Delaware News


State Rundown 5/18: Tax Debate Heat Wave Hitting States


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This week saw tax debates heat up in many states. Late-session discovered revenue shortfalls, for example, are creating friction in Delaware, New Jersey, and Oklahoma, while special sessions featuring tax debates continue in Louisiana, New Mexico, and West Virginia. Meanwhile the effort to revive Alaska's personal income tax has cooled off.

-- Meg Wiehe, ITEP State Policy Director, @megwiehe

  • With only a couple days left of regular session, Oklahoma lawmakers continue to search for ways to fill a nearly $900 million shortfall. A revenue package to increase the cigarette tax, gas tax, and production of oil and gas failed to pass the House.
  • Delaware could raise its income tax rates and increase the corporate franchise tax for the largest businesses operating in the state as lawmakers and Gov. John Carney work to close a $400 million budget gap.
  • New Jersey got unpleasant "April surprise" this week, learning that underperforming April revenues have created a $527 million budget shortfall that must be addressed before the end of June. To do so, Gov. Chris Christie's administration will delay paying out money owed to local jurisdictions for homestead property tax credits and raid the state's Clean Energy Fund. The administration has not proposed reversing the harmful tax cuts passed last year, which will cost the state more than $1 billion annually.
  • Meanwhile, some New Jersey lawmakers are looking for ways to modernize Garden State's revenue system. The state could become the latest to legalize and tax recreational marijuana, via a bill that would legalize sales and possession of small amounts and add a tax on those sales that grows from 7 percent to 25 percent over five years. Another bill that has been approved by the Assembly Budget Committee would subject Airbnb stays to the same taxes that apply to hotel visits.
  • West Virginia’s special session continues to highlight a disconnect between the goals of the Senate and the House. Paring back the state income tax remains a sticking point.
  • New Mexico will go into special session starting May 24th where Gov. Martinez wants to resurrect a major tax reform package from this past legislative session. HB 412 proposed significantly expanding the Gross Receipts Tax by eliminating existing exemptions (including taxing food) while also changing the personal income tax rates to a flat 5 percent.
  • Prospects of significant tax reform this legislative session are dimming as lawmakers on the House Ways and Mean Committee have rejected all major tax reform proposals recommended by Louisiana's Task Force on Structural Changes in Budget & Tax Policy. However, a proposal to raise the gas tax has passed out of committee and will go to the full House for consideration.
  • A Nevada bill to exempt feminine hygiene products from sales tax appears poised to pass, having cleared the Senate with unanimous approval. Businesses in the state could also see a payroll tax cut due to an automatic trigger put in place in 2015.
  • Over the weekend, the Alaska Senate took up the House's proposal to bring back a state personal income tax. The bill was defeated largely along party lines, leaving the state to deal with a multi-billion revenue deficit.
  • Minnesota Gov. Mark Dayton vetoed multiple budget bills this week—sending lawmakers back to the drawing board with only six days left in the session. Key sticking points include disagreements over allocation of the state surplus, with Republican legislatures wanting significant tax cuts and the governor preferring increased spending investments.
  • Arizona lawmakers passed a $9.8 billion budget which included deep service cuts and a handful of tax breaks. In other news, former Gov. Jan Brewer admitted that the size of previous tax cuts to corporations were a mistake, leaving Arizonans short for services.
  • Maryland has become the first state to allow a tax credit for residential and commercial energy storage systems.
  • Having already declined to raise Alabama's state gas tax earlier in the session, lawmakers this week also killed a bill that would have allowed counties to raise their own gas taxes if approved by a local vote. Until elections are behind them or unless a federal infrastructure plan requires state matching funds, lawmakers say, a gas tax update in Alabama is unlikely.

What We're Reading...  

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email. 


State Rundown 3/29: More States Looking to Raise or Protect Revenues Amid Fiscal and Federal Uncertainty


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This week we see West Virginia, Georgia, Minnesota, and Nebraska continue to deliberate regressive tax cut proposals, as the District of Columbia considers cancelling tax cut triggers it put in place in prior years, and lawmakers in Hawaii, Washington, Kansas, and Delaware ponder raising revenues to shore up their budgets. Meanwhile, gas tax debates continue in Oklahoma, West Virginia, and South Carolina, among other news.

-- Meg Wiehe, ITEP State Policy Director, @megwiehe

  • It's been another whirlwind week for tax policy in West Virginia. Down to the wire on "crossover" day, the West Virginia Senate voted down the party line to overhaul the state tax system. SB 409 would raise the state sales and use tax to 7 percent (increasing the food tax to 3.5 percent) and step-down the state income tax, phasing it out over time. Ultimately this would shift the state's reliance on the personal income tax to the sales tax, benefiting those most well-off.
  • Georgia lawmakers will end their session Thursday and may pass a major income tax cut then. The plan, which was initially a very regressive flat tax proposal, has morphed into a more fair but also more costly package that eliminates the state deduction for state income taxes, lowers the top personal income tax rate to 5.65 percent, and indexes tax brackets and other provisions for inflation. It is projected to reduce state funding for services by $292 million in 2019, growing to $526 million annually by 2022.
  • Minnesota lawmakers have no shortage of plans for the state's surplus—with House Republicans proposing $1.35 billion in cuts and Senate Republicans aiming for $900 million. Both plans include exempting portions of Social Security income, tax breaks for student debt, and reducing the statewide property tax on business. The Senate plan also includes a provision to cut the lowest marginal tax rate—a policy change that is sold as providing tax relief to low income families but that disproportionately benefits the wealthy while undermining the progressivity of the income tax.
  • The current situation in the District of Columbia highlights two major trends in tax policy this year: tax-cut triggers and federal uncertainty. A trigger has been tripped that will cut DC taxes to the tune of $100 million unless the city council and mayor's office cancel those cuts, and at the same time, the city estimates it will lose at least $100 million under federal budget cuts outlined by President Trump. Such arbitrary automatic cuts undermine states' ability to respond to changing circumstances such as federal policy changes.
  • Nebraska legislators may be inching closer to a destructive tax-cut package that would use triggers like those in DC to ratchet down the state's income tax rates.
  • Advocates for low-income families in Hawaii are hopeful as bills that would boost taxes on the wealthy to pay for tax breaks for low-income people continue to move through the Legislature.
  • The Washington House released a budget that requires $3 billion in new revenues over the next two years from new taxes on capital gains and increases in business taxes. New revenues are necessary for the state to be in compliance with court mandates to adequately fund public education in the state.
  • In other state budget news, the Kansas House budget similarly requires $800 million in new revenues over the next two years in order to remain in the black and Gov. Walker's proposed budget in Wisconsin would increase the state's structural deficit to over $1 billion by 2021. While agitation for tax reform continues in Kansas, there is no similar activity in the Badger state.
  • Delaware Gov. Carney presented his budget-balancing proposal last week after holding "budget reset" listening sessions throughout the state and settling on an approach based on a mix of funding cuts and revenue increases. The tax proposal includes small rate increases of 0.2 to 0.4 percentage points, elimination of itemized deductions, and an increase in the standard deduction, while also raising the cigarette tax and a cap on corporate franchise taxes.
  • Oklahoma's Senate passed a measure that would increase teacher pay through a fuel tax increase (from $0.17 to $0.23 for unleaded gas and $0.14 to $0.21 for diesel). Similarly, West Virginia's Senate approved a gas tax increase of 4.5 cents, coupled with vehicle fees, to fund the state's Road Fund. Both bills now head to their respective Houses for consideration.
  • Chances diminished this week of South Carolina passing a needed gas tax update without tacking on harmful tax cuts that will shift taxes to low-income residents and undermine funding for schools, public safety, and other needs, as advocates for such cuts voted against giving the gas tax update priority status.
  • Idaho lawmakers in both chambers have approved legislation that would eliminate the sales tax on groceries along with a $100 grocery credit. The bill now goes to the governor who is opposed to eliminating the tax on food but who has not said he will veto the bill.
  • The Minnesota Revenue Department released its 2017 Tax Incidence Study, showing that while the overall state and local tax system remains regressive, there was a significant decrease in overall regressivity from 2012 to 2014, thanks in large part to refundable income tax credits and property tax refunds for homeowners and renters.
  • Iowa legislators have settled on $118 million in budget cuts to balance the current year budget.
  • Maryland, Virginia, and the District of Columbia are considering a regional sales tax to improve public transit in the area, an idea that people surveyed in Maryland narrowly support.

Governors' State of the State Addresses

  • Most governors have now given their addresses for the year. The next scheduled address is Gov. Kasich of Ohio on April 4.

What We're Reading...  

  • A new brief from the Corporation for Enterprise Development (CFED) outlines steps legislators can take to make the federal EITC even more successful at reducing poverty and encouraging work.
  • Tulsa World's editorial board asks Oklahomans to "eliminate the false idea that prosperity comes from whittling away at state income tax rates."
  • Ted Boettner, executive director of the West Virginia Center on Budget and Policy explains how the state's tax proposals result in a tax shift from the wealthy to low-income families.
  • A new paper to be published in the N.Y.U. Law Review explores the political popularity and danger of marginal rate cuts at low levels of income and how these policy changes actually disproportionately benefit the wealthy and undermine progressivity while being perniciously sold as "low income tax cuts."

 

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email. 


State Rundown 6/10: Ballots and Budgets


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Thanks for reading the State Rundown! Here's a sneak peek: Oregon officials approve ballot initiative to increase corporate taxes. Rhode Island legislative committee approves state budget. Local officials in Delaware worry about state shifting costs, need to raise property taxes. Minnesota special session looks less likely.

-- Meg Wiehe, ITEP State Policy Director, @megwiehe


Voters in Oregon will have the final say on a proposal to increase taxes on corporations this fall after state elections officials certified that Initiative Petition 28 (IP-28) has enough support to appear on the ballot. IP-28 would increase the state's corporate minimum tax for businesses with annual Oregon sales over $25 million. Under current law, corporations pay the greater of a minimum tax on sales ($150 to $100,000) or a tax on income (6.6 percent on income up to $1 million and 7.6 percent on income above $1 million). IP-28 would eliminate the $100,000 cap on the corporate minimum tax and apply a 2.5 percent rate to sales above $25 million.  If passed IP-28 would generate $3 billion in new revenue earmarked specifically to education, health care and services for senior citizens. Gov. Kate Brown released a plan this week that outlines her vision for how the money should be spent if IP-28 is approved. The governor would spend more on vocational and technical education, expand the state's Earned Income Tax Credit, and reform business taxes by creating new deductions and closing existing loopholes.

A Rhode Island House committee approved a state budget this week. The House Finance Committee approved the $9 billion measure in the wee hours of Wednesday morning, rejecting Gov. Gina Raimondo's proposed cigarette tax increase but embraced her recommendation to increase the state's earned income tax credit from 12.5 to 15 percent of the federal.  The budget also included a $15,000 exemption on retirement income for taxpayers who have reached full Social Security retirement age and have less than $100,000 of income.

County officials in Delaware worry that the state could shift costs to them due to a revenue shortfall. State legislators want county governments to assume more responsibility for public services in the face of lower-than-expected tax revenue. Lawmakers have $75 million less than anticipated when Gov. Jack Markell released his budget in January. While the revenue outlook is not as dire as that faced by other states – Delaware will spend $200 million more this year than last year – most of the new revenue will be eaten up by automatic cost increases (school enrollment, state employee health insurance, and other categories). A panel of state and county officials is studying which state services counties could absorb. Local officials could be forced to increase property taxes.

Talk of a special session in Minnesota to tackle tax reform and public works funding was dead on arrival in St. Paul this week. Gov. Mark Dayton and legislative leaders were unable to reach a deal on holding a special session following Dayton's pocket veto of a tax package that would have reduced state revenues by $100 million. The bill included tax breaks for farmers, working families, businesses, college graduates and professional sport stadiums. Amazingly, the revenue reduction came down to a wording error in the bill's language ("or" instead of "and" in a crucial clause) due to the rushed nature of the bill's passage at session's end. Dayton refused to sign the bill and initially said the measure could be taken up again in special session. Legislative leaders balked, wary that the governor would use the session to win passage of a larger package of public works spending. The impasse makes the prospect of a state EITC expansion this year – a measure included in the bill vetoed by the governor –  far less likely.

 

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email.


2016 State Tax Policy Trends: Addressing Poverty and Inequality Through Tax Breaks for Working Families


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This is the fifth installment of our six-part series on 2016 state tax trends. An overview of the various tax policy trends included in this series is here.   

As we explain in our annual report on low-income tax credits, the strategic use of Earned Income Tax Credits (EITCs), property tax circuit breakers, targeted low-income tax credits and child-related tax credits can have a meaningful impact on addressing poverty, tax fairness and income inequality in the states.  

The use of these tools is so important especially because states have created an uneven playing field for their poorest residents through their existing tax policies. Every state and local tax system requires low- to middle-income families to pay a greater share of their incomes in taxes than the richest taxpayers and, as a result, tax policies in virtually every state make it even more difficult for those families in poverty to make ends meet. Unfortunately, it does not stop there–many recent tax policy proposals include tax increases on the poor under the guise of “tax reform”.   

That reality may seem bleak, but it provides state lawmakers plenty of opportunities to improve their tax codes in order to assist their state’s lowest-income residents. Targeted low-income tax cuts can serve as a vital tool in offsetting upside down tax systems and proposed regressive tax hikes. On top of that, targeted tax breaks and refundable credits do not only benefit a state’s low-income residents–they can also pump money back into the economy, providing both immediate and long-term economic stimulus. With this in mind, a number of lawmakers are heading into the 2016 legislative session with anti-poverty tax reform on the agenda.  

This year we expect states to build on reforms enacted in 2015 with a range of policies to address poverty and income inequality–including, most notably, efforts to enact or improve state EITCs in as many as a dozen states. Unfortunately, lawmakers in a few states are looking to reduce or eliminate their EITCs.  Here’s a look at the opportunities and threats we see for states in 2016:   

Enacting state EITCs:   

Twenty-six states plus the District of Columbia currently have a state EITC, a credit with bipartisan support designed to promote work, bolster earnings, and lift Americans low-wage workers out of poverty. 

In 2016, a number of states are looking to join this group by enacting their own state EITCs. For instance, Mississippi Gov. Phil Bryant recently called for “blue collar tax dividends” to give people back a portion of their hard-earned tax dollars (he has proposed a nonrefundable state EITC). In South Carolina, a refundable EITC is on the table to help offset a largely regressive transportation revenue raising package. And lawmakers in Idaho have proposed the enactment of an EITC at 8 percent of the federal credit (PDF).  Advocates in GeorgiaHawaiiKentuckyMissouri and West Virginia are calling on their state lawmakers to enact state EITCs as a sensible pro-work tool that would boost incomes, improve tax fairness, and help move families out of poverty. 

Even states without an income tax could offer a state EITC and lift up the state’s most vulnerable. Washington State enacted a Working Families Tax Rebate at 10 percent of the federal EITC in 2008, though it still lacks sufficient funding to take effect.  

Enhancing state EITCs:   

While state EITCs are undoubtedly good policy, there is still room for improving existing credits. Three states (Delaware, Ohio and Virginia) have EITCs but only allow them as nonrefundable credits–a limitation which restricts their reach to those state’s lowest-income families and fails to offset the high share of sales and excise taxes they pay. Lawmakers in Delaware seem to have recognized this shortcoming by recently introducing a bill that would make the state’s EITC refundable, but only after reducing the percentage from 20 to 6 percent of the federal credit and then gradually phasing it back up to 15 percent over the course of a decade.  Advocates in Virginia are calling for a strengthening of the state's EITC as an alternative to untargeted tax cuts proposed by Gov. Terry McAuliffe. 

In addition to refundability, many states are discussing an increase in the size of their credit. Governors, in particular, are stepping up to the plate: Rhode Island Gov. Gina Raimondo recently announced her plan to raise the state’s EITC to 15 percent, up from 12.5 percent of the federal credit; Louisiana Gov. John Bel Edwards, meanwhile, has called for doubling the state EITC as part of his commitment to reduce poverty; and Maryland’s governor, Larry Hogan, called to accelerate the state’s planned EITC increase. In California, Gov. Jerry Brown reiterated his support for the state’s new EITC in his 2016-17 budget. In New York, Assembly Speaker Carl Heastie proposed increasing the EITC by 5 percentage points over two years. And Oregon lawmakers are calling to bring the EITC up to 18 percent of the federal credit.   

Another “enhancement” trend that is building momentum is expanding the EITC to workers without children. At the federal level, President Obama proposed just that (PDF) in 2014 and again reiterated his support for such a change in his most recent State of the Union address and budget proposal. Just last year, the District of Columbia expanded its EITC for childless workers to 100 percent of the federal credit, up from 40 percent, and increased income eligibility.   

Protecting state EITCs:  

Rather than focusing on proactive anti-poverty strategies, a handful of states will be spending the better part of 2016 protecting their state EITCs from the chopping block. Tax reform debates in Oklahoma have led to calls that the state’s EITC should be re-examined and possibly eliminated, possibly in combination with the elimination of the state's low-income sales tax relief and child care tax credit.  

For more information on the EITC, read our recently released brief that explains how the EITC works at both the federal and state levels and highlights what state policymakers can do to continue to build upon the effectiveness of this anti-poverty tax credit. 

 


What to Watch for in 2016 State Tax Policy: Part 1


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State legislative sessions are about to begin in earnest.We expect tax policies to get major playin statehouses across the nation this year with many states facing revenue surpluses for the first time in years and others having to grapple with closing significant deficits. Regardless, officials should focus on policies that create fairer, more sustainable state tax systems and avoid policies that undermine public investments.

ITEP this year once again will be taking a hard, analytic look at tax policy proposals and legislation in the states. This is the first in a six-part blog series providing analyses on the implications of policy proposals, as well as thoughtful commentary on best policy practices.

 Part 2: Revenue Surpluses May Prompt Tax Cut Proposals

In some states, economies have recovered well since the economic downturn, and lawmakers are considering spending surpluses on tax cuts instead of providing much-needed boosts to public investments that were scaled back during the recession. The economic recovery has been uneven, however, and some states that find their economies still struggling or newly sputtering may consider tax cuts on high-income residents under the misguided premise that tax cuts at the top trickle-down and stimulate economic growth.

One trend we expect to see is tax cuts that take effect in small increments over a very long period based on revenue performance or some other automatic "trigger." The effect of these incremental cuts is to push the brunt of revenue losses into the future. Another trend is to move toward single-rate income taxes, negating the chief advantage of the income tax: its ability to reduce tax unfairness by requiring people with higher incomes to pay higher rates and those with less income to pay lower rates. Keep an eye in 2016 on Georgia where there is a proposal to cut and flatten the income tax and then further reduce it in future years based on automatic triggers.

Part 3: Revenue Shortfalls Create Opportunities for Meaningful Tax Reform

A number of states including Alaska, Connecticut, Delaware, New Mexico, Vermont, West Virginia, and Wyoming are grappling with current and future year revenue shortfalls. Pressed for revenue, we anticipate that some states may turn largely to spending cuts or more regressive and less sustainable tax options (like a small hike in the cigarette tax) to close their budget gaps. The scale of the problem in many of these states could also present a real opportunity for lawmakers to debate and enact reform-minded tax proposals that could raise needed revenue, improve tax fairness, and craft more sustainable state tax systems for the future. 

The most significant revenue downturns and best opportunities for reform are in states dependent on oil and gas tax revenue, most notably Alaska and Louisiana. Alaska Governor Bill Walker unveiled a proposal in December that would among other things bring back a personal income tax. Louisiana's new governor, John Bel Edwards, will call a special session next month to pitch short- and long-term revenue raising ideas, including much-needed reforms to the state's income tax. We are also watching Illinois and Pennsylvania where lawmakers are now more than seven months overdue on putting together a budget for the current fiscal year, largely over disagreements on how to find needed revenue to pay for public investments.

Part 4: Tax Shifts in All Shapes and Sizes

Tax shifts, which reduce or eliminate reliance on one tax and replace it with another source, are one bad policy idea we expect to continue to rear its ugly head. The most common tax shifts in recent years have sought to eliminate personal and corporate income taxes and make up the lost revenue with an expanded sales tax. Such proposals result in a dramatic reduction in taxes for the wealthy while hiking them on low- and middle-income households, increasing the unfairness of state tax systems and exacerbating already growing income inequality.

Lawmakers in Mississippi  and Arizona  have expressed support for lowering and eliminating income taxes. Changing political and revenue pictures in both of these states could lead to lawmakers finally making good on their promises in 2016. Also watch for smaller scale shifts like a plan in New Jersey where lawmakers want to pair a much needed increase in the state’s gas tax with an elimination of the estate tax to “offset” the tax hike.

 Part 5: Addressing Poverty and Inequality Through Tax Breaks for Working Families

In 2016, we expect states to focus on a range of policies to support working families, building off the momentum of their 2015 reforms and national dialogue on poverty and income inequality. In particular, developments to enact or improve state Earned Income Tax Credits (EITCs) are likely in a dozen states across the country. For instance, Louisiana’s new governor John Bel Edwards called for doubling the state EITC as part of his commitment to reduce poverty. Maryland’s governor, Larry Hogan, called to accelerate the planned EITC increase. Delaware lawmakers are looking to take a step forward by making the state’s EITC refundable, but unfortunately are also considering a drop in the percentage of the credit.

Tax breaks for working families may also appear as proposals to provide targeted cuts to offset regressive tax increases in states where lawmakers plan to raise revenue. We suggest also keeping an eye on working family tax break proposals in the following states: California, Georgia, Illinois, Minnesota, Mississippi, Missouri, Oregon, Rhode Island, Utah, Virginia, and West Virginia.

Part 6: Overdue Increases in Transportation Funding

The recent momentum toward improvements in funding for transportation infrastructure is likely to continue in 2016. Governors in states such as Alabama, California, and Missouri have voiced support for gasoline tax increases, and gas taxes seem to be on the table in Indiana and Louisiana as well. These discussions on a vital source of funding for infrastructure improvements are long-overdue, as many of these states haven’t updated their gas taxes for decades

But not all transportation funding ideas being discussed are worth celebrating. Arkansas Gov. Asa Hutchinson, for example, has proposed that additional infrastructure funding come from diverting significant revenues away from education, health care, and other services. Meanwhile, lawmakers in other states (Mississippi, New Jersey, and South Carolina) would like to leverage a gas tax increase to slash income or estate taxes for high-income households. While these plans would result in more funding for transportation, their overall effect would be to worsen the unfairness and unsustainability of these states' tax codes.


What Makes Delaware an Onshore Tax Haven


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When you think of a tax haven, you probably imagine the far off tropical islands of Bermuda or Grand Cayman, but the reality is that there is a major tax haven even closer to home in the state of Delaware. A new report from the Institute on Taxation and Economic Policy (ITEP) explains how one of our nation’s smallest states is one of the world’s biggest havens for tax avoidance and evasion.

What makes Delaware a tax haven? First, Delaware is one of the easiest places in the world to set up an anonymous shell corporation. In fact, setting up a company in Delaware requires less information than signing up for some library cards. This means that it is difficult for law enforcement to trace the activities of the anonymous shell corporations to the people who actually own and control them. This is what makes Delaware corporations an ideal vehicle not only tax evasion, but also for illicit activities like drug trafficking, terrorism finance and defrauding the government.

In addition, the state does not require companies to pay any tax on income relating to intangible assets held by companies based in the state. Companies take advantage of accounting gimmicks to shift their intangible income from other states into Delaware in order to take advantage of the zero tax rate on income earned from intangible assets. For example, Toys R Us has avoided millions in taxes by transferring its trademarks and trade names (including “Geoffrey the Giraffe”) into Delaware and charging its subsidiaries in other states for use of its trademarks.

Taken together, these two features help explain why there are 1.1 million companies registered in a state that has a population of only 935,000 people. While many in the media have highlighted the 19,000 companies listing the Ugland House in the Cayman Islands as their address, this pales in comparison to the 285,000 companies that are listed at the modest CT Corporation building in Wilmington, Delaware.

Barring action from the Delaware legislature , the good news is that individual states and the federal government can easily close down this onshore tax haven. To stop anonymous shell corporations, Congress could pass legislation, such as the Incorporation Transparency and Law Enforcement Act, mandating that states require the name and address of each owner of a company at the time of incorporation and after any change in ownership. This would lift the veil on individuals seeking to hide behind their anonymous shell corporations. And states can adopt “combined reporting,” which requires companies to report the income and expenses of all out-of-state subsidiaries for the purpose of determining corporate income tax.

Ending Delaware’s tax haven status would send a clear signal to other nations that the U.S. is a credible actor and thus bolster our efforts to combat offshore tax avoidance and evasion internationally. In addition, by putting an end to anonymous shell corporations, the United States could play a leadership role in promoting this critical policy throughout the rest of the world.

Read ITEP’s full report “Delaware: An Onshore Tax Haven” 


State Rundown 6/18: Promising Gas Tax Developments, Pandering Tax Cuts


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Wisconsin lawmakers are considering eliminating the state’s Alternative Minimum Tax (AMT), a move that would send tax breaks to the rich and nothing to more than 80 percent of Wisconsinites. The AMT is meant to ensure that wealthy individuals pay a minimum level of income tax, and is therefore assessed at higher incomes. Ironically, as state lawmakers and Gov. Scott Walker slashed top marginal income tax rates for the wealthy, more of these taxpayers were subjected to the AMT. The proposal to eliminate the tax would cost more than $27 million annually in lost revenue.

The Rhode Island House of Representatives unanimously approved the 2016 budget deal on Tuesday night, sending the measure to the Senate Finance Committee for consideration. The unanimous approval cleared the House by 7:30pm, and has been touted as the quickest budget vote in at least 30 years. The $8.7 billion bill exempts Social Security income from the personal income tax for Rhode Islanders over 65 if their income is below $80,000 (single) or $100,000 (married) – a change that will benefit mostly wealthy retirees, as we’ve argued before. The plan also phases out sales taxes on utility bills for non-manufacturing businesses. On a positive note, the budget increases the states refundable Earned Income Tax Credit (EITC), a tax break for working families, from 10 to 12.5 percent.

The Florida Legislature approved a $400 million package of tax cuts on Monday, and Gov. Rick Scott is expected to sign the measure even though it reduces taxes by less than he wanted. Passage of the measure comes after the resolution of a deadlock over healthcare spending; Florida is expected to lose federal aid to state hospitals, and many lawmakers were reluctant to accept Medicaid dollars offered under the Affordable Care Act. In the end, the size of the tax cuts relative to what Scott proposed was reduced by almost half in order to cover healthcare costs. The package of cuts includes tax cuts for cellphone purchases and cable bills, college textbooks, and sailboat repairs that cost more than $60,000.

As the summer travel season heats up, lawmakers in states across the country are mulling gas tax increases as a way to boost road construction and maintenance budgets. Tennessee Gov. Bill Haslam plans to barnstorm the state to stress the need for more transportation funding, though he’s stopped short of endorsing a gas tax increase. Tennessee’s gas tax hasn’t risen in decades, and the average motorist there is paying a third less per mile for roads than a generation ago. An editorial in The New York Times, meanwhile, argues that New Jersey lawmakers must raise their state gas tax to pay for crumbling roads. At 14.5 cents a gallon, the state tax is less than a third of New York’s tax and trails Pennsylvania and Connecticut by similar margins. Meanwhile, New Jersey has 577 structurally deficient bridges and 300,000 potholes. Efforts to increase state gas taxes also received a boost from a recent study that finds gas tax increases do not result in penny-to-penny increases in the price that motorists pay at the pump.

A Delaware House committee will consider a bill that would make their income tax rate structure more progressive. Currently, the top personal income tax rate is 6.6 percent for income above $60,000. The new proposal would institute a rate of 7.1 percent for income between $125,000 and $250,000, and a rate of 7.85 percent for income above $250,000. State officials say the changes would increase revenue by $97.5 million over the next two years. 


New Year, New Gas Tax Rates


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Residents of 10 states will see their gasoline tax rates change on Jan. 1, but the direction of those changes is decidedly mixed.  Five states will raise their gas tax rates when the clock strikes midnight, while the other five will cut theirs, at least for the time being.

Among the states with gas tax increases are Pennsylvania (9.8 cents), Virginia (5.1 cents), and Maryland (2.9 cents).  Each of these increases is taking place as scheduled under major transportation finance laws enacted last year.

North Carolina (1 cent) and Florida (0.3 cents) are also seeing smaller gas tax increases as a result of formulas written into their laws that update their tax rates each year alongside inflation or gas prices.

The states where gas tax rates will fall are Kentucky (4.3 cents), West Virginia (0.9 cents), Vermont (0.83 cents), Nebraska (0.8 cents), and New York (0.6 cents).  Each of these states ties at least part of its gas tax rate to the price of gas, much like a traditional sales tax.  With gas prices having fallen, their gas tax rates are now falling as well.

While some drivers may be excited by the prospect of a lower gas tax, these cuts will result in less funding for bridge repairs, repaving projects, and other infrastructure enhancements that in many cases are long overdue.  Because of this, Georgia Governor Nathan Deal recently signed an executive order preventing a gas tax cut from taking effect in his state on January 1.  And Kentucky is considering following Maryland and West Virginia’s lead by enacting a law that stabilizes the gas tax during times of dramatic declines in the price of gas.

But while states such as Kentucky may struggle to fund their transportation networks in the immediate wake of these tax cuts, these types of “variable-rate” gas taxes are still more sustainable than fixed-rate taxes that are guaranteed to become increasingly outdated with every passing year.  To that point, here are the states where gas tax rates will be reaching notable milestones of inaction on Jan. 1:

  • Iowa, Mississippi, and South Carolina will see their gas tax rates turn 26 years old this January.  Each of these states last increased their gas taxes on January 1, 1989.  
  • Louisiana will watch as its gas tax rate hits the quarter-century mark.  Its gas tax was last raised on January 1, 1990.  
  • Colorado’s gas tax rate will “celebrate” its 24th birthday on New Years Day, having last been increased on January 1, 1991.
  • Delaware will become the newest addition to the 20+ year club as it “celebrates” two decades since its last gas tax increase on January 1, 1995.

Gas tax rates need to go up if our infrastructure is going to be brought into the 21st century Jan. 1 may be a mixed bag in that regard, but it’s increasingly likely that things could change soon as debates over gas tax increases and reforms get under way in states as varied as Georgia, Idaho, Iowa, Michigan, New Jersey, South Dakota, Tennessee, Utah, and Wisconsin.


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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On the heels of state Earned Income Tax Credit (EITC) expansions in Iowa, Maryland, and Minnesota and heated debates in Illinois and Ohio about their own credit expansions,  the Institute on Taxation and Economic Policy released a new report today, Improving Tax Fairness with a State Earned Income Tax Credit, which shows that expanding or enacting a refundable state EITC is one of the most effective and targeted ways for states to improve tax fairness.

It comes as no surprise to working families that most state’s tax systems are fundamentally unfair.  In fact, most low- and middle-income workers pay more of their income in state and local taxes than the highest income earners. Across the country, the lowest 20 percent of taxpayers pay an average effective state and local tax rate of 11.1 percent, nearly double the 5.6 percent tax rate paid by the top 1 percent of taxpayers.  But taxpayers don’t have to accept this fundamental unfairness and should look to the EITC.

Twenty-five states and the District of Columbia already have some version of a state EITC. Most state EITCs are based on some percentage of the federal EITC. The federal EITC was introduced in 1975 and provides targeted tax reductions to low-income workers to reward work and boost income. By all accounts, the federal EITC has been wildly successful, increasing workforce participation and helping 6.5 million Americans escape poverty in 2012, including 3.3 million children.

As discussed in the ITEP report, state lawmakers can take immediate steps to address the inherent unfairness of their tax code by introducing or expanding a refundable state EITC. For states without an EITC the first step should be to enact this important credit. The report recommends that if states currently have a non-refundable EITC, they should work to pass legislation to make the EITC refundable so that the EITC can work to offset all taxes paid by low income families. Advocates and lawmakers in states with EITCs should look to this report to understand how increasing the current percentage of their credit could help more families.

While it does cost revenue to expand or create a state EITC, such revenue could be raised by repealing tax breaks that benefit the wealthy which in turn would also improve the fairness of state tax systems.

Read the full report


Gas Tax Remains High on Many States' Agendas for 2014


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Note to Readers: This is the fourth installment of a five-part series on tax policy prospects in the states in 2014.  This series, written by the staff of the Institute on Taxation and Economic Policy (ITEP), highlights state proposals for “tax swaps,” tax cuts, and tax reforms.  This post focuses specifically on proposals to increase or reform state gasoline taxes.

Six states and the District of Columbia enacted long-overdue gas tax increases or reforms last year, despite the tough politics involved in raising the price drivers pay at the pump.  Will 2014 bring the same level of legislative activity on the gas tax?  Maybe not; but there are a number of states where the issue is receiving serious attention.

Delaware: Governor Jack Markell of Delaware is pushing for a 10 cent increase in his state’s gas tax, which hasn’t been raised in over 19 years.  The idea faces an uphill battle in the legislature, but without the increase the Delaware Department of Transportation’s capital budget will have to be slashed by about 33 percent next year.  Delaware’s House Minority leader would rather raid the state’s general fund budget (most of which goes toward education and health care) as opposed to addressing the state’s transportation revenue problems directly through reforming the gas tax.

Iowa: Governor Terry Branstad isn’t going to lead the fight for a gas tax increase, but he won’t veto one, either, if it makes it to his desk. Last week, an Iowa House subcommittee unanimously passed a 10 cent gas tax hike just a few hours before Branstad made clear his intention to remain on the sidelines during this important election-year tax debate.

Kentucky: Governor Steve Beshear wants to reverse a 1.5 cent gas tax cut that went into effect last month as a result of falling gas prices (Kentucky is one of eighteen states where the tax rate changes alongside either gas prices or inflation).  Doing so would raise about $45 million in additional funds to invest in the state’s transportation infrastructure.  And putting a “floor” on the gas tax to prevent further declines in the tax rate could avoid up to $100 million in funding cuts in the next two years.

New Hampshire: The chair of New Hampshire’s Senate Transportation Committee wants to raise the gas tax and index it to inflation.  The tax has been stuck at 18 cents per gallon for over twenty-two years, and the commissioner of the state’s Department of Transportation is optimistic that could finally change this year.  Governor Maggie Hassan hasn’t been a major player in the push for a higher gas tax, but it seems likely she would sign an increase if it made it to her desk.

Utah: Utah Senate President Wayne Niederhauser is rightly concerned about the fact that “more and more money is coming out of the state's general fund for transportation,” and would like to reform the state’s gas tax to provide transportation with a sustainable revenue stream of its own.  Familiar concerns about not wanting to hike the gas tax in an election year have been raised, but Governor Gary Herbert seems to realize that some kind of change to the gas tax is needed.  To provide some context to this debate, we recently found that Utah’s gas tax is currently at an all-time low, after adjusting for inflation.

Washington: Last year’s unsuccessful push to raise the gas tax in Washington State has spilled over into the current legislative session.  Governor Jay Inslee still supports raising the tax, and House and Senate leaders have spent a significant amount of time trying to cobble together an acceptable compromise.

But while these six states are the most likely to act this year, they’re hardly the only places where the gas tax is generating a lot of interest.  In Oklahoma, both of the state’s largest newspapers have urged lawmakers to consider gas tax reform, as has the Oklahoma Policy Institute and the Oklahoma Academy.  In Minnesota, the commissioner of the Department of Transportation wants to see the gas tax rise on a yearly basis, and a coalition has been formed seeking more revenue for transportation.  The chairman of the South Carolina Senate Finance Committee supports a gas tax hike, as does the chair of New Mexico’s Transportation and Public Works Committee, some members of New Jersey’s legislature, and the editorial boards of both New Mexico’s and New Jersey’s largest newspapers.  And in Michigan, Governor Snyder’s laudable attempt to raise the gas tax last year has stalled, though it remains a topic of discussion in the Wolverine State.

Altogether, thirty-two states levy unsustainable flat-rate gas taxes, twenty-four states have gone a decade or more without raising their gas tax, and sixteen of those states have gone two decades or more without an increase.  With so many states reliant on outdated gas tax structures, there’s little doubt that reforming the tax will remain a major topic of discussion for the foreseeable future.

Photo via herzogbr Creative Commons Attribution License 2.0 


State Governments Rush to Squander Improved Revenue Outlook


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California, Delaware, Michigan, New Jersey, Oregon, and Wisconsin have all experienced better than expected revenue growth over the past few months.  This is unambiguously good news, but for many lawmakers it’s unfortunately an excuse to ditch any restraint on tax-cutting.

California

In California, stronger-than-expected revenue growth has made the GOP even more vocal in opposing efforts to extend a variety of temporary income, sales, and vehicle tax increases.  Governor Jerry Brown’s continued push to extend these tax hikes is very sensible given that the unanticipated revenue boost was still quite small compared to the state’s total budget.  

Brown has behaved much less sensibly, however, in deciding to abandon efforts to end a variety of business tax credits.  As Jean Ross of the California Budget Project points out, “One of the virtues of the original budget was that there was some level of shared sacrifice.  But now, some businesses are going to come out ahead of where they were last year.”

Delaware

In Delaware, a surprise bump in revenue collections has inspired the state’s Democratic Governor, and a number of Republican legislators, to begin pushing for tax cuts.  

Specifically, the Governor has proposed cutting taxes for banks, businesses, and individuals with taxable incomes of over $60,000.  

In reference to the windfall that banks would receive under the Governor’s plan, Rep. John Kowalko argues that "They do pretty damn well with the federal handouts … I want to see a return on the investment before I will blindly vote on that."

Michigan

In Michigan, better-than-expected revenue growth in the current fiscal year may be used to reduce cuts in school spending that are currently under consideration.  

Any unexpected revenue growth in subsequent fiscal years, however, will be swallowed up by the massive business tax cuts that Michigan’s legislature passed last week.

New Jersey

In New Jersey, unanticipated revenue growth is expected to be used by Governor Chris Christie as yet another excuse for doling out billions in corporate tax breaks.
 
As New Jersey Policy Perspective points out, however, “the state remains stuck in a very deep hole … even with that growth, the state’s revenue collections would still be $3.4 billion less than was collected in FY2008, the year prior to the recession … the state must choose to invest these revenues wisely, using the money to restore the devastating cuts made to services and to pay into the state pension system.”

Oregon

In Oregon, unexpected revenue growth will likely be used to restore cuts to human services and public safety, at least in the short term.  By 2013, however, the state’s “kicker” law will probably require that some amount of revenue growth be dedicated to tax cuts.  

As Rep. Phil Barnhart points out, "Because this budget is so bad, we don't take care of schoolchildren, basic health issues and maintaining prisons — and we have a kicker at the end … We are stuck with this kicker law when we really need to spend some of this money on the budget."

Wisconsin

Finally, in Wisconsin, Governor Scott Walker has stubbornly refused to adapt to changing conditions on the ground.   If Walker gets his way, $1 billion will still be slashed from public schools, despite the state’s recently improved revenue picture.


State Transparency Report Card and Other Resources Released


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Good Jobs First (GJF) released three new resources this week explaining how your state is doing when it comes to letting taxpayers know about the plethora of subsidies being given to private companies.  These resources couldn’t be more timely.  As GJF’s Executive Director Greg LeRoy explained, “with states being forced to make painful budget decisions, taxpayers expect economic development spending to be fair and transparent.”

The first of these three resources, Show Us The Subsidies, grades each state based on its subsidy disclosure practices.  GJF finds that while many states are making real improvements in subsidy disclosure, many others still lag far behind.  Illinois, Wisconsin, North Carolina, and Ohio did the best in the country according to GJF, while thirteen states plus DC lack any disclosure at all and therefore earned an “F.”  Eighteen additional states earned a “D” or “D-minus.”

While the study includes cash grants, worker training programs, and loan guarantees, much of its focus is on tax code spending, or “tax expenditures.”  Interestingly, disclosure of company-specific information appears to be quite common for state-level tax breaks.  Despite claims from business lobbyists that tax subsidies must be kept anonymous in order to protect trade secrets, GJF was able to find about 50 examples of tax credits, across about two dozen states, where company-specific information is released.  In response to the business lobby, GJF notes that “the sky has not fallen” in these states.

The second tool released by GJF this week, called Subsidy Tracker, is the first national search engine for state economic development subsidies.  By pulling together information from online sources, offline sources, and Freedom of Information Act requests, GJF has managed to create a searchable database covering more than 43,000 subsidy awards from 124 programs in 27 states.  Subsidy Tracker puts information that used to be difficult to find, nearly impossible to search through, or even previously unavailable, on the Internet all in one convenient location.  Tax credits, property tax abatements, cash grants, and numerous other types of subsidies are included in the Subsidy Tracker database.

Finally, GJF also released Accountable USA, a series of webpages for all 50 states, plus DC, that examines each state’s track record when it comes to subsidies.  Major “scams,” transparency ratings for key economic development programs, and profiles of a few significant economic development deals are included for each state.  Accountable USA also provides a detailed look at state-specific subsidies received by Wal-Mart.

These three resources from Good Jobs First will no doubt prove to be an invaluable resource for state lawmakers, advocates, media, and the general public as states continue their steady march toward improved subsidy disclosure.


New 50 State ITEP Report Released: State Tax Policies CAN Help Reduce Poverty


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ITEP’s new report, Credit Where Credit is (Over) Due, examines four proven state tax reforms that can assist families living in poverty. They include refundable state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits. The report also takes stock of current anti-poverty policies in each of the states and offers suggested policy reforms.

Earlier this month, the US Census Bureau released new data showing that the national poverty rate increased from 13.2 percent to 14.3 percent in 2009.  Faced with a slow and unresponsive economy, low-income families are finding it increasingly difficult to find decent jobs that can adequately provide for their families.

Most states have regressive tax systems which exacerbate this situation by imposing higher effective tax rates on low-income families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve economic security. Although state tax policy has so far created an uneven playing field for low-income families, state governments can respond to rising poverty by alleviating some of the economic hardship on low-income families through targeted anti-poverty tax reforms.

One important policy available to lawmakers is the Earned Income Tax Credit (EITC). The credit is widely recognized as an effective anti-poverty strategy, lifting roughly five million people each year above the federal poverty line.  Twenty-four states plus the District of Columbia provide state EITCs, modeled on the federal credit, which help to offset the impact of regressive state and local taxes.  The report recommends that states with EITCs consider expanding the credit and that other states consider introducing a refundable EITC to help alleviate poverty.

The second policy ITEP describes is property tax "circuit breakers." These programs offer tax credits to homeowners and renters who pay more than a certain percentage of their income in property tax.  But the credits are often only available to the elderly or disabled.  The report suggests expanding the availability of the credit to include all low-income families.

Next ITEP describes refundable low-income credits, which are a good compliment to state EITCs in part because the EITC is not adequate for older adults and adults without children.  Some states have structured their low-income credits to ensure income earners below a certain threshold do not owe income taxes. Other states have designed low-income tax credits to assist in offsetting the impact of general sales taxes or specifically the sales tax on food.  The report recommends that lawmakers expand (or create if they don’t already exist) refundable low-income tax credits.

The final anti-poverty strategy that ITEP discusses are child-related tax credits.  The new US Census numbers show that one in five children are currently living in poverty. The report recommends consideration of these tax credits, which can be used to offset child care and other expenses for parents.


New ITEP Report Examines Five Options for Reforming State Itemized Deductions


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The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.


ITEP's "Who Pays?" Report Renews Focus on Tax Fairness Across the Nation


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This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.


State Spending Done Through the Tax Code Needs to Be Reviewed


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A new report from Citizens for Tax Justice makes the case for a “performance review” system designed to evaluate the effectiveness of special tax breaks in achieving their stated goals. While CTJ's report primarily focuses on the importance of such a system at the federal level, most of its findings are equally applicable to the states.

The special breaks littered throughout state tax codes — or “tax expenditures,” as they are frequently called — are an enormous and often overlooked part of government’s operations.  Although the primary purpose of a tax system is to raise the revenue needed to pay for public services, every state, as well as the federal government, also uses its tax system to accomplish a variety of other policy goals. Encouraging job creation, subsidizing private industry research, and promoting homeownership are just a few of the countless ends pursued via special subsidies contained in state tax codes. Rather than having anything to do with fair or efficient tax policy, these tax credits, exemptions, and other provisions are actually much more akin to government spending programs — hence the term, “tax expenditures.”

A performance review system takes the commonsense step of asking whether these provisions are doing what policymakers intended of them. Under such a system, tax credits designed to encourage research and experimentation, for example, would be regularly examined to determine the amount of new research undertaken as a result of the credits. Shockingly, the vast majority of states, and the federal government, do not currently attempt to answer fundamental questions of this sort with any type of rigorous evaluation.

Among CTJ’s findings are:

— “Procedural biases,” such as the omission of tax expenditures from the authorization and appropriations processes, allow tax expenditures to slip by with a fraction of the scrutiny given to direct spending programs. State legislative systems requiring supermajority consent to “raise taxes” (or eliminate tax expenditures) are particularly biased in this regard.

— “Political biases,” such as the erroneous belief that government can take a “hands off” approach, or reduce its overall size by offering special tax breaks, also contribute to the current lack of oversight.

— A number of states have made strides in recent years to counteract these biases through performance reviews and other, similar means. Washington State’s efforts represent the most complete attempt at tax expenditure performance review yet to be undertaken in the United States. California, Delaware, Nevada, Oregon, and Rhode Island have also made attempts — with varying degrees of success — to enhance the level of scrutiny applied to their tax expenditures.

— The bleak state budgetary outlook makes the implementation of tax expenditure review all the more urgent. States, like the federal government, can no longer afford to deplete their resources with ill-advised and ineffective tax expenditures. By implementing a tax expenditure performance review system, states can pave the way for a reduction in tax expenditures by identifying those expenditures that are ineffective.

— A formal review system could also help to reconceptualize these provisions in the minds of policymakers, the media, and the public as spending-substitutes, rather than simply as tax cuts. This would further help reduce the rampant biases in favor of tax expenditure policy.

— The precise design of a tax expenditure review system is very important. States should be sure to include all taxes, and all tax expenditures within the scope of the review. Additionally, states should exercise care in selecting the criteria to be used in the reviews — Washington State’s criteria represent a good starting point from which to build. Other key design issues include choosing the appropriate body to conduct the reviews, timing the reviews to coincide with the budgeting process, allowing similar tax expenditures to be reviewed simultaneously, and attaching some type of “action-forcing” mechanism to the reviews so that policymakers must explicitly consider the reviews’ results.

— Tax expenditure reviews are necessary, though they may not be sufficient to correct for the biases in favor of tax expenditure policy. A tax expenditure performance review system can play a vital informational role either on its own, or alongside other, more aggressive tax expenditure control techniques such as sunset provisions or caps on tax expenditures’ total value.

Read the full report.

Read the 2-page summary.

It's one thing for the federal government to allow a one-time amnesty for Americans who've hid their income from the IRS in offshore accounts. (See related story.) The "stick" is effective (prison) and the "carrot" is not overly generous (since these Americans will pay taxes, interest, and penalties).

But lately several states are providing their own tax amnesties that are very different and very misguided. According to a recent article in State Tax Notes (subscription required), the thirteen state tax amnesties already conducted or promised this year ties the 2002 record for most amnesties offered in one year.  Assuming that DC Mayor Adrian Fenty signs the budget (which contains a tax amnesty) that was recently passed by the DC Council, that record will be broken.  Pennsylvania and Michigan, however, still have a chance to avoid adding to the list of states enacting these short-sighted measures. Amnesties have been proposed within each state's legislature.

As we've argued before, allowing delinquent taxpayers to pay the taxes they owe with little or no penalty is unfair to those diligent taxpayers who paid their taxes on time.

This unfairness is compounded greatly if the interest owed on the late tax bill is reduced, or even waived entirely, as was done this year in Delaware.  Waiving the interest owed on late tax bills essentially means that delinquent taxpayers are granted an interest-free loan by the state, for no reason other than the fact that the state is now desperately in need of money. Had all taxpayers been aware of the possibility of this interest-free loan, the rate of noncompliance would undoubtedly have skyrocketed. 

Repeatedly offering amnesties, as is increasingly becoming the norm, harms the ability of states to enforce their tax laws.  With record numbers of tax amnesties having been offered in the last seven years, delinquent taxpayers can usually assume that they'll be offered an easy way out eventually -- if only they're patient enough.  As one revenue official from Kansas recently put it, "if you have amnesties too often, you're literally training taxpayers not to pay."


Progress on Progressive Taxation in the States


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Few would envy the position most state lawmakers now find themselves in. Nearly every state is required to balance its budget each year and the vast majority of states face substantial budget deficits in the coming years. Those lawmakers will have to support either cuts in essential public services or increases in politically unpopular taxes -- and do so in the midst of a deepening recession.

Under these circumstances, the best way to eliminate state budget deficits is through tax increases on upper-income individuals and families, as such changes would reduce consumer demand the least. Three states in the northeast -- New York, Connecticut, and Delaware -- seem ready to do just that.

In the Empire State, Governor David Paterson and members of the legislative leadership this week reached agreement on a plan to close a $17.7 billion budget gap. The centerpiece of the plan is the addition of two new tax rates. A rate of 7.85 percent would apply to income in excess of $300,000 and a rate of 8.97 percent would apply to income above $500,000. While those changes would only be temporary in nature (lasting only through 2011) they are expected to bring in about $4 billion per year in revenue.

In the Nutmeg State, budget deficits are projected to total $8.7 billion over the next two years. In response, the Assembly's Finance Committee approved legislation that, among other changes, would add four new income tax brackets, with rates ranging from 6 percent to 7.95 percent, all affecting married Connecticuters with incomes over $250,000 annually (and single taxpayers with incomes above $132,500).

Finally, in the First State, Governor Jack Merkell has put forward a broad-ranging budget plan that would take the constructive step of raising Delaware's top income tax rate from 5.95 percent to 6.95 percent, the first income tax increase since 1974. Even though it would impose pay and benefit cuts on state employees and rely more heavily on gaming and excise tax revenue, this budget plan is a step forward on progressivity.


Delaware Budget Negotiations: Better Than Most States, But Still a Disappointment


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Budget negotiations are wrapping up this week in Delaware, and unlike most states, Delaware has taken an approach to remedying their $151 million budget shortfall that utilizes both spending cuts and tax increases. While many states seem content with purely slashing spending to balance the budget, (see this week's Digest articles on New Jersey, Rhode Island, and Florida) Delaware has chosen to scrape together some extra revenues to help save some of its public services.

Admittedly, the means the state has chosen to go about doing this aren't especially exciting. On the revenue side are minor increases in the gross-receipts tax, the state's share of slot machine revenues, the alcohol tax, registration fees for limited liability partnerships, and the possibility of a tax on medical providers. Clearly, the only overarching theme of these tax policy changes is that they are the only options on which Delaware budget negotiators managed to agree.

Noticeably missing from this hodge-podge of ideas is a bill filed in the Senate seeking to increase the state's top income tax rate from 5.95% to 7.95%. This change wouldn't have provided a tremendous amount of revenue, but the revenue it did raise would have been collected from those more fortunate Delawareans least vulnerable to the hardships caused by the recent economic slowdown.

The legislature should be credited for not falling victim to the anti-tax sentiment that has paralyzed many state budget-makers in the past months, but next time a budget shortfall surfaces, progressive income tax hikes should be considered as a more equitable and more sustainable way of filling the hole.


Tax Reform? No. Save an Antiquated Pastime that Can't Support Itself? Yes.


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In many ways, Maryland's current debate over legalized gambling is depressingly familiar. Faced with a loophole-ridden and unfair tax system that cries out for progressive reform, some elected officials want to introduce thousands of slot machines as a politically palatable revenue-raising alternative. But Maryland offers an interesting, if bizarre, twist. Governor Martin O'Malley's administration is arguing that slot machines would make an excellent economic development tool for propping up the state's ailing horse-racing industry.

About the best one can say about the idea of providing tax subsidies for such a small and distinctly 19th-century industry is that it's less expensive than the more conventional smokestack-chasing other states continue to engage in. But Maryland isn't the first state that's had this idea -- and neighboring Delaware's experience has not exactly yielded dividends for that state's racing industry. And as an excellent Washington Post editorial explains, the environmental and economic policy goals the administration allegedly seeks to achieve with slots are a red herring.

The author of the O'Malley administration report that makes the economic development-based pitch for slots, Thomas Perez, claims that the introduction of slots in neighboring states has "revitalized the previously moribund horse racing industries in those states." Perez describes his report as "a fact finding tour of racetracks in Delaware, West Virginia and Pennsylvania." Perez's research techniques included counting the number of Maryland license plates in a West Virginia parking lot -- but his time might have been better spent just asking West Virginia's Racing Commission chairman, who sees "no correlation... inverse, in fact" between their 1994 introduction of slots at racetracks and the current health of that state's racing industry.


Tobacco Tax Hikes... A Lesser Evil?


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People who follow tax issues know that cigarette taxes are regressive, meaning they take a larger percentage of a poor person's income than a wealthy person's income. This is generally true of other consumption taxes such as sales taxes and gasoline taxes because poor people consume a larger percentage of their income than wealthy people, who have the luxury of saving and investing a large percentage of their income.

So cigarette taxes are not the best way to raise revenues from a fairness perspective. But there seem to be situations in which the only tax increases politicians will tolerate are the unfair ones. The state legislature in Delaware wanted revenue to address health and school construction, and just raised $48 million by increasing cigarette taxes from 55 cents to $1.15 a pack. Raising progressive taxes (for example, state income taxes) would be a fairer alternative, but tobacco taxes may be a second-best option when lawmakers refuse to increase other taxes.

New Hampshire just enacted a budget that includes a cigarette tax increase of 28 cents to $1.08 a pack as well as several other regressive fee hikes. While this is unfortunate, the budget also expands children's health insurance by as many as 10,000 kids, which might be hard to do in tax phobic New Hampshire. In Connecticut, the legislature recently approved a budget that raises the cigarette tax 49 cents to $2 per pack in a compromise between Republican Governor Jodi Rell and the Democratic-controlled Assembly. (Rell had earlier suggested increasing income taxes but quickly changed her mind about that.)

Now members of Congress are eyeing an increase in the federal tobacco tax from 39 cents to $1 a pack to fund an expansion of the State Children's Health Insurance Program (SCHIP). Some members of both parties on the Senate Finance Committee have come to a tentative agreement to raise $35 billion over 5 years (less than the $50 billion envisioned in the Senate budget passed several months ago). One can imagine many more progressive ways of raising federal revenues. But if the Senate lacks the leadership and courage to fight for more progressive funding sources, this may be the best chance to expand children's health care this year.


Earned Income Tax Credits Advance Around the Nation


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Over the past few weeks, three more states have taken steps towards helping low-wage workers and their families by means of the earned income tax credit (EITC). In Delaware, the Senate Revenue and Taxation Committee recently approved a measure that would make the state's existing EITC refundable, meaning that individuals and families who owe less in personal income taxes than the value of their EITCs would receive refund checks to help offset other taxes and to make it easier to make ends meet. In Oregon, Republican and Democratic members of the House Revenue Committee have put forward a proposal that would raise that state's EITC from 5 percent of the federal EITC to 12 percent. As the Eugene Register-Guard observes this proposal would help to achieve a vital goal - eliminating income taxes on working families living in poverty in Oregon. Lastly, the Louisiana Senate has passed legislation that would create a state EITC equal to 5 percent of the federal EITC. This report from the Louisiana Budget Project details the positive impact that such a credit would have.


Payoffs for Layoffs


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Once again, the public is learning that tax funded corporate economic incentives don't really work. In Oregon, right after Georgia-Pacific received a property tax break that will amount to $15 million over 15 years, the company turned around and announced that it was laying off 130 workers. Chuck Sheketoff over at the Oregon Center for Public Policy puts it the best, "[i]t's payoffs for layoffs". On the other side of the country, AAA Mid-Atlantic demanded that Delaware grant the company tax incentives if the state wanted them to move there. The twist? AAA Mid-Atlantic already made the decision to move to Delaware before they demanded the tax incentives - Delaware simply paid AAA Mid-Atlantic to do something it was already going to do. For a more in-depth analysis of AAA Mid-Atlantic's scheme, check out this report by New Jersey Policy Perspectives.


Casinos and Competition


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The recent shutdown of New Jersey casinos provided an opportunity for surrounding states to lure gamblers (and tax dollars) away from the Garden State. In Delaware, slot parlors saw an estimated increase of almost 20 percent in revenue. Nearby Pennsylvania has also legalized some forms of gambling and will also soon compete with New Jersey. As more and more states turn to casinos to generate tax dollars, states will probably find it more difficult to depend on revenue from this source. Instead of gambling on the future, lawmakers should focus on more reliable sources of funding. You can read ITEP's policy brief on gambling by clicking here.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog, http://www.justtaxesblog.org/

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