Truth and Nonsense about Progressive Solutions to State Budget Crises


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As the current economic storm continues to batter state budgets, policymakers in numerous states are continuing to talk of raising taxes to help mitigate cuts in state services.  In Maryland, lawmakers are debating an extension of the state’s temporary “millionaires’ tax,” while a new policy brief out of Georgia proposes to eliminate an unwise (and rare) deduction currently only offered in just seven other states — Arizona, Hawaii, Louisiana, Oklahoma, New Mexico, Rhode Island, and Vermont.

Maryland's legislature is currently considering whether to extend a temporary "millionaires’ tax" enacted as part of a major 2007 tax reform effort. ITEP staff testified Thursday at a hearing of the state House Ways and Means Committee. ITEP's testimony highlighted several important details, such as the fact that the millionaires’ tax modestly reduces the overall unfairness of Maryland's tax system. With the tax in place, low-income families still pay more of their income in Maryland taxes than millionaires must pay — and if the tax is repealed, this inequity will become even worse.

The testimony also explains why claims by anti-taxers that millionaires have fled the state in response to the millionaires’ tax are unfounded. As ITEP's analyses have shown, the primary cause of the decline in the number of Maryland millionaires in the past year is that they stopped being millionaires due to the recession.  The claim that the decline in the number of millionaires is due to the high income tax would be news to lawmakers in Utah (the only other state in which there is publicly available data on the change in the number of millionaires between 2007 and 2008). In the same year that Maryland lost 30 percent of their millionaires, Utah lost 60 percent of theirs. And while Maryland hiked their income tax on wealthy taxpayers the previous year, Utah cut theirs.

In Georgia, some attention is beginning to be paid to a progressive idea passed by the New Mexico legislature just last week.  On Thursday, the Georgia Budget and Policy Institute (GBPI) released a brief explaining why the state’s deduction for state income taxes paid — which costs the state $450 million each year — should be eliminated to help fill the state’s budget gap.  The vast majority of states already disallow this deduction (which originates from federal tax rules) in order to avoid the bizarre, circular situation in which one’s state tax payment can be used to reduce their state taxes.  

Finally, a new report from the Center on Budget and Policy Priorities (CBPP) helps put these developments in Maryland and Georgia into perspective.  The report notes that states have increased taxes by a combined $32 billion during the current recession.  In total, thirty three states have raised taxes to help fill their budget gaps, with twenty two of those having enacted “significant” tax increases, meaning increases that total more than 1 percent of their total revenues.  The report’s appendices provide an excellent summary of the multitude of state tax changes that have been enacted during these difficult budgetary times.

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