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Revenue Options in 2010: Making the Case and Debunking the Myths
Altaf Rahamatulla on February 1, 2010 - 2:22pm
Last Tuesday, Oregonians overwhelmingly approved two ballot initiatives that ratified legislative action last year to increase high-end personal income and corporate taxes. The initiatives, put on the ballot by corporate interests, will impact just 2.5 percent of the state -- the richest individuals and corporations -- and generate over $700 million in the upcoming fiscal year to protect vital services.
The failure of the anti-tax movement in Oregon is one more in a long stream of right-wing initiatives rejected by voters at the ballot box. In fact, progressive revenue generation as part of a balanced approach to addressing state deficits has been popular with both voters and legislatures for years. This Dispatch will provide both the facts and messages to debunk opposition to smart revenue options, while outlining a few of the best revenue approaches to filling budget holes.
The right-wing may try to pretend that voters oppose taxing the wealthy or that voters prefer to cut education or health services instead of raising needed revenue, but recent history actually shows broad rejection of anti-tax initiatives. Economic reports have consistently shown that states that have raised revenue have not suffered lower growth than states that have relied predominantly on cutting services. Raising revenue in a progressive manner is sound, politically feasible, and popular with the public, especially compared to massive cuts in investments in education, infrastructure, and health care that endanger a state's economic and social vitality.
Demand Federal Help on State Revenues
Beyond raising taxes in the states, swift and bold action by federal lawmakers on job creation and state fiscal relief is also needed. PSN encourages legislators to sign on to our letter calling on President Barack Obama and the US Congress to enact a new, broad-based job plan, including fiscal relief to states and local governments to foster growth and create jobs across the nation. Advocates can email legislators encouraging them to sign the letter using this online tool.
Table of Contents:
Public Support for Progressive Taxation & The Failure of the Anti-Tax Movement
By approving Measures 66 and 67 this week, Oregonians not only expressed their desire to protect services, but became the latest state to reject the hollow manipulations of right-wing anti-tax rhetoric.
- Just last November, voters in Maine and Washington rejected anti-tax initiatives , including so-called "Taxpayer Bill of Rights" (TABOR) initiatives meant to impose a rigid strait jacket on revenue options for state legislatures.
- In 2008, similar measures were defeated overwhelmingly in Massachusetts, North Dakota and Oregon. In all three states, proposed initiatives that would have slashed or, in the case of Massachusetts, completely eliminated the income tax, were rejected at the polls.
- In 2006, voters in Maine, Nebraska and Oregon each rejected TABOR ballot initiatives. This came on top of judges and other officials rejecting TABOR initiatives in Michigan, Montana, Nevada, Oklahoma and Missouri due to fraud and manipulation by anti-tax campaigns.
- In 2005, voters in Colorado--the only state ever to approve a TABOR initiative--decided by initiative to significantly weaken the TABOR rules. This followed years of declining education and health standards due to the state's as a result of the implementation of the TABOR.
State Legislatures Reject Anti-Tax Rhetoric: The string of failures of the anti-tax movement at the ballot box is paralleled by state legislatures passing revenue increases across the country. In 2009 alone, California, Connecticut, Colorado, Delaware, Hawaii, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, and Wisconsin instituted either a permanent or temporary reform of personal income taxes. Another 11 states considered or enacted business tax increases to help deal with budget deficits and even more states raised other taxes or fees to address the fiscal crisis in state across the country.
The Ballot Initiative Strategy Center (BISC) notes that out of the 28 right-wing attempts by to introduce TABOR legislatively, Colorado is the only state that has adopted this disastrous policy. State lawmakers have watched as Colorado's experience with TABOR has led to an increase in the number of adults and children without health insurance and a severe decline in education funding.
Empty Threats by the Anti-Tax Right: While right-wing leaders like Grover Norquist and his Americans for Tax Reform like to make threats of punishing legislators who raise taxes, anti-tax forces have largely revealed themselves to be weak paper tigers. After New Jersey increased taxes on the wealthy in 2004, the Democratic House majority increased to its largest size in three decades the following year, while progressives in Maryland and Minnesota continued to maintain and grow strong legislative majorities in the wake of approving increased taxes on high-income earners in 2008 and 2007.
In 2009, BISC found that "[t]he Grover Norquist, Club for Growth, Glenn Beck, Tea Party crowd tried to use the bleak budget picture as an opportunity to ratchet down even harder as states look to find the revenue necessary to protect priorities, create jobs, and get their economies going-- but voters rejected that failed approach."
Even many conservative politicians have rejected these type of policies. For instance, Tom Slade, the former head of the Florida Republican party, dismisses Norquist's ideas and finds his anti-tax pledge to be illogical and dangerous. Slade states, "[y]ou don't know how wide or deep the river's going to get. Saying I'm never going to use a life boat seemed foolish to me." After a Republican State Senator from Virginia, Robert Hurt, voted for a $1.4 billion tax increase, Norquist vowed to back a primary challenge against him. Despite this, the Senator won re-election and is now favored to win the party's nomination for Congress.
Public Opinion Supports Funding Public Investments: Polling shows that 79 percent of the public believes "[g]overnment investments in education, infrastructure, and science are necessary to ensure America’s long-term economic growth." Accordingly, during an economic downturn when so many working families are struggling, voters are likely to support policies to raise revenue, strengthen public programs, and provide safeguards to those who have been hurt by the recession.Resources:
Ballot Initiative Strategy Center - Fiscal/Budget Issues
The Oregonian - Oregon voters pass tax increasing measure by big margin
Center on Budget and Policy Priorities - Raising State Income Taxes on High-Income Taxpayers
Center on Budget and Policy Priorities - Tax Measures Help Balance State Budgets
Center for American Progress report, State of American Political Ideology, 2009: A National Study of Values and Beliefs
Debunking Myths that Taxes Undermine Economic Growth
One reason states are readily raising revenue as an alternative to more cuts is that they can turn to a wealth of examples to debunk the rhetoric that raising taxes to fund services in a state is harmful to the economy.
Taxes Do Not Undermine State Economic Growth: As we've highlighted in previous Dispatches, research consistently shows that, contrary to right-wing rhetoric, there is no link between tax increases and job loss.
- States with higher personal income tax rates experienced significant job growth in the past decade, as the Fiscal Policy Institute and Center for Working Families point out in their report, Back on Track and as the Center on Budget and Policy Priorities found in a similar report.
- Moreover, according to a 2008 Information Technology & Innovation Foundation analysis, states with some of the higher marginal income tax rates, including New York and Maryland, have more innovative new economy industries. Likely as a result of larger investments in infrastructure, education, and technology, these states are better suited to foster economic growth that is sustainable and well-paying in an increasingly fierce global competition for jobs.
- This builds on analysis by the Institute on Taxation and Economic Policy (ITEP) detailing that states that collect the highest percentage of personal income in taxes actually sustain higher income growth.
- Similarly, an older study by the California Budget Project (CBP) analyzed state economies and concludes, "[s]tates that enacted large tax cuts between 1994 and 2001 — reducing revenue by at least 7 percent — subsequently experienced weaker growth in jobs and personal income and larger increases in the unemployment rate, on average, than other states."
Progressive Taxes Don't Cause Out-Migration of Wealthy Residents: Opponents of progressive income tax reform like to argue that tax increases cause wealthy residents to leave a state. In fact, states that have increased the top rate in recent years have not experienced any significant out-migration of wealthy residents:
- California: The California Budget Project found that there was a significant growth in millionaire households after California passed higher PIT rates in the 1990s and again in 2004. In fact, the number of California millionaires increased by 37.8 percent between 2004 and 2006.
- New Jersey: A Princeton University report discovered that the passage of a higher top rate in 2002 had "little effect on migration patterns among half-millionaire households.”
- New York: After the state temporarily raised income taxes on the wealthy from 2003 to 2005, the number of high income tax returns grew 30 percent, from 250,000 to 325,000.
A New York Times article, entitled "Taxes Not Seen as Making the Rich Flee New York" succinctly articulates:
[T]here is surprisingly little evidence to support the proposition that rich New Yorkers would bolt if forced to pay higher income taxes. Though tracking the movement of wealthy taxpayers from state to state is difficult, experts on public finance and migration say they have yet to document a substantial 'rich drain' in states that have raised income taxes in recent years.
Progressive States Network - Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth
Progressive States Network - Right-Wing Fraud Derails Tax Revolt
Center for Working Families and Fiscal Policy Institute - Back on Track: Why Progressive Tax Reform is an Essential Part of New York's Budget Solution
California Budget Project - Budget Cuts or Tax Increases: Which are Preferable During an Economic Downturn?
California Budget Project - The Number of High-Income Taxpayers Increased During a Period With 10 Percent and 11 Percent Tax Rates on High-Income Earners
Princeton University Policy Research Institute for the Region - Trends in New Jersey Migration: Housing Employment and Taxation
Institute on Taxation and Economic Policy - High Income Tax States Have Strong Economies
As 48 states confront monetary shortfalls this fiscal year, the budget will undoubtedly be the predominant focus of lawmakers. In fact, the Center on Budget and Policy Priorities (CBPP) estimates that states will face cumulative deficits of approximately $350 billion in 2010 and 2011. The downturn has also taken an enormous toll on tax revenue. Mark Zandi, Chief Economist at Moody's Economy.com, reports that state and local tax revenues have dropped 9 percent from last year, "the largest decline on record going back to just after World War II."
During an economic downturn, progressive revenue generation is far preferable to deep cuts, as it allows states to provide funding for essential programs, pump money into the economy, and protect working families in this time of hardship. A budget that relies too heavily on cuts will not only force layoffs of state employees, but will also cut off funding for crucial services and reduce spending in the private sector.
Peter Orszag, Director of the Office of Management and Budget, and Nobel prize winning economist, Joseph Stiglitz confirm:
[T]ax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.
As a recent report by the Economic Opportunity Institute denotes, "every dollar of state spending generates $1.41 of economic activity. Much of that spending — 62%, or 88 cents — boosts the private sector. Cutting state spending means fewer purchases from suppliers, reduced contracts with service providers, less money from public and private employee paychecks circulating through local businesses — and of course, fewer public services."
Spending on programs that assist low and middle-income families is smart economic policy. By assisting working families, who will more readily spend their funds on basic necessities, the government is boosting short-run demand and fostering market activity. For instance, Zandi finds that increasing food stamps spending creates $1.73 in demand for each dollar spent by the federal government.
Cuts Hurt the Economy: Unfortunately, several states have responded to the fiscal crisis with deep service cuts:
- 28 states instituted cuts that will limit low-income children's access to health care
- 24 states have slashed services for the elderly and disabled
- 36 states have reduced funding for higher education
- 42 states implemented cuts that affect state employees, including 26 that have hiring freezes, 14 that have announced layoffs and 26 that have decreased wages
If new revenues are not generated, further cuts will continue a cycle of job layoffs by states, lower spending on crucial programs, diminished economic growth, and deep budget cuts. The Economic Policy Institute (EPI) provides the following chart illustrating the danger of state budget cuts as they ripple through the economy; teachers, nurses and police are laid off, state funds supporting private sector activity are reduced, and individuals receiving state support stop spending in their local communities.
Working and Middle Class Families Have the Highest Tax Burdens On Average: A common misconception about state and local taxes is the idea that the wealthy have incredibly high tax burdens. The reality is the richest taxpayers have not been contributing their fair share for years. When you factor in sales and excise, property, and income taxes, states tax working families far more heavily than richer individuals, according to Who Pays?, a report from ITEP. As the graph below highlights, the lowest 20 percent of earners pay about 11 percent of their income in state and local taxes while the top 1 percent pay a little over 6 percent of their income to state and local governments.
Additional Federal Fiscal Relief Needed to Help States Address Recession's Impact
Economic Policy Institute - Dire states--State and local budget relief needed
National Governors Association and the National Association of State Budget Officers - Fall 2009 Fiscal Survey of States
California Budget Project - Budget Cuts or Tax Increases: Which Are Preferable During An Economic Downturn?
California Budget Project - The Number of High-Income Taxpayers Increased During a Period With 10 Percent and 11 Percent Tax Rates on High-Income Earners
Fiscal Policy Institute - Balancing New York State’s 2009-2010 Budget in an Economically Sensible Manner
Institute for Taxation and Economic Policy - Who Pays?
The New York Times - Taxes Not Seen as Making the Rich Flee New York
Princeton University - Trends in New Jersey Migration: Housing, Employment and Taxation
Corporate Tax Reform and Eliminating Wasteful Economic Subsidies
Corporations should also be paying their fair share in taxes. They benefit from state investments in education, infrastructure, and public safety, but unfortunately, corporations have repeatedly and excessively exploited the tax system.
- Corporate income tax revenue as a share of all taxes has fallen dramatically. In 1979, the corporate income tax accounted for 10.2 percent of total state tax revenue. In 2005, the figure fell to 6.5 percent.
- The Iowa Fiscal Partnership reported that approximately half of Iowa corporations with at least $1 million of sales in state pay no corporate income tax.
- Similarly, the Oklahoma Tax Commission revealed that only 35 percent of corporations filing tax returns in 2000 reported positive taxable income— almost an anomaly considering the economy experienced substantial gains that year.
- The problems are similar at the federal level. A Government Accountability Office report, Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005, found almost two-thirds of all corporations reported no tax liability from 1998 to 2005.
Accordingly, there are a variety of corporate taxation policy options legislators can pursue to ensure businesses are contributing adequately to a state.
- Close Tax Loopholes: Ending some of the egregious corporate tax loopholes that businesses abuse should be a top priority for lawmakers. States lose billions of dollars each year as a result of these loopholes. For instance, states should opt out of the "domestic production deduction" tax break that was passed by the federal government in 2004 and subsequently incorporated into the tax code in several states. Currently, 25 states allow the deduction, which by 2011, will cost states $500 million annually and favors large corporations over small businesses. States can also eliminate Net Operating Loss “Carryback” Deductions, reform the “cancellation of debt income” (CODI) provision, and reform the tax treatment of S-Corporations and Limited Liability Companies.
- Combined Reporting: 23 states have implemented combined reporting, which requires multi-state corporations to report profits from all entities, including subsidiaries, for tax purposes. Combined reporting is a key policy to restrict tax avoidance. The policy makes the tax system fairer, brings in greater revenue, and does not impede economic growth. In fact, CBPP finds, "combined reporting states are well-represented among the most economically-successful states in the country."
The Film Tax Credit as Case Study of Corporate Giveaways: Several states are dealing with ineffective expenditures, a notorious recent example being the proliferation of film tax credits. In 2002, only three states offered incentives to the film industry. Currently, of the 44 states that offer some type of movie production incentive, 28 provide tax credits. The Tax Foundation provides a graphic that depicts states with incentives and the year in which they were approved.
Following an explosive scandal involving members of the Department of Economic Development and abuse of the film tax credit, Iowa Gov. Chet Culver ordered a review of credits the state provides. In early January, Iowa released the Tax Credit Review Report that recommended the state:
- Provide greater transparency of tax credits;
- Develop an effective return on investment calculation for all tax credits;
- Establish a five-year sunset for all tax credits;
- Cap all currently uncapped tax credits;
- And eliminate certain tax credits.
Reports by many other advocacy organizations and government bodies, including the Oregon Center for Public Policy, Connecticut Voices for Children, New Mexico Fiscal Policy Project, the Massachusetts Department of Revenue and the Wisconsin Department of Commerce, indicate that offering these tax credits are ineffective and provide little to no economic benefit to a state or its residents. The Tax Foundation writes that states are greatly overestimating the impact of providing film tax credits and basing decisions "on fanciful estimates of economic activity and tax revenue (leading to) small returns and unnecessary risks with taxpayer dollars."
Other states have taken tangible steps to address these problems:
- Connecticut: Gov. M. Jodi Rell estimated that a $25 million cap for film tax credits would save the state $70 million in the next two years.
- Massachusetts: Rep. Steven D'Amico introduced legislation, HB 3854, to limit state spending on incentives for the film industry.
- Michigan: Gov. Jennifer M. Granholm proposed reducing the 42% refundable tax credit to approximately 37%.
- Wisconsin: Gov. Jim Doyle offered a plan to completely eliminate the state's 25% film tax credit and replace it with a two-year, $1 million grant program to create permanent film industry jobs
- New Mexico: Rep. Dennis Kintigh has sponsored HB52 to limit the state's spending on film tax credits.
Discontinue Excessive Corporate Subsidies: Even as states confront massive gaps, many are still doling out huge subsidies to corporations. Many times, these subsidies do not produce long-term growth and may even result in lost revenue. In North Carolina, for instance, a Dell plant closed just a few years after it received a promise of up to $300 million in grants, an amount more than twice the cost of building the plant. As Good Jobs First explains, states waste money competing for firms to locate within their borders by providing extremely costly and ineffective incentives, rather than on fostering entrepreneurship and new jobs. The report details:
[T]ax reductions, exemptions or credits exert a very small marginal influence on corporate investment decisions... For the vast majority of companies, tax breaks are windfalls, not determinants, and are therefore wasted.
As government officials look to eliminate wasteful spending, they should also rethink allocating enormous and often inefficient business tax breaks as a better option than cutting programs for their most vulnerable residents. The public money squandered through tax credits and corporate subsidies demonstrates that blind giveaways are not a sustainable model for economic growth and a more transparent budget process is needed in the future.
Center for American Progress - The Corporate Tax Dodge
Center on Budget and Policy Priorities - A Majority of States Have Now Adopted a Key Corporate Tax Reform - "Combined Reporting"
Center on Budget and Policy Priorities - States Can Opt Out of the Costly and Ineffective "Domestic Production Deduction" Corporate Tax Break
Citizens for Tax Justice - Judging Tax Expenditures
Good Jobs First - Growing Pennsylvania's High-Tech Economy: Choosing Effective Investments
Good Jobs First - More States Yell 'Cut" on Film Tax Credits
Iowa Fiscal Partnership - Revitalizing Iowa's Corporate Income Tax
New Jersey Policy Perspective - Big Firms Get Big Breaks
U.S. PIRG - Close Corporate Loopholes
Citizens for Tax Justice - State Film Tax Credits: Next on the Cutting Room Floor?
State of Iowa - Tax Credit Study Review Report
Tax Foundation - Movie Production Incentives: Blockbuster Support for Lackluster Policy
Corporate Transparency in State Budgets
Problems due to lack of transparency in subsidy distribution, contract allocation, and hidden tax breaks are well-documented. Almost every week there is a story relating to states distributing subsidies with little to nothing to show for it, failing to save money from utilizing contractor services rather than state employees, and providing huge tax breaks to large corporations that often do not reflect the greater public interest. Additionally, states have been losing millions of dollars from declining corporate tax revenue.
Lawmakers should enact more enhanced transparency requirements. PSN is advancing a model corporate transparency bill that aims to foster more comprehensive reporting of subsidy allocation, contract distribution, tax expenditures, and corporate taxation trends. For analysis of recent cases, ideas for messaging, fact sheets, reports, and a list of allied organizations, visit the campaign resource page.
There is significant bipartisan consensus that transparency is needed for a more targeted and equitable budget process. Lawmakers across the country have been moving corporate transparency bills.
- Last week, Hawaii Sen. Les Ihara, Jr. and Rep. Roy Takumi introduced a corporate transparency bill, SB2868/HB2750, intending to augment disclosure of subsidies, contracts, tax expenditures, and corporate tax trends.
- This month, New Mexico Sen. Tim Keller and Rep. Eleanor Chavez introduced bills to require the state to publish an annual tax expenditure budget, SB 23 and HB82. Sen. Keller additionally sponsored SB47, which establishes transparency guidelines for economic development subsidies and mandates that the state provide a list of taxpayers receiving incentives.
- Former New Jersey Gov. Jon Corzine signed S3153 into law last month, requiring the Governor to include a tax expenditure report in the annual budget address. The bill's main sponsor, Sen. Barbara Buono commented, “[w]ithout an annual accounting for the cost and effectiveness of tax expenditure spending, New Jersey lawmakers cannot develop a full understanding of the State’s fiduciary obligations and expenses, and cannot act to end ineffective and costly programs. This new law will make sure that when reviewing the State’s annual budget, we have all the information we need to put together a complete profile of expenditures.”
- In 2008, the Ohio legislature passed legislation that requires the state attorney general to review economic development awards received by entities. Attorney General Richard Codray's office began the process this past October by informing over 3,000 entities that they must provide his office with information, such as actual jobs created, efforts to attract minority or disadvantaged workers, and wage law compliance.
Progressive States Network - Corporate Transparency in State Budgets
Expanding the Sales Tax Base
If states facing yawning deficits do need to enact broader-based revenue increases, another option is to extend the state sales tax to more services and to goods purchased over the Internet.
Broadening the Sales Tax by Including Services: The current sales tax in most states is outdated, designed for an industrial economy where most consumer spending went to buying goods, rather than services which remain largely untaxed in most states.
Services represent a broad range of industries that increasingly represent a much larger share of market activity including, medical, dental, automotive, telecommunications, home care, consulting engineer, dry cleaning, physical training, real estate, personal care, and residential utility services. As CBPP explains, expanding the sales tax to services, "makes state tax systems fairer, more stable, more economically neutral, and easier to administer."
Moreover, because state sales taxes are a major source of funding for schools, universities, health care, public safety, and other functions of state and local government, adding services to state sales tax bases can help states maintain their support for those functions, for instance during an economic downturn when state revenues are declining." Expanding the sales tax base will also help states avert unfavorable tax increases down the road. CBPP estimates that broadening the sales tax base could yield a total of $87 billion nationwide.
In the past few years, lawmakers proposed or enacted sales taxation on certain services.
- Nebraska Sen. Cap Dierks introduced LB 1066, a measure to broaden the sales tax to services this January. Some of the services outlined in the bill include garment alterations, armored-car services, barber and beauty services, all farm-equipment repairs, financial institution, dating services, garbage collection and recycling services.
- In June 2009, Maine passed legislation to broaden its sales tax to amusement, entertainment, recreation, installation, repair, and personal property services. The measure is estimated to generate $41 million in FY2010, representing 4.4 percent of projected sales tax revenue collections.
- New Jersey implemented an expansion of its sales tax to some services in 2006.
Implement the "Amazon tax": States lose billions every year due to the "inability to collect all sales taxes that are legally due on purchases made over the Internet." In 2008, New York became the first state to require online retailers to collect sales tax on purchases to customers in the state. The state changed its tax code to mandate that an out-of-state retailer with more than $10,000 a year in sales generated through sales affiliates in the state has nexus and must collect sales and local taxes. After the bill's passage, Amazon.com immediately sued, but lost the case. The state expects to generate $47 million from the "Amazon tax." Rhode Island followed New York's lead and passed the Amazon tax last year. This year, New Mexico Rep. Eleanor Chavez sponsored HB 50 to extend the state's gross receipts tax to online sales.
Center on Budget and Policy Priorities - Expanding Sales Taxation of Services: Options and Issues
Center on Budget and Policy Priorities - Maine Could Tax more Services under Its Sales Tax
Center on Budget and Policy Priorities - Amazon’s Arguments Against Collecting Sales Taxes Do Not Withstand Scrutiny
Center on Budget and Policy Priorities - New York's "Amazon Law": An Important Tool for Collection Taxes Owed on Internet Purchases
Given the fiscal and economic crisis facing states, public investments in jobs and services for those in need are critical. Lawmakers should not be intimidated by the virulent rhetoric of the anti-tax movement and ensure that everyone, including corporations and wealthy individuals, are contributing their fair share. Progressive approaches to raising revenue is not only effective and economically productive, but also popular with the public, especially compared to the alternative of slashing needed education, health, public safety and infrastructure investments.
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Grover Norquist's Americans for Tax Reform has a policy center called the <a href="http://www.fiscalaccountability.org/">Center for Fiscal Accountability</a>, where they promote many of their anti-government policies, from deadlocking legislatures with supermajority requirements to mandated spending limits to strangle social services.08/18/09