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State Revenue Increases Across the Nation Continue to Ease Pain of Downturn
Altaf Rahamatulla on May 24, 2010 - 12:28pm
Tea Party protests are purportedly an indication of Americans demanding tax and spending cuts. Yet, last Tuesday, Arizonans overwhelmingly approved Proposition 100 to temporarily increase the state's sales tax by one percent for the next three years. The measure is estimated to generate $1 billion in additional revenue per year. In spite of opposition to the tax cuts by many of the Legislature's conservative leaders, Republican Gov. Brewer campaigned diligently for the increase, emphasizing, "If we don't get the revenue we will have to cut another billion dollars."
This vote in Arizona, a state whose Legislature is so tax averse that it has enacted 42 tax cuts to its three major revenue sources since 1992, not only highlights the depth of the fiscal crisis, but additionally demonstrates that voters across the political spectrum recognize that budget shortfalls cannot be solved solely by budget cuts. The approval of the Arizona sales tax increase follows a strong vote for raising income and corporate taxes in Oregon in January.
As this Dispatch will detail, these votes mirror actions taking place in both conservative and progressive states and localities around the country. In 2009 and 2010, states have enacted a wide-ranging set of revenue increases to cope with cumulative 2010 and 2011 deficits of approximately $375 billion. Although revenue forecasts are improving, states are still reeling from historic declines in the past year.
What is remarkable is that the anti-tax movement has wracked up such regular failures in the crisis, as even many state leaders previously signing "no taxes" pledges have reneged on them. Instead, popular demand for new revenue to avert budget cuts has driven legislative movement on progressive tax and budget policy.
Adding to the general public support has been research consistently showing that progressive revenue increases during a downturn is a better alternative to cuts in order to promote growth and protect vulnerable populations suffering during the recession.
Finally, this Dispatch will outline some of the effective messaging and research to demonstrate to voters that progressive measures and tax increases are economically sound and go to the programs they want preserved -- the critical step in the success of revenue campaigns.
Table of Contents:
On top of the vote in Arizona, the Kansas Legislature recently approved a one cent sales tax increase that will take effect July 1 and bring in over $3 million in revenue to avoid cuts in school programs. Despite a vitriolic Tea Party campaign against revenue generation, St. Louis, Missouri passed a half-cent sales tax increase to restore bus lines that had been defunded and to eventually expand the city's mass transit system.
In South Carolina, the House recently voted to override Gov. Mark Sanford's veto of HB 3584 and approved an increase of the state's cigarette tax by 50 cents. Several conservative South Carolina lawmakers, who had previously signed on to an Americans for Tax Reform letter to not raise taxes, refused to abide by it and voted for the tax as well. Similarly, two Kansas House members who had signed the pledge were the margin of victory for passing the sales tax in that state. Though regressive, the new sales and excise taxes will provide funding for education and other essential services.
And even in fervently and vocally anti-tax Georgia, the Legislature imposed a temporary 1.45 percent hospital fee and raised other fees to cut the budget deficit.
Myth of an Anti-Tax Electorate: Many of these conservative leaders are just following the lead of voters across the country. Even before Arizona and Oregon votes this year, voters and lawmakers have continually rejected anti-tax initiatives, such as the so-called "Taxpayer Bill of Rights" (TABOR), over the last five years. Just last November, voters in Maine and Washington disapproved of these types of deleterious measures. In 2008, similar initiatives were defeated 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.
In response, legislatures have increasingly taken their cue from voters, not the empty threats of the anti-tax ideologues. Of the 28 right-wing attempts to introduce TABOR legislatively, Colorado is the only state that has adopted this disastrous policy. As the Ballot Initiative Strategy Center finds, "[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."
Raising Taxes is the Norm in Recessions: In 2008 and 2009, over 30 states increased taxes as a response to the recession, as the March 2010 map above displays-- with additional states like Arizona, South Carolina, Georgia and Kansas filling in additional states since then. As CBPP indicates, this parallels a general trend of states increasing revenue during recent economic downturns--"[i]n the recession of the early 1990s, some 44 states raised taxes; in the early 2000s, some 30 states did so." Raising revenue is typical during recessions.
Ballot Initiative Strategy Center - Fiscal/Budget Issues
Progressive States Network - Public Support for Progressive Taxation & The Failure of the Anti-Tax Movement
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. Many of these states have increased revenue by over 5 percent.
This session, the Hawaii Legislature capped itemized deductions at $50,000 for joint filers with income over $300,000, or at $25,000 for individuals earning over $150,000. The move will generate $33 million next fiscal year. This follows the state's high-end income tax increase last year after the Legislature overrode the Governor's veto to raise three top rates, with the highest increasing from 8.25 to 11 percent. The increase only applies to the top 2.6 percent of tax filers in the state.
At the end of January 2010, voters in Oregon overwhelmingly approved two ballot initiatives that ratified legislative action last year to increase high-end personal income and corporate taxes. The initiatives will only affect 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.
William Gates Sr., father of Bill Gates, is leading an effort in Washington to create a state income tax for wealthy state residents. I-1098 would impose a 5 percent tax on joint filers above $400,000, and individuals making over $200,000, and a 9 percent on families making over $1 million. The proposal would also increase the business and occupation tax. In a recent article, Gates, along with Gerald Grinstein and Michael DeBell, writes, "this proposal offers a clear choice to voters: assist small businesses, cut taxes for the middle class and support much needed investments in our schools and in health care — or keep the status quo, which penalizes small business and shortchanges our children and families." If 241,153 valid voter signatures are successfully gathered by July 2, the measure will appear on the ballot in November.
In Washington DC, Councilmember Michael Brown has proposed the creation of two new income tax brackets, 8.9 percent over $250,000 and 9.4 percent over $1 million.
Center on Budget and Policy Priorities - Raising State Income Taxes on High-Income Taxpayers
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. Just last year, 11 states considered or enacted business tax increases to help deal with budget deficits and others have enacted or considered them this session. States have strategically responded to corporate tax erosion by a number of approaches, from combined reporting to eliminating wasteful tax credits.
Wisconsin enacted combined reporting in the 2009-2010 session. Combined reporting requires multi-state corporations to report profits from all entities, including subsidiaries, for tax purposes. Furthermore, combined reporting is a key policy to restrict tax avoidance and nullify certain tax shelters. Currently, over 20 states have implemented the policy.
This session, the Iowa Legislature approved HF 2527/SF 2380, which enacts modest tax credit reform, including a process to regularly examine credits, temporarily suspending the film tax credit, and in total, reducing inefficient credits by $115 million. Unfortunately, many states still pursue costly and misguided expenditures without properly assessing their value or the total revenue loss to the state.
CBPP finds that certain credits, such as those utilized for job creation, do not benefit states economically. They report, "[j]ob-creation tax credits raise a number of issues of cost and effectiveness. While 22 states have broad, statewide credits similar to those being proposed, and about another 12 states have narrower credits targeting specific industries or areas of the state, there is no evidence that these states’ economies are doing better than other states’ economies...Indeed, a state-level effort to stimulate the economy in this way can inadvertently create a fiscal drag on the state and national economy."
Tax Credit and Budget Transparency: One key step to reform is augmented transparency of how much money states are actually losing on tax credits, subsidies, contracts and corporate tax giveaways. This session, Colorado Rep. Sal Pace and Sen. Morgan Carroll introduced HB 1350, which requires any entity that receives public funds for the purpose of economic development to file an annual report to the Colorado economic development commission on jobs created, wages paid, and other important categories. If the state finds that a recipient of an economic incentive has not complied with requirements, it has the authority to “clawback,” or recapture any public money expended on the economic incentive. The measure passed the House, but ultimately failed in the Senate.
However, Gov. Bill Ritter issued Executive Order D 2010-009, which contains similar principles as the bill and directs the Colorado Economic Development Commission to compile a report on how the state can effectively track grants, loans, or tax credits issued for economic development and job creation purposes.
In late April, the Massachusetts House unanimously passed the Revenues and Expenditures Transparency Act, H 2972, to create a searchable, online database that details state spending and revenue sources. Lawmakers also approved an amendment to create greater taxpayer accountability by providing increased transparency around some business tax credits. As House Chairman of the Joint Committee on Revenue Rep. Jay Kauffman explains, "[p]ublic access to the way we raise and spend money is essential, enabling us to make more-informed decisions for the tax-paying constituents who elect us to serve on their behalf."
As U.S. PIRG comprehensively details in Following the Money: How the 50 States Rate in Providing Online Access to Government Spending Data, which analyzes and ranks each state on their development of comprehensive, one-stop, one-click budget accountability and accessibility, some of the major benefits of corporate transparency, include promoting sound fiscal practices, identifying spending inefficiencies, reducing corruption, and encouraging a more focused budget process.
Several lawmakers across the country have introduced various transparency efforts in order to safeguard taxpayers, foster better budgeting practices, promote good jobs, and garner savings. PSN has model corporate transparency legislation that aims to collect comprehensive information regarding state subsidy allocation, contract distribution, tax expenditures, and corporate taxation trends.
Center on Budget and Policy Priorities - A Majority of States Have Now Adopted a Key Corporate Tax Reform — “Combined Reporting”
MASSPIRG - House Adopts State Spending Website
U.S. PIRG - Following the Money: How the 50 States Rate in Providing Online Access to Government Spending Data
Similar to last year, a number of states are pursuing sales and excise tax increases. Some are more targeted, such as Wyoming taxing wind energy, while others are drilling down on particular products or on Internet retailers.
Candy and Soda Taxes: This year marked a great interest in pursuing taxes on candy and soda as both Colorado and Washington State raised taxes on the products. New York Gov. David Paterson has led an effort both this year and last to assess higher taxes on sugary beverages while reducing taxes on diet drinks. New York City Mayor Michael Bloomberg, who supports the effort, stated, the "proposal will discourage consumption of high-calorie beverages while simultaneously making lower-calorie beverages more affordable, which will help lead to major gains in public health ."
Cigarettes and Alcohol Taxes: So far this year, South Carolina, Hawaii New Mexico, Utah, and Washington state raised cigarette taxes. In 2009, sixteen states enacted cigarette tax increases, while six others raised alcohol taxes.
"Amazon Tax": States lose billions every year due to the failure to collect sales taxes that are legally due on purchases made over the Internet. This hurts not only state budgets but local retailers and local job creation, as purchases shift from main street to out-of-state retailers.
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 and North Carolina 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. In February, Colorado enacted HB1193 to apply the sales tax on out-of-state retailers. Showing a petty vindictiveness, Amazon canceled all business relationships with affiliates in the state in retaliation, even though there is "no connection between the affiliate program and the new law."
Center on Budget and Policy Priorities - The Zero-Sum Game: States Cannot Stimulate Their Economies by Cutting Taxes
Center on Budget and Policy Priorities - Expanding Sales Taxation of Services: Options and Issues
Stateline.org - States Plug Budget Holes, For Now
Unfortunately, some states illustrate the extremely regressive proposals and budget recklessness that come into play when states fail to raise the revenue needed.
With its requirements of a two-thirds vote threshold to pass new revenue, California has remained hamstrung in closing its massive budget crisis. In response to the downturn, Gov. Arnold Schwarzenegger proposed discontinuing the state's entire welfare program, most subsidized child care, a 60 percent cut to mental health services, $750 million cut to in-home services, reducing K-12 education funding by $2.8 billion, and slashing services for the elderly and disabled. Yet, he refuses to eliminate corporate tax breaks that amount to a loss of $2.1 billion in revenue annually.
Using Strategic Revenue Increases to Target Right-Wing Governors: In New Jersey, newly-elected Gov. Chris Christie unveiled his $29.3 billion FY2011 budget proposal--an extremely regressive plan that, rather than renewing an income tax surcharge on high-end earners, cuts taxes for the wealthy while imposing severe reductions to municipal and county aid, discontinuing property tax rebates, completely eliminating funding for grants to support clinical family planning services, cutting aid to school districts, closing psychiatric hospitals, proposing a constitutional amendment to lower the property tax cap to 2.5 percent that may be placed on the November ballot, and reducing the state workforce by over 1,300 workers.
The Legislature responded to the Governor by restoring the state's millionaire's tax and property tax rebate program, forcing the governor to veto them. As state Sen. Stephen Sweeney described the Governor's position this Spring, "The wealthy people in New Jersey got a tax cut. The middle class and the poor are going to get a tax increase," since property taxes will inevitably rise with local aid cut and property tax rebates are eliminated. In response to the veto and the proposed budget cuts, 35,000 New Jerseyans flooded downtown Trenton to denounce the Governor, the largest rally in the state capitol's history. Along with an approval rating for the Governor that has dropped to 33 percent, this backlash shows that voters don't buy the argument that protecting the wealthy justifies slashing funding for working families.
In Minnesota, the Legislature agreed to 85 percent of the budget cuts proposed by the Gov. Tim Pawlenty, but also enacted a 1.3 percent increase in the income tax rate on joint taxable income in excess of $200,000. Yet the Governor still chose to veto the bill, forcing a budget deal that merely delays $1.9 billion in payments to local schools--a solution that will just push the crisis forward into next year. However, many of the candidates hoping to succeed Pawlenty have made the tax on high-income individuals a fixture of their campaign, emphasizing the way progressives can capitalize on popular support for taxing the wealthy.
Hypocrisy of Right as they Increase Taxes on Working Poor: In Georgia, the Legislature approved a bill that eliminates the refundability of the state’s low-income tax credit, which provides much needed tax relief and wage support for workers who make less than $20,000 per year, even as legislators enacted a long-term tax cut for the state's wealthiest taxpayers. If the Governor signs the bill, it would impact 1 million low-income working and elderly Georgians.
Similarly, Virginia this year enacted a cut to the state's Earned Income Tax Credit (EITC) that will cost 114,000 low-income families a total of $6 million. have moved forward with very harmful cuts to credit programs that assist low-income families. Gov. Christie in New Jersey similarly has proposed a reduction in the state's EITC. And Gov. Pawlenty cut funding for a renters tax credit in Minnesota, that will cost 300,000 low- and moderate-income residents $51 million, even as he fought increased taxes on the wealthy.
What stands out is that almost all states with EITCs have maintained full funding for tax relief for working families, but some rightwing governors have pushed for higher income taxes on low-income families just to protect wealthy tax payers from sharing in the burden of solving the budget crisis.
Center on Budget and Policy Priorities - Some States Scaling Back Tax Credits for Low-Income Families
Georgia Budget and Policy Institute- Revenue Increases Help Balance the Budget in the Short Term, but Tax Cuts Will Lead to Deficits in the Long Term
Progressives have emphasized some key messaging and research in making the case for new revenues.
Spending on Programs that Assist Low and Middle Income Families is Effective Recovery Policy:
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. A budget that relies too heavily on cuts will not only force layoffs of state employees, but will also diminish crucial services and reduce spending in the private sector.
By assisting working families, who will more readily spend their funds on basic needs, the government is boosting short-run demand and fostering market activity. A report by the Economic Opportunity Institute details:
Every dollar of state spending generates $1.41 of economic activity...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."
On the other hand, cuts are extremely damaging to the economy. Further reductions will diminish state workforces, decrease spending on crucial programs, curb economic growth, and exacerbate the effects of the downturn. The Economic Policy Institute details the danger of state budget cuts as they impact employment, economic activity, and investment in both the public and private sector.
Taxes Do Not Undermine Economic Growth:
As PSN has highlighted in previous Dispatches, research consistently shows that there is no link between tax increases and job loss. Moreover, states with higher personal income tax rates experienced significant job growth in the past decade, have more innovative new economy industries as a result of crucial investments in long-term growth industries, and sustain higher income growth.
The Overall Tax Burden Is Low:
Despite intense rhetoric from the right, the Bureau of Economic Analysis reports that "[f]ederal, state and local taxes—including income, property, sales and other taxes—consumed 9.2% of all personal income in 2009, the lowest rate since 1950." In fact, the average rate has decreased 26 percent since the national recession began in late 2007. The Center on Budget and Policy Priorities (CBPP) reported similar results in a recent study, finding that as a result of tax cuts included in the American Recovery and Reinvestment Act (ARRA) and other tax changes at the federal level, middle class families are paying the lowest proportion of federal taxes as a percent of income in decades.
But the Rich Pay Far Less of Their Income in State Taxes than Working and Middle Class Families:
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, contrary to common notions about taxation. The Institute for Taxation and Economic Policy (ITEP) finds that on average, 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.
Taxes on the Wealthy Are the Most Effective Response to the Recession:
Given that the wealthy are already paying a lower percentage of their income in state taxes, it makes both economic and moral sense to raise revenues by creating a more equitable burden of taxation between wealthier and lower-income state residents. Raising income taxes on high-income individuals is the most direct way to accomplish this.
Progressive Taxes Don't Cause Out-Migration of Wealthy Residents:
And to respond to a favorite talking point of the right-wing, states that have increased the top rate in recent years have not experienced any significant out-migration of wealthy residents. For example, after the New York 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 in the state. Similar trends occurred in California and New Jersey.
Progressive States Network - Revenue Options in 2010: Making the Case and Debunking the Myths
Center on Budget and Policy Priorities - Raising State Income Taxes on High-Income Taxpayers
Center on Budget and Policy Priorities - Federal Income Taxes on Middle-Income Families at Historically Low Levels
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?
Center for American Progress report, State of American Political Ideology, 2009: A National Study of Values and Beliefs
Institute on Taxation & Economic Policy - Who Pays?
Princeton University Policy Research Institute for the Region - Trends in New Jersey Migration: Housing Employment and Taxation
Polling conducted by the Center for American Progress (CAP) indicates 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." Other significant findings of the study include:
- 69 percent believe "[g]overnment has a responsibility to provide financial support for the poor, the sick, and the elderly" - with 33 percent strongly agreeing.
- 60 percent of the public agree that "[r]ich people like to believe they have made it on their own, but in reality society has contributed greatly to their wealth" - with 30 percent strongly agreeing.
- 62 percent believe "[t]he gap between rich and poor should be reduced, even if it means higher taxes for the wealthy."
- Over 60 percent believe government should "take care of people who can't care for themselves" and "guarantee food and shelter for all."
During an economic downturn when so many working families are struggling, voters are likely to support policies to raise revenue, specifically increases on the wealthiest individuals and corporations that have a much smaller tax burden than lower-income families and small businesses. They are also likely to support measures that strengthen public structures, invest in programs that benefit society collectively, and provide safeguards to those who have been hurt the most by the recession.
Need to Message the Effectiveness of Government Action: As we highlighted last fall, while the public supports government action, they are often skeptical that it will deliver on the promises of elected officials, with up to 61 percent of the public believing that "government spending is almost always wasteful and inefficient" and even more, 65 percent, fearing that government policies will "serve the interests of corporations and the wealthy" rather than regular voters.
To counter these fears, a recent policy brief, Promoting Broad Prosperity, by the Topos Partnership and Demos details some key messaging on how to discuss government:
- Don't talk about government in the abstract.
- Emphasize that “public structures” created and maintained by government are foundational to prosperity and economic stability, as well as the strength of the middle class.
- True prosperity rests on collective success, not just individual opportunity or success.
- Public structures (like the FDIC, community colleges and Social Security) are built collectively and yield collective benefits.
- Explain how government policies direct the flow of money to different parts of our society and help people focus on how policies lead to particular social and economic outcomes.
Since the public retains skepticism about government in the abstract, emphasize talking about new revenues to support specific public institutions like schools or other concrete programs that people support and utilize daily.
The strongest point of optimism is that younger voters, so-called Millennials, are more committed to progressive goals and notably less cynical of the effectiveness of government as a tool for achieving those ends.
Center for American Progress - State of American Political Ideology, 2009: A National Study of Values and Beliefs
Progressive States Network - Progressive Values Dominant -- But Need to Rebuild Trust in Effectiveness of Government Action
Progressive States Network - Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth
Topos Partnership and Demos - Promoting Broad Prosperity
Even as states raise revenue at home, states will continue to face shortfalls in the coming year and millions of Americans remain out of work. Mark Zandi, Chief Economist at Moody's Economy.com, reports that the revenue drop last year was "the largest decline on record going back to just after World War II." Furthermore, as Stateline.org points out, budget gaps in recent years greatly surpass those during the 2001 recession.
The crisis requires swift and bold action by federal lawmakers on job creation. Without further federal assistance, states will slash hundreds of thousands of jobs and reduce health care, education and public safety services even further than they have already.
Congress will be considering the Promoting American Jobs and Closing Tax Loopholes Act of 2010, H.R. 4213, a jobs bill that will help boost economic recovery and assist people out of work. This will result specifically in $26 billion in sorely needed funding for state and local governments health programs, known as federal medical assistance percentages (FMAP).
The legislation would also extend unemployment insurance (UI) and subsidized COBRA health coverage for those out of work, provide additional fiscal relief to states, continue expanded temporary assistance for needy families (TANF) and fund summer jobs for young workers. On top of that, the bill would close a corporate tax loophole that allows Wall Street hedge funds to have their earnings taxed as capital gains instead of as ordinary income.
If you are a state lawmaker, please sign onto this letter calling on the President and Congress to enact a comprehensive jobs plan, including relief to states and local governments to foster economic growth and create and maintain jobs.
AFL-CIO - Act Now: Tell House to Pass Badly Needed Jobs Bill
Stateline.org - States Plug Budget Holes, for Now
Economic Policy Institute - Dire States--State and Local Budget Relief Needed
PSN has outlined progressive options for revenue generation and balanced budgets in previous issues of the Dispatch. The Tax Fairness Organizing Collaborative also provides guidelines for closing recessionary budgets, which should include raising money available to state governments, making tax increases and reform one in the same, and encouraging augmented federal-state revenue sharing.
Center on Budget and Policy Priorities - Tax Measures Help Balance State Budgets
Progressive States Network - Revenue Options in 2010: Making the Case and Debunking the Myths
Tax Fairness Organizing Collaborative - Solutions that Work for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps