

Read the rest of the Forbes piece here.

Broadening or Redefining the Base

Mon, 06 Jul 2009 00:00:00 EDT

A recent Op-Ed in the Los Angles Times makes the claim that "Amazon Taxes" are just a broadening of the tax base:

A better approach would be to make the sales tax requirement broader. Not to require more or higher sales taxes, but to require any online seller that sells to Californians to add the appropriate tax instead of leaving it to the buyer to add it up and pay it separately.

Amazon taxes represent an attempt to do more than broaden the base but to fundamentally redefine that base. The standard determination of sales tax liability has been based around the physical presence determination. This understanding has been upheld by the Supreme Court through the 1992 decision in Quill Corp. v. North Dakota.

Taxes which redefine the base to include the taxation of non-voting out-of-state business create greater complexity, less neutrality and distort economic decision making. All this and they might violate the Constitution.

Los Angeles County Sales Tax Goes Up; Pico Rivera and South Gate Pay 10.75%

Mon, 06 Jul 2009 00:00:00 EDT

On July 1, 2009, the sales tax in Los Angeles County went up another half-point. Last November, voters approved Measure R with 67% of the vote. The measure imposed the half-cent sales tax for 30 years and also approved a series of transportation projects to be funded by the tax. The tax is the third half-cent sales tax for transportation in Los Angeles County, and is expected to raise $40 billion over its life.

(A side note: Measure R's half-cent sales tax is expected to cost the average person just $25 per year. That low number illustrates how California's sales tax base is full of exemptions. California has one of the narrowest sales tax bases in the country.)

The boost in sales tax rates is attracting attention, since there's now a substantial disparity with neighboring areas. The Los Angeles Times noted that aside from five communities with local sales taxes, L.A. county has a 9.75% total sales tax rate (8.25% base state rate plus 1.5% in transportation taxes). Neighboring Orange, Riverside, and San Bernardino Counties have rates of 8.75%, and Ventura County is even lower at 8.25%. These rates, of course, reflect the statewide sales tax increase that went into effect in April.

Two Los Angeles County cities have the highest sales taxes in the state. Pico Rivera and South Gate consumers will now pay 10.75% on their purchases. (Google searching "South Gate corruption" is interesting reading.) Three other cities (Avalon, El Monte, and Inglewood) have rates of 10.25%.

Seattle Mayor Moves to Repeal "Head Tax" on Solo Commuters

Mon, 06 Jul 2009 00:00:00 EDT

Safe Walks, a Seattle-based group that pushes for improved sidewalks and other city infrastructure, discusses an emerging debate about that city's interesting "head tax." The $25-a-year tax is imposed on employees who drive alone to work. It's a few years old, and some city officials now claim that it is harming job creation.

Suggestion for Progressive Policymakers

Sun, 05 Jul 2009 00:00:00 EDT

Right now, two major agenda items are in front of the U.S. Congress: health care reform and cap-and-trade. Those on the left of the political aisle (progressives) are seeking policies that would promote greater access to health care for many in America, while also trying to combat what they believe is a major problem: climate change.

But the current cap-and-trade bill (Waxman-Markey) is terrible. Even if you believe global warming is a problem, Waxman-Markey is a ridiculous way of trying to combat it. The biggest problem is the amount of giveaways in the bill. Over 80 percent of the emissions permits are just given away. That could end up leaving about $80 billion on the table per year. That's $80 billion that could be raised with little economic distortion.

Now move over to health care. Democrats in Congress are looking everywhere for revenue...soda taxes, higher taxes on alcohol, limiting deductions for high income people, you name it. They just want money to finance their goal of universal health care.

Which brings me to this suggestion for the progressives in Congress. Instead of giving away $80 billion in permits per year, why not use that as a significant down payment on your health care agenda? And then if you believe that these revenue levels from carbon permits will not be around forever, gradually eliminate (or limit) the exclusion of employer-provided health insurance by say not indexing a $20,000 threshold for inflation. This would reduce many of the transitional effects of imposing greater limitations on the current exclusion.

This is not a first-best policy scenario in my view as I don't necessarily agree with all the initial assumptions, but it's better than anything that I have seen proposed by either Congress or the administration. It's better from an economic efficiency perspective, and it's probably even better from the point of view of most progressives. The only parties that wouldn't like this I guess are the special interests seeking protection for their industries from cap-and-trade taxes.

Taxing the Fourth of July

Fri, 03 Jul 2009 00:00:00 EDT

One of the Tax Foundation's principles of sound tax policy is neutrality, which states that since taxes pay for general public services enjoyed by everyone, they should be levied broadly rather than on a group of people who happen to purchase a particular product or service. The fundamental purpose of taxes is to raise necessary revenue for programs, not to micromanage a complex market economy with subsidies and penalties. High taxes on certain goods only distort economic activity. Put another way, the principle of neutrality says that high tax rates on specific goods or services are simply unfair.

The Fourth of July is in part a celebration of independence from unfair taxation, so how ironic would it be for governments to apply unfairly high taxes to items used in Independence Day celebrations? Well, that's exactly what some states do.

Cleburne County, Alabama, levies an 8 percent tax on fireworks:

The net proceeds of the first two cents ($.02) per one dollar ($1) gross sales of any such tax levied and collected shall be distributed equally among the volunteer fire departments located in the county. The remaining net proceeds shall be paid to the county general fund.

Firefighters serve all the members of a community, so it would be more fair to fund fire departments with taxes that are levied on everyone, not simply on those who purchase fireworks.

West Virginia store owners must pay (and probably pass on to the consumer) a "Sparkler and Novelty Registration Fee" in order to sell sparklers and novelties. (We wonder whose job it is to decide what qualifies as a "novelty." Just imagine the desks in the WV Department of Revenue covered with sparkers, glow worms, and noisemakers as weary government officials test them to determine which items are sufficiently novel or sparkly to merit a special fee.) While fireworks are illegal in the state, this annual fee applies to a detailed list of items often used at holiday celebrations, especially the Fourth of July. They include the following (from the West Virginia Tax Department):

Wire sparkler consisting of wire or stick coated with a nonexplosive pyrotechnic mixture of 100 grams or less per item, that produces a shower of sparks upon ignition
Snake and glow worms composed of pressed pellets of a pyrotechnic mixture that produce a snake-like ash when burning
Trick noisemakers which produce a small report designed to surprise the user
Other sparkling devices which emit showers of sparks and sometimes a whistling or crackling effect when burning, do not detonate or explode, are hand-held or ground-based, cannot propel themselves through the air and contain not more than 75 grams of chemical compound per tube, or not more than a total of 200 grams if multiple tubes are used

And in Texas, people buying fireworks must pay a 2 percent tax to support volunteer fire departments.

Something for Fourth of July revelers to contemplate as they enjoy their fireworks and sparklers.

Business Week: Job Creation Tax Incentives Don't Help Economy

Thu, 02 Jul 2009 00:00:00 EDT

From Business Week:

Companies taking advantage of lucrative tax incentives are jumping from state to state—and bringing their jobs with them. Sure, some states will see job gains, but they may be only temporary. As a result, the states' efforts likely won't improve the national jobs picture. The tax-break boom "undermines the economic union, and it misallocates resources," says Arthur J. Rolnick, senior vice-president and research director for the Federal Reserve Bank of Minneapolis. "It amounts to economic warfare among states."

More here.

California Issuing State Warrants to Pay Bills

Thu, 02 Jul 2009 00:00:00 EDT

Without a state budget and about out of cash anyway, California Controller John Chiang began issuing the first state IOUs to pay state bills. Here are items from a helpful FAQ on these new California bucks (an unrelated collectible currency is pictured at right):

1. What is a registered warrant?

A registered warrant is a “promise to pay,” or an IOU, that is issued by the State when there are not enough funds to pay all of its General Fund obligations. Registered warrants bear interest and are redeemable by the State Treasury only when the General Fund has sufficient money. If the Legislature and Governor fail to enact budgetary solutions that provide enough cash for the State to pay all of its bills by July 2, the Controller will begin issuing registered warrants. Assuming there is adequate cash in the Treasury, those warrants may be redeemed on October 1, 2009. Both the issue and the maturity date will be printed on the warrant.

3. Why is the State issuing registered warrants?

Without action by the Governor and Legislature to stave off a severe cash deficit of almost $3 billion at the end of July, and more than $3.5 billion in August, the Controller will be forced to issue individual registered warrants, also called IOUs, for many payments.

7. What happens if my financial institution will not accept the registered warrant?

You may decide to open an account at another financial institution that will accept registered warrants, or you will have to hold the warrant until it matures on October 1, 2009.

14. How much interest will the State pay?

The State’s Pooled Money Investment Board will set the interest rate for registered warrants at an emergency meeting on July 2. The State will pay that interest from the time the warrant is issued until it matures on October 1, 2009. As soon as the rate is set, this Web site will be updated with more information.

That meeting, by the way, set an interest rate of 3.75%. I wonder how much of a discount people will demand to take California dollars instead of U.S. dollars?

New Hampshires New Taxes Bad for Businesses and Poor

Thu, 02 Jul 2009 00:00:00 EDT

Gov. John Lynch (D) signed into law the state's budget, which increases the cigarette tax by one-third, to $1.78 per pack, increases restaurant and hotel taxes to 9%, and imposes a 5% dividends tax on limited liability companies (LLCs). A new 10% tax on gambling winnings over $600 was also enacted, as well as increased car and boat registration fees.

The cigarette tax is an easy political gimmick because it is targeted at a minority; however, it is poor tax policy. For Governor Lynch, it's nice to pretend that cigarette taxes will come out of the pockets of Big Tobacco. In reality, cigarette taxes hit mostly low-income individuals more than any other income group. Notice, however, that N.H. has been careful to keep its rate lower than Massachusetts's so as not to stifle the bargain hunting traffic coming across the border to shop.

One tax which has seen some resistance from the business community is an extension of the Rooms Tax to campers. Typically, room and meal tax just applies to places like hotels. David Edgerly, manager of Great Bay Camping in Newfield N.H., says a 9 percent meal and room tax increase could put many campgrounds out of business. However, principled tax policy calls for all lodging to be taxed equally, so the state is not without justification for this change.

This budget continues the recent trend in the Northeast of taxing out-of-staters. Maine just passed numerous items specifically designed to disproportionately tax tourists such as car rentals, entertainment and recreation services. My colleague Kail Padgitt predicted in a recent report that "this tax-your-neighbor strategy is likely to draw retaliation from neighboring states and distort economic decision making." Were New Hampshire legislators more comfortable hiking taxes on tourists because of this trend?

Governor Lynch is imposing a 5% dividends tax on the owners of limited liability corporations (LLCs). While all types of businesses, including C-Corporations, S-Corporations and LLCs, pay the same state business profits and enterprise tax in New Hampshire, the owners of LLCs have been the only ones to avoid tax on any interest or dividends earned. No longer.

By extending the 5% interest and dividends tax to include the owners of LLCs, the state seems to be moving closer to treating three business structures equally. People who accuse the state of levying a double tax are correct: by taxing business income at the entity level and then again at the personal level, the state is double-taxing business income. However, there's no good reason to favor LLCs over other business forms. Unsurprisingly, it has been the fastest growing business structure in the state.

Ideally, the goal should be to create a tax structure which fosters competition and should be neutral to firm structure. If this truly closed loopholes, it ought to reduce the rate as well in order to encourage a competitive business environment. This tax may move closer to treating firms equally. However, there are many variables in corporate laws that create distortions outside of just the tax rate. Preferably, there should be a low, broad rate which is neutral to firm structure, and business owners would choose the best firm structure for other reasons than tax liability.

Gas Tax Change in North Carolina

Thu, 02 Jul 2009 00:00:00 EDT

Our friends at the John Locke Foundation in North Carolina offer some insight into the recent change to their state gas tax. As we mentioned yesterday, expiring yesterday was a cap on the state's gas tax, which normally should change with the wholesale price (not inflation) each year but has been prevented from doing so for several years.

The cap has now been transformed into a floor, which prevents the gas tax from going any lower. Experts predict that the gas tax may go up about 10 cents per gallon due to the change. According to Joe Coletti at John Locke, the tax would have fallen to 27 cents per gallon yesterday, but the floor prevented it from dropping below 29 cents per gallon.

Guess legislators aren't listening to complaints about high gas taxes anymore.

Top State Income Tax Rates

Thu, 02 Jul 2009 00:00:00 EDT

The Los Angeles Times blog, referencing our list yesterday of last minute state budgets, states a new fact:

California has lost the distinction of having the highest personal income tax rate among the 50 states.

True! Following a flurry of legislative activity in recent weeks, California no longer has the highest individual income tax top rate in the United States. Here are state income tax rates over 8% now:

State	Individual Income Tax Rates
Hawaii	11% (on income over $200,000)
Oregon	11% (on income over $250,000)
New Jersey	10.75% (on income over $1 million)
California	10.55% (on income over $1 million)
New Jersey (2nd bracket)	10.25% (on income over $500,000)
Hawaii (2nd bracket)	10% (on income over $175,000)
Oregon (2nd bracket)	9.9% (on income over $125,000)
Rhode Island	9.9% (on income at the federal top rate)
California (2nd bracket)	9.55% (on income over $47,055)
Vermont	9.4% (on income at the federal top rate)
Oregon (3rd bracket)	9% (on income over $7,600)
Hawaii (3rd bracket)	9% (on income over $150,000)
Rhode Island (2nd bracket)	9% (on income at the second highest federal rate)
Iowa	8.98% (on income over $63,315)
New York	8.97% (on income over $500,000)
Vermont (2nd bracket)	8.9% (on income at the second highest federal rate)
Maine	8.5% (on income over $19,450)
California (3rd bracket)	8.25% (on income over $37,233)
Hawaii (4th bracket)	8.25% (on income over $48,000)
Vermont (3rd bracket)	8.25% (on income at the third highest federal rate)
New Jersey (3rd bracket)	8% (on income over $400,000)

Notes: Rhode Island offers an optional flat tax with fewer deductions, not shown here. Iowa allows deduction of federal income tax, reducing their effective tax rate. Maryland is not included, although substantial county income taxes produce a top rate of over 9%. Maine has passed a bill to reduce their income tax top rate to 6.85%, effective January 1, 2010. Local income taxes not included.

Soda Taxes are Highly Regressive and Not Too Effective at Reducing Obesity

Wed, 01 Jul 2009 00:00:00 EDT

The National Center for Policy Analysis summarized recent studies on the effect of soda taxes:

Increasing the soft drink tax by 55 percentage points would decrease the obese and overweight population by only 0.7 percentage points.
That means a 27.5 cent tax on a 50 cent can of soda would only lower the number of the obese and overweight from 66 percent to 65.3 percent of the population.

Such excise taxes are also highly regressive:

On average, the bottom fifth of income earners spend 1.7 percent of their gross income on alcoholic beverages compared to 0.6 percent for the top 20 percent.
They spend 2.5 percent of income on tobacco products versus 0.2 percent for the top 20 percent.
They spend 9.9 percent on gasoline and motor oil compared to 2.3 percent for the top 20 percent.

See their full report here.

Happy New Fiscal Year to 46 States

Wed, 01 Jul 2009 00:00:00 EDT

Today marks the first day of Fiscal Year 2010 for most states.

There are four states that will begin fiscal year 2010 at some other point, including:

New York (April 1st), technically called fiscal year 2009-2010
Texas (Sept. 1st), if anybody knows why they chose a month that is not even the end of a quarter, send us a note as we're curious
Michigan (Oct. 1st), same as federal government
Alabama (Oct. 1st), same as federal government

The federal government's fiscal year 2010 will begin on October 1st with a projected deficit of about $1.4 trillion. Like the federal government, most states are probably saying good riddance to F.Y. 2009, but will F.Y. 2010 be any better?

Note: The federal government's fiscal year used to begin on July 1 each year, but was changed in 1976 to allow Congress more time to enact a budget. Yeah...that worked well.

Some States Approve Last Minute Budgets

Wed, 01 Jul 2009 00:00:00 EDT

For many states, Fiscal Year 2010 starts today. Several states went down to the wire in passing their budgets:

Arizona Sends Budget to Governor Without Sales Tax Increase: At about 3AM, lawmakers approved a budget plan that does not include either Gov. Jan Brewer's (R) requested 1% increase in the sales tax, nor a suggested 2.8% flat income tax proposal. Brewer has ten days to sign or reject the budget.

California Still Negotiating: Gov. Arnold Schwarzenegger (R) has threatened to veto any budget that includes tax increases, but the Legislature is pushing a plan that raises vehicle and tobacco taxes, and imposes an oil severance tax, and no agreement is close. Without changes, the state's continuation budget would involve spending $2 billion more per month than the state takes in with revenue. The state's comptroller is preparing to issue $3 billion in IOUs to fund July expenses.

Connecticut Still Negotiating: Last-minute talks did not reach agreement, and Gov. M. Jodi Rell (R) issued an executive order to spend $1.4 billion on essential services through July (essentially all state operations except local grants). Rell has previously vetoed a spending plan that included an increase in the state income tax from 5% to 7.5%.

Delaware Hikes Income Tax and Franchise Tax: Just before dawn, Gov. Jack Markell (D) signed into law the state's budget, which cuts state employee pay by 2.5% and raises the state's top income tax rate by 1% to 6.95% for four years, following rejection of an effort to increase liquor taxes. The state's gross receipts and corporate franchise taxes also went up.

Illinois Still Negotiating: For the third year in a row, Illinois started July 1 without a budget. Gov. Pat Quinn (D) has threatened to veto any budget that is "underfunded," and is urging a 50% increase in income taxes. The House this week passed a measure to borrow $2.2 billion, paid off over the next five years, to fund initial operating expenses, but Quinn urged the Senate to reject the measure. The Legislature has been in special session since last week and continues to meet.

Indiana Approves Budget With No Tax Increases: The Legislature approved the budget with five hours to spare, and it includes parameters set by Gov. Mitch Daniels (R): no tax increases, keeps $1 billion in state reserves, has cuts for any spending increases above his recommended spending level, does not borrow from pension funds, and uses stimulus funds for one-time purposes (infrastructure and final grant installments). Democrats say the plan will kill off public schools (the plan increases education spending by 1.3%).

Massachusetts Hikes Sales Tax: Gov. Deval Patrick (D) signed the state's budget on Monday, which includes an increase in the state sales tax from 5% to 6.25%. Taxes on hotels, alcohol, meals, and satellite dishes also went up. Towns bordering New Hampshire are especially wary of the sales tax increase.

Mississippi Budget Includes Hospital Tax: Mississippi lawmakers reportedly approved the state's budget late last night after a three-day special session. The bill includes a proposal by Gov. Haley Barbour (R) to tax hospitals to fund Medicaid, a key sticking point.

New Hampshire Hikes Some Taxes: Gov. Jon Lynch (D) signed into law the state's budget, which increases the cigarette tax by one-third to $1.78 per pack, increases restaurant and hotel taxes to 9%, and imposes a 5% dividends tax on limited liability companies (LLCs). A new 10% tax on gambling winnings over $600 was also enacted, as well as increased car and boat registration fees.

New Jersey Raises Taxes: Gov. Jon Corzine (D) signed into law the state's budget, which imposes three-year taxes on high-income earners: 8% on income over $400,000; 10.25% on income over $500,000; and 10.75% on income over $1 million. [Different news reports say the top rate is 10.75%, 10.76%, or 10.97%. We're fairly sure it's 10.75%.] The cigarette tax goes up to $2.70 per pack, and taxes on liquor and wine (but not beer) are also increasing.

North Carolina Still Negotiating: Lawmakers approved a two-week temporary budget, cutting General Fund spending by 15%, while they debate between the House plan to raise the sales tax by a quarter point and impose a higher income tax on those making more than $200,000 a year, and the Senate plan to lower sales and income tax rates but broaden the sales tax. Expiring today is a cap on the state's gas tax, which normally changes with wholesale prices each year but has been prevented from doing so for several years. Experts predict that the gas tax may go up about 10 cents per gallon due to the change, which includes a new floor to prevent the gas tax from dropping. Suggestions that North Carolina may force out-of-state Internet companies with in-state affiliates to collect North Carolina taxes led to Amazon.com ending its North Carolina commission program.

Ohio Still Negotiating: Gov. Ted Strickland (D) approved a 7-day temporary budget, cutting General Fund spending by 30%. Strickland is pushing to raise money by installing video lottery terminals in state horse-racing tracks.

Oregon Hikes Income Tax: Gov. Ted Kulongoski (D) plans to sign a budget that imposes a three-year high-income earners income tax of 11%, tied with Hawaii for the highest state income tax rate in the country. The bill also increases the corporate minimum tax from $10 to a sliding scale topping out at $100,000. Opponents of the tax increases may take them to the ballot.

Pennsylvania Still Negotiating: Officials continued negotiations last night with no breakthrough. Gov. Ed Rendell (D) is pushing a three-year increase in the state's flat income tax from 3.07% to 3.57% and rejects the idea of spending less than last year, while Republicans are pushing spending cuts. Unless a budget is enacted, state workers will receive partial paychecks on July 17 and 24 and none thereafter.

Rhode Island Keeps Optional Flat Tax: Gov. Don Carcieri (R) said in a statement that would have preferred to veto the budget or let it become law without his signature, but the inevitability of it being enacted over his objections and the short timeframe led to him signing it yesterday. Carcieri's proposal to eliminate the corporate income tax was not enacted, although the state will keep its optional flat tax, which we discussed here. The estate tax exemption was increased to $850,000, short of Carcieri's recommended $1 million. The budget also increases the state's unique lower rate capital gains taxes, raises the gas tax by 2 cents, and imposes a tax collection obligation on out-of-state Internet companies with in-state associates. Amazon.com responded to the budget by firing its Rhode Island affiliates.

Wisconsin Raises Income Tax: Wisconsin's budget, approved by Gov. Jim Doyle (D), imposes a new top income tax bracket of 7.75% on income over $225,000, up from 6.75%. The film tax credit also becomes refundable.

Colorado Springs Offers Amnesty to Sales Tax Cheats

Mon, 29 Jun 2009 00:00:00 EDT

Tax amnesties pop up now and then at the state level, but Colorado Springs, Colorado is doing a local one:

The City of Colorado Springs (City) has established a Tax amnesty program to run for three months, from May 12, 2009 through August 14, 2009, which will include sales and use taxes paid to the City.

The program provides an opportunity for taxpayers to pay any unreported taxes while avoiding penalties. In addition, interest charges on delinquent taxes will be reduced to 6% per annum or 1/2% per month.

Taxes eligible for amnesty includes City sales, use, lodgers, auto rental, bicycle and movie admission.

Ah yes, they always say it's a one-time thing. Oklahoma has done its one-time amnesty at least twice (some say three times) since 2002.

Amnesty programs have a downside in that people who've dutifully paid their state taxes will feel left out. (Those who have already been caught and are paying back taxes are also ineligible.) Tax cheats may wait for such programs to come around again if a state repeatedly offers amnesty over a several-year period, he said. People will come to expect them.

Tax Foundation - Tax Foundation's "Tax Policy Blog"

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USA Today on Tourism Taxes

More California Budget Antics

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New D.C. Bag Charge is a Tax, Not a Fee

Obama's Proposed Limitation on Itemized Deductions Is Better than Surtax

I'll Have Some Margarita Mix To Drink and a Packet of Lemonade Mix For Dessert

Michigan and Ohio are Not Examples of "Failed Low Tax Policy"

San Francisco Considering Local Beer Tax

California is Not a Low-Tax State, Despite Proposition 13

Broadening or Redefining the Base

Los Angeles County Sales Tax Goes Up; Pico Rivera and South Gate Pay 10.75%

Seattle Mayor Moves to Repeal "Head Tax" on Solo Commuters

Suggestion for Progressive Policymakers

Taxing the Fourth of July

Business Week: Job Creation Tax Incentives Don't Help Economy

California Issuing State Warrants to Pay Bills

New Hampshires New Taxes Bad for Businesses and Poor

Gas Tax Change in North Carolina

Top State Income Tax Rates

Soda Taxes are Highly Regressive and Not Too Effective at Reducing Obesity

Happy New Fiscal Year to 46 States

Some States Approve Last Minute Budgets

Colorado Springs Offers Amnesty to Sales Tax Cheats

Oregon Legislature Enacts Slew of Tax Hikes, Including Millionaires Tax

New Hampshires New Taxes Bad for Businesses and Poor