From the Dispatch

Maine Voters Reject Tax Reform Initiative, but Approve Infrastructure Investment

Altaf Rahamatulla — Thu, 10 Jun 2010 16:58:23 -0400

This past Tuesday, Maine votersconsidered legislation which would have reformed the state's tax structure and bond measures that will bolster infrastructure investment.By a large margin, Mainers rejected a law passed last June, LD1495, to lower the top income tax rate from 8.5 percent to 6.5 percent for state residents earning less than $250,000 annually by broadening the sales tax to include different services and shifting tax burden to nonresidents by increasing the meals and lodging tax from 7 to 8.5 percent.

Supporters of the reform initiative, most notably, Maine AFL-CIO, some regional Chambers of Commerce, the Maine Council of Churches, and the MaineCenter for Economic Policy Institute (MECEP), contended that itrepresented the most substantial reform of the state's tax code in almost four decades. Overall, MECEP found that the "modestly...progressive" package would have provided "direct help for families struggling to survive in this troubling economic climate, and it is money that will stay in the local and state economies and buoy Maine small businesses." Opponents, including conservative groups, the state's Realty Association, and businesses tied to the tourism industry,who argued against shifting some of the state's tax burden to tourists and expanding the sales tax base to include different categories of services, gatheredthe necessary signatures to place the issue up for referendum as Question 1.

While the legislation would have reduced the income tax burden for 95 percent of Maine families and made it easier to apply and receive property tax relief through the state's circuit breaker program, advocates believe the campaign to support reform faltered due to the complexity of the message. While many voters readily saw expanding the sales tax base to services as a tax increase, they were skeptical that the state would deliver on lowering the income tax burden. Sen. Joe Perry, one of the authors of the legislation, reflected on the results, "I never thought I'd seethe public vote to raise their own taxes."

The ballot defeat additionallyindicates that while the current sales tax in most states is outdated and designed for an industrial economy in which most consumer spending went to buying goods, expanding the sales tax to services is still a challenging message to articulate to voters.

Although Mainers rejected changes to the state's tax structure, voters made clear that they support spending for long-term investments to spur economic development by approving bond measures for "$26.5 million for an offshore wind energy demonstration site, related manufacturing and campus energy conservation; $47.8 million for highways, railroads and marine facilities; and $10.25 million for clean water projects."

State Revenue Increases Across the Nation Continue to Ease Pain of Downturn

Altaf Rahamatulla — Mon, 24 May 2010 13:28:26 -0400

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 racked 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:

- Red State Tax Increases and the Failure of the Anti-Tax Movement

- Wave of High-Income Tax Increases

- Eliminating Corporate and Business Tax Loopholes

- Raising and Reforming Sales and Excise Taxes

- Challenging Regressive Budget Actions

- Making the Case for Progressive Tax Policy

- The Public Supports Progressive Investments-- But Needs to Be Sold on Government Effectiveness

- The Need for Continued Federal Support

- Conclusion

Red State Tax Increases and the Failure of the Anti-Tax Movement

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.

Resources:
Ballot Initiative Strategy Center - Fiscal/Budget Issues
Progressive States Network - Public Support for Progressive Taxation & The Failure of the Anti-Tax Movement

Wave of High-Income Tax Increases

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.

Resources:
Center on Budget and Policy Priorities - Raising State Income Taxes on High-Income Taxpayers

Eliminating Corporate and Business Tax Loopholes

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 Governm ent 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.

Resources:
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 Governm ent Spending Data

Raising and Reforming Sales and Excise Taxes

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."

Resources:
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

Challenging Regressive Budget Actions

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

Making the Case for Progressive Tax Policy

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.

Resources:
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

The Public Supports Progressive Investments-- But Needs to Be Sold on Government Effectiveness

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.

Resources:
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

The Need for Continued Federal Support

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.

Resources:
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

Conclusion

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.

Resources:
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

Recovery Act Boosting Economic Performance and Providing Middle Class Tax Relief

Altaf Rahamatulla — Thu, 29 Apr 2010 12:15:36 -0400

The Council of Economic Advisers (CEA) recently released its third quarterly report on the impact of the American Recovery and Reinvestment Act (ARRA). The report generally confirms what economists across the board have concluded: the Recovery Act has prevented a full economic collapse; generated millions of jobs; boosted national economic performance; and provided sorely needed state fiscal relief.

The CEA estimates ARRA has created or saved between 2.2 and 2.8 million jobs, nearly half of which have been enabled by the tax relief and income support provisions of the law. The report also finds that as a result of the Recovery Act:

government investment in high-growth areas, including infrastructure and clean energy, increased $16 billion in the first quarter of 2010;
real GDP began rising in the third quarter of 2009 and payroll employment started to increase in the first quarter of 2010;
first quarter GDP in 2010 is between 2.5 an 2.9 percent higher than what it would have been; and
approximately $110 billion in tax relief and $90 billion in other income support, like unemployment benefits and food assistance, directly benefited middle and lower income families

The last point is critical. Not only has ARRA positively impacted the economy, it has offered real relief to working families in a time of extreme economic hardship. As CEA Chair Christina Romer, relates, “[i]n addition to shoring up the overall economy... the Recovery Act has made a real difference in the lives of families. The broad set of tax cuts and income supports enacted last year have clearly boosted consumption and employment growth in a way that has been absolutely essential.” The table below illustrates that ARRA's tax relief provisions are predominantly directed towards the middle and working class and have helped reduce these families' tax burdens to the lowest levels they have been in decades.

Resources:
Center on Budget and Policy Priorities - Federal Income Taxes on Middle-Income Families at Historically Low Levels
Council of Economic Advisers - The Economic Impact of the American Recovery and Reinvestment Act of 2009: Third Quarterly Report
Progressive States Network - 2.4 Million Jobs Supported by the Recovery Act - and a Depression Averted
Progressive States Network - Take Action: Additional Federal Job Creation and State Fiscal Relief Needed
The White House - New CEA Report Finds Recovery Act Already Responsible for about 2.5 Million Jobs

Tax Day: With Middle Income Families Paying Less Federal Taxes, States Have More Leeway for Revenue Increases

Nathan Newman — Thu, 15 Apr 2010 12:46:02 -0400

As states struggle to close budget gaps, it's worth highlighting that due to tax changes at the federal level, most middle income families are paying a far smaller percentage of their income in federal taxes than they did a few years ago. So while states should concentrate revenue increases on those who can most afford it, there is greater capacity among middle income families to absorb some tax increases due to the lower federal tax burden.

Two new studies highlight this reality. In a recent policy brief, President Obama cut taxes for 98% of working families in 2009, Citizens for Tax Justice found, detailing that provisions in last year's Recovery Act reduced federal income taxes for 98 percent of all working families and individuals. More broadly, the Center on Budget and Policy Priorities (CBPP) outlines in their report, Federal Income Taxes on Middle-Income Families at Historically Low Levels, that a family of four in the exact middle of the income spectrum will pay only 4.6 percent of its income in federal income taxes this year, the second-lowest percentage in the past 50 years.

Despite the the alarms advanced by the Tax Foundation and other conservative groups that average Americans have to work for many months to pay their tax obligations, a separate report from CBPP debunks these claims. Congressional Budget Office data shows that 80 percent of U.S. households pay federal tax at a lower rate than the Tax Foundation’s estimated “average” federal tax obligation.

More Options for States to Raise Revenue: With a lower federal tax burden, generating revenue at the state level become a less onerous proposition. Progressive States Network has highlighted many of the best practices for states to raise revenue for needed services in an earlier Stateside Dispatch, Revenue Options in 2010: Making the Case and Debunking the Myths, which details how states are raising rates on high-income individuals, closing corporate loopholes, and expanding the sales tax base to services to increase revenue and fairness.

Emphasizing the argument for greater taxes on the wealthiest families, a new Economic Policy Institute report, At the Top: Soaring Incomes, Falling Tax Rates, shows how the 400 American families with the highest incomes have seen a dramatic decline in their effective tax rate since 1992.

Another report, Leaving Money on the Table, from the Institute on Taxation and Economic Policy and United for a Fair Economy's Tax Fairness Organizing Collaborative, demonstrates that residents in states that predominantly rely on regressive sales tax rather than a progressive state income tax, pay much higher federal income taxes. States flagged in the analysis include Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. They conclude that states who "are most flagrantly ignoring the benefits of this important source of tax fairness could use this revenue-sharing agreement to provide valuable tax cuts to many state residents without depleting state coffers by a dime."

Resources:
Progressive States Network - Revenue Options in 2010: Making the Case and Debunking the Myths
Citizens for Tax Justice - President Obama Cut Taxes for 98% of Working Families in 2009
Center on Budget and Policy Priorities - Federal Income Taxes on Middle-Income Families at Historically Low Levels
Institute on Taxation and Economic Policy and Tax Fairness Organizing Collaborative - Leaving Money on the Table
Economic Policy Institute - At the Top: Soaring Incomes, Falling Tax Rates

Eye on the Right: Arizona's Failed Experiment with Tax Cuts

Altaf Rahamatulla — Thu, 11 Feb 2010 11:58:44 -0500

How are Arizona's right-wing legislators responding to the state's most severe fiscal crisis since the Great Depression?

Massive corporate income tax cuts, of course.

A "Corporate Bailout": Arizona's "job recovery act" (HB2250), passed the state House of Representatives in late January and included such corporate subsidies as reducing the assessment for business property taxes, cutting the the corporate income tax rate from 6.968 to 5 percent over four years, and lowering income tax rates by 10 percent. Ignoring demands by progressive legislators to at least postpone the vote until a fiscal impact study could be conducted, the leadership just has taken steps towards further fiscal calamity.

Opponents of the measure in the legislature point out that if businesses property taxes are reduced, homeowners will have to pay a greater share. Rep. Tom Chabin states, "[i]t is very clear that homeowners today cannot sustain this kind of burden." Assistant Minority Leader, Rep. Kyrsten Sinema adds, “[t]he reality is that it’s a corporate bailout package” that would harm the economy and benefit CEO's rather than the middle and working class.

How Arizona's Tax Cuts Fed Their Current Fiscal and Economic Crisis: The state has become so averse to taxes that a picture of the Sesame Street character, Grover, hangs in the Senate Republican staff room. The caption under the photograph reads: "Ask Grover," referring not to the beloved children's puppet, but to Grover Norquist, the head of Americans for Tax Reform, an organization that opposes raising taxes and asks lawmakers to sign on to a pledge to reject any and all increases. Arizona has one of the highest percentage of lawmakers who have added their signatures to the pledge. Since 1992, the state has approved 42 tax cuts to its three major revenue sources--personal and corporate income, and sales--and eliminated statewide property taxes that accrued to the general fund.

The result?

Despite right-wing promises that tax cuts prevent job losses and foster economic growth, the state now faces a projected FY2011 budget deficit of $2.6 billion and has suffered the largest job losses of any state in the nation. In fact, since the current economic recession began in December 2007, Arizona has lost 265,000 jobs, or 9.9 percent of the state's employment. Even Michigan, with an economy dependent on a shrinking car industry, has not seen those kinds of losses as a percentage of jobs during the recession. Arizona has some of the highest foreclosure rates in the country, 18.9 percent of the state lacks health insurance and 276,500 Arizona children do not have coverage. Since 2000, Medicaid rolls have increased exponentially, reaching over 1.3 million in August 2009.

Arizona Fails to Invest in the Future: Having systematically cut taxes and underfunded education and other long-term social investments for years, the state last year continued to dig a deeper hole by slashing public health, all levels of education, and even temporary health insurance for people with serious medical problems. Gov. Jan Brewer even approved a proposal to sell Capitol buildings to private firms, which will just cost the state even more in rent payments in the future-- a classic pattern of right-wing state leadership engaging in short-term thinking at the expense of long-term fiscal and economic health.

As PSN has detailed, utilizing progressive tax increases to invest in the building blocks of growth, like education, health care, and transit, leads to higher economic growth in the long-term and is a far better alternative to massive budget cuts. Grover's picture needs to come down off the wall at the Arizona state capitol.

Resources:
Arizona Daily Star - A needed increase in taxes won't hurt Arizona's economy
Ballot Initiative Strategy Center - Fiscal/Budget Issues
Center for American Progress - State of American Political Ideology, 2009: A National Study of Values and Beliefs
Center on Budget and Policy Priorities - Recession Continues to Batter State Budgets; State Responses Could Slow Recovery
Pew Center on the States - Beyond California
Progressive States Network - Revenue Options in 2010: Making the Case and Debunking the Myths
Progressive States Network - State Job Creation Strategies Part I: Finding the Money and Investing in Human Capital and Physical Infrastructure

Revenue Options in 2010: Making the Case and Debunking the Myths

Altaf Rahamatulla — Mon, 01 Feb 2010 13:22:15 -0500

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.

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

- Debunking Myths that Taxes Undermine Economic Growth

- New Revenue is Needed to Invest in Economic Recovery

- Corporate Tax Reform and Eliminating Wasteful Economic Subsidies

- Corporate Transparency in State Budgets

- Expanding the Sales Tax Base

- Conclusion

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.

Resources:
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

New Revenue is Needed to Invest in Economic Recovery

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.

Resources:
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.

Resources:
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.

Resources:
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.

Resources:
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

Conclusion

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.

Big Business Already Giving Big to Take Down Oregon Tax Increase

PSN — Thu, 13 Aug 2009 10:50:17 -0400

Courtesy of Citizens for Tax Justice.

Earlier this year, policymakers in Oregon enacted both temporary and permanent changes in the state’s tax system to help close an enormous budget gap and, by extension, provide funding for vital services like education, health care, and public safety. Among the changes are an increase in the personal income tax rate on income in excess of $250,000, new limitations on the personal income tax deduction for federal taxes paid, reforms to the state’s corporate minimum tax, and an increase in the top corporate income tax rate.

Yet, due to quirks in Oregon’s legislative process, opponents of these changes have an opportunity to put them before the voters for approval via referendum. Not surprisingly, representatives of big business and a who’s who of anti-tax organizations are attempting to take full advantage of that opportunity. Groups such as Associated General Contractors of America, Associated Oregon Industries, and Common Sense for Oregon have all already given tens of thousands of dollars to the referendum effort, which must collect over 55,000 signatures by September 25. If they do, then the changes will be put before the voters in January.

While corporate interests will almost certainly go to great lengths to stop these changes from taking effect, it will ultimately be the voters who decide -- and, for now, it appears that they understand the need for additional revenue generated in a progressive fashion. Polling conducted by Grove Insight and released by the Oregon Center for Public Policy indicates that 62% of likely voters would back the changes enacted by the legislature, with just 26% opposed.

For more on the recent changes in tax policy and on the referendum fight, visit the Defend Oregon Coalition.

Progressive Revenue Measures Approved or Moving in Oregon and Other States

Nathan Newman — Thu, 25 Jun 2009 12:02:13 -0400

Oregon became the latest state to address the current fiscal crisis with progressive revenue increases. This is part of a welcome trend that we highlighted back in April of states recognizing that budget cuts need to be balanced with wealthier state residents being asked to pay their fair share to address the effects of the economic downturn.

The Oregon legislature approved the creation of two new temporary top income tax brackets with rates of 10.8 and 11 percent and increases in the state's corporate minimum tax (which had not been raised since 1931). The tax increases for corporations and individuals and couples making more than $250,000 per year will yield $700 million in additional revenue.

Oregon's action follows New York and Hawaii, who approved similar income tax increases on wealthier earners this year, as did the Minnesota legislature (whose bill was vetoed by Minnesota Governor Pawlenty). Other states have also taken action or are moving in that direction to raise necessary revenue in a progressive manner:

New Jersey is debating a budget that includes $1 billion in income tax increases on the wealthy, with rates increasing from 6.37 percent to 8 percent on household income between $400,000 and $500,000, from 8.97 percent to 10.25 percent for income between $500,000 and $1 million, and from 8.97 percent to 10.75 percent on income over $1 million.
The Connecticut legislature is proposing income tax increases on joint filers making more than $500,000 per year (although they face a veto threat from the governor).
The Rhode Island House released a budget this past week that would eliminate the preferential treatment of capital gains in that state, thereby treating such income the same as wages.
Wisconsin is debating a number of major progressive tax proposals, with the state Assembly approving raising income taxes on individuals earning more than $225,000 and households making more than $300,000 a year, while both chambers have approved cutting back on preferential treatment of capital gains income.
Pennsylvania Governor Ed Rendell indicated that he would support increasing the state's personal income tax rate from 3.07 to 3.57 percent.
The North Carolina House budget calls for a combination of sales tax increases along with higher income taxes on couples making more than $200,000 a year.
Colorado ended taxpayers’ ability to deduct capital gains income derived from assets or businesses located within the state.
Delaware's House budget currently being debated calls for the restoration of the state inheritance tax and an increase from 5.55 percent to 5.95 percent on taxable income from $50,000 to $60,000, from 5.95 percent to 6.95 percent on income from $60,000 to $150,000, and from 5.95 percent to 7.45 percent on income exceeding $150,000.
Washington, D.C. Councilman Jim Graham has proposed raising the top tax rate in the District to 8.9 percent, but only for those taxpayers with incomes above $500,000.

As we detailed in April, such tax increases are sound economic policy and help prevent devastating budget cuts that would undermine future growth. Overall, at least twenty-three states have enacted tax increases of some kind this session and another thirteen are considering it (see map courtesy of the Center on Budget and Policy Priorities).

Resources:
Progressive States Network - Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth
Citizens for Tax Justice - The Tax Justice Digest
Center for Budget and Policy Priorities - Tax Measures Help Balance State Budgets: A Common and Reasonable Response to Shortfalls

Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth

Nathan Newman — Mon, 06 Apr 2009 14:03:58 -0400

Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth

After resisting the proposal for months, New York Governor Patterson has agreed with legislative leaders to raise income taxes on the wealthiest state residents in order to help close the state budget gap. “It’s a profound breakthrough for tax fairness,” said Dan Cantor, executive director of the Working Families Party, an organization of New York individuals, labor unions and other groups that was a leader in the campaign to raise the tax rates.

As this Dispatch will outline, the New York deal is part of a national movement of state leaders looking to raise new revenue from high-income residents to avoid budget cuts and fund needed investments for long-term economic recovery. Instead of listening to tired rhetoric about the wonders of tax cuts for economic growth, policy leaders across the country are instead paying more attention to the history of states where higher taxes on high-income residents and investments in public needs has led to stronger economic growth. The rightwing anti-tax movement has been an increasing failure in recent years and no longer intimidates state leaders who are committed to achieving both economic growth and economic justice in their communities.

Table of contents

- Current and Recent Campaigns to Raise the Income Tax

- Why Tax Increases are Better than Budget Cuts in Addressing the Economic Crisis

- Economic Growth and Income Tax Rates

- Beating Anti-Tax Politics with Tax Fairness

Current and Recent Campaigns to Raise the Income Tax

New York's plan will raise an additional $4 billion per year by creating two new tax brackets. Single filers who earn $200,000 to $500,000 and married couples whose combined earnings total $300,000 to $500,000 will be taxed at a rate of 7.85% and filers with $500,000 of taxable income will be taxed at a rate of 8.97%. Currently, the state's tax rate is 6.85% for everyone who earns more than $40,000.

Just in the last few months, other state leaders have also rolled out a wide range of proposals for new taxes on high-income residents:

Wisconsin: Wisconsin's governor has proposed a new tax bracket for individuals making more than $225,000 a year or couples making $300,000.
Connecticut: The Assembly's Finance Committee approved adding four new income tax brackets, with rates ranging from 6% to 7.95%, for married Connecticut residents with incomes over $250,000 annually (and single taxpayers with incomes above $132,500).
New Jersey: New Jersey is considering a one year increase in the tax on the highest end income earners to 10.25% from 8.97% and suspending the property tax deduction for better-off New Jersey residents. The proposal would raise an estimated $620 million to help close a $7 billion shortfall.
Iowa: Iowa legislators are discussing a far-ranging proposal to reform and simplify their income tax code, including eliminating state income tax deductions for federal income taxes paid, which would increase income taxes paid by high-income taxpayers while the rest of the reforms would lower tax rates for low- and moderate-income taxpayers. House Speaker Pat Murphy recently voiced his support for the changes and the Senate seems poised to act as well.
Delaware: 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% to 6.95% for residents making more than $60,000 per year, the first income tax increase since 1974.
Oregon: Among the proposals to address budget shortfalls before the House Revenue Committee is one to increase income tax brackets for individuals making $125,000 a year.
Washington: In a state that doesn't have an income tax, Senate Majority Leader Lisa Brown has raised the possibility of an income tax on high-income residents to close the state budget gap, potentially taking the issue to the ballot.

General increases in the income tax are part of budget proposals in California and Illinois. The California governor and Legislature agreed in February to raise the tax on all brackets by one quarter of a percentage point, a proposal which will be going to voters this Spring. In Illinois, Governor Quinn has proposed increasing the state's income tax rate from 3% to 4.5% and tripling the personal exemption from $2,000 to $6,000.

Recent "Tax the Rich" Campaigns: A number of states in recent years have passed legislation to increase revenues through higher tax brackets for high-income earners:

New Jersey: Back in 2004, as New Jersey struggled with both a budget deficit and calls to lower the property tax burden, the state created a new 8.97% tax bracket for those making $500,000 per year or more. Only 30,000 households saw a tax increase, while 1.8 million households saw a tax cut.
Maryland: In 2007, Maryland enacted comprehensive tax fairness legislation, adding a 5% rate on single filers earning more than $150,000 and a rate of 5.5% on those making more than $500,000. In 2008, the state added a top tax bracket of 6.5% for those making $1 million or more -- raising an additional $328.5 million over the next three years. These laws were approved after a 2003 study by the Institute on Taxation and Economic Policy showed median income Marylanders were paying 8.8% of their income in state and local taxes, while the wealthiest state residents were only paying 5.1%.
Minnesota: Similarly, the Minnesota legislature approved a plan in 2007 (unfortunately vetoed by their governor) that would have cut taxes for 90% of the populace while raising revenue with a new 9% tax rate for married couples making $400,000 per year or more. Both of these examples show that a fairer tax system can help middle class families without gutting social spending.

This rapid spread of campaigns to raise income tax rates on high-income earners reflects both the present economic crisis and the increasing recognition that it is both the best economic and political option for state leaders.

Resources
Citizens for Tax Justice - Tax Justice Digest
Progressive States Network - Make Tax Systems More Progressive
Working Families Party - Victory for Progressive Taxes!

Why Tax Increases are Better than Budget Cuts for Addressing the Economic Crisis

Raising taxes on the wealthy and directing those funds to job growth in our states is the most effective tool policy leaders have to address the current economic crisis. Despite the argument put forth by some politicians that tax cuts for the rich will "trickle down" to everyone else, the reality is that they don't. In fact, the best way to help low- and moderate-income families is to do so directly through state spending programs that fund jobs and provide services. This is not just because it improves the lives of those families, but because it drives broader economic growth as well.

Bottom-Up Economics: As Nobel Prize winning economist Joseph Stiglitz and Peter Orszag, Obama's new director of the Office of Management and Budget, wrote earlier this decade:

“[E]conomic analysis suggests that tax increases would not in general be more harmful to the economy than spending reductions…any tax increase or transfer payment reduction would reduce saving rather than consumption…whereas [cutting] government spending on goods and services would directly reduce consumption.

The spending by individuals and businesses that would be affected by tax increases often is less concentrated among local producers — since part of the decline in purchases that would occur if taxes were raised would be a decline in the purchase of goods produced out of state.”

To put it more bluntly, income by wealthy state residents is more likely to be spent on buying a second home in Mexico or France, while money spent on health care, transportation or education will fund jobs and services in your state. Money spent on a pre-school, for example, not only creates jobs for pre-K teachers, it puts money in the pockets of parents who don't have to pay for private day care and gives them more flexibility in finding and keep work that is available. Money spent on Medicaid employs local nurses and helps patients financially by allowing them to spend what they do have on other local goods and services.

State Spending for Low-income Families is the Best Economic Recovery Strategy: As the Congressional Budget Office has explained, "policies aimed at lower-income households tend to have greater stimulative effects" because such families have a higher tendency to spend money they receive. Because of this, the Center on Budget Policy and Policy Priorities argued earlier this year that state spending that helps low- and moderate-income individuals such as health care spending or nutrition assistance is one of the best ways to boost the economy. Many analysts have noted that typical state government spending is particularly well-targeted at boosting economic recovery, so raising taxes on the wealthy who can afford to contribute to fund government spending is one of the most effective approaches to job creation and economic stimulus.

Resources
Peter Orszag and Joseph Stiglitz - Budget Cuts vs. Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?
Center on Budget Policy Priorities - Assistance for Hard-Pressed Families is one of the Best Ways to Preserve and Create Jobs
Progressive States Network - Why States Need to be a Focus for Any Economic Recovery Plan

Economic Growth and Income Tax Rates

Since public investments are dependent on robust state revenues, increasing taxes on the wealthy is a key to both short-run economic recovery and long-term economic growth. Rightwing attacks on income tax increases as undermining economic growth are just rhetoric unsupported by facts.

Earlier this year, Economist Joseph Stiglitz wrote state leaders in New York in support of proposed tax increases on wealthier New Yorkers, highlighting the short-term economic gains from shifting that money towards state spending for low- and moderate-income families. But he also emphasized that such spending was crucial to long-term economic growth as well:

"Raising taxes and maintaining public expenditures (including investments) also helps America in meeting its long run needs. America today faces two major problems -- inadequate investments, especially in infrastructure, and growing inequalty...Investments in infrastructure also increase the productivity of private investment -- another important spillover."

More broadly, in 2004 economist Robert Lynch with the Economic Policy Institute published Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, one of the most extensive analyses of the relation of state tax policies to economic growth. The bottom-line conclusion of his study was that tax policies themselves have little effect on overall economic growth; what mattered was that states raise enough revenue to invest in the "public services such as education and infrastructure [that] spur economic growth and influence business location decisions."

Higher Tax States Have Higher Incomes and Stronger Income Growth: Because higher-tax states invest more in their communities, they generally generate higher-wage jobs compared to lower-tax states. For example, states that enacted large tax increases between 2002 and 2004 – increasing state revenues by at least 5% – subsequently experienced stronger average growth in personal income than states that did not increase taxes at all. This builds on other analyses that states which collect the highest percentage of personal income in taxes actually sustain higher income growth.

The Wealthy Don't Leave High-Income Tax States: And despite rightwingers inevitably predicting economic doom, tax increases on the wealthy do not lead to wealthier residents leaving the state:

From 2004 to 2006, following California’s implementation of a new national top rate of 10.3% on income over $1,000,000, there was a 38% increase in the number of millionaires in the State.
The number of half-millionaires in New Jersey grew by 70% since the state increased their highest rate from 6.37% to 8.97% in 2002, from 26,000 in 2002 to 44,000 in 2006.
New York experienced a comparable increase in high-income tax returns after temporarily raising income tax rates earlier in the decade, from 250,000 in 2003 to over 325,000 in 2005, representing a 30% growth.

In fact, the already-wealthy benefit far more from a strong economy, so investments in education, transit and the health of the workforce are worth far more to them over the long-term than a few points added to present day tax rates.

Business Leaders Don't Make Location Decisions Based on Tax Code: Business leaders don't create jobs in states based on the level of taxation, despite myths to the contrary-- a point even conservative business leaders admit. As Paul O'Neil, CEO of Alcoa Aluminum and Treasury Secretary under George W. Bush admitted in his confirmation hearings :

"I never made an investment decision based on the tax code...If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements.”

Or as long-time business leader and current NYC mayor Michael Bloomberg said:

"Any company that makes a decision as to where they are going to be based on the tax rate is a company that won’t be around very long. If you’re down to that incremental margin you don't have a business."

Debunking rightwing anti-tax arguments: So given these realities, a few key debunking talking points are useful to remember when the rightwing tries to argue that higher taxes will undermine growth:

Supposedly "high tax states" usually have higher per capita income growth rates.
"Growth" in supposedly low tax states can just mean more low-paying jobs without any wage increases for existing residents.
“Low tax” states often have very high user fees and less and more costly services for state residents.

Resources
Joseph E. Stiglitz - Letter to New York Governor David A. Paterson, New York Senate Majority Leader Joseph L. Bruno, and New York State Assembly Speaker Sheldon Silver
Economic Policy Institute - Rethinking Growth Strategies
Center for Working Families - Fact Check: What Happens When Income Taxes on the Rich Are Raised?
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

Beating Anti-Tax Politics with Tax Fairness

The politics of enacting income tax increases on high-income residents is as clear as the economic argument. After New Jersey enacted its 2004 plan increasing taxes on the wealthy, the Democratic House majority in 2005 increased to its largest size in three decades, while progressives in Maryland and Minnesota have continued to maintain and even grow strong legislative majorities in the wake of approving bills to increase taxes on high-income earners.

This has led to a broad trend in recent years of almost consistent rightwing failure on tax issues as progressives have sharpened their message and mobilized. When the rightwing tried to enact TABOR-like initiatives in states across the country, progressives highlighted fraud in signature collecting in multiple states and issue was thrown off the ballot in Michigan, Montana, Nevada, Oklahoma and Missouri. On Election Day, voters in Maine, Nebraska and Oregon finished the job in voting down the remaining TABOR initiatives. And in 2008, anti-government tax measures were defeated overwhelmingly in Massachusetts, North Dakota and Oregon.

When progressives stand up for tax fairness and shift the tax burden to those who can afford to pay, the rightwing bogeyman of anti-tax politics is largely toothless.

Trumping the Rightwing with Tax Fairness: Almost every state tax system requires working families to pay a higher percentage of their income in taxes than their wealthier citizens. In fact, as the Institute on Taxation & Economic Policy detailed in their 2003 study, Who Pays?:

[O]nly four states require their best-off citizens to pay as much of their incomes in taxes as middle-income families have to pay. Only eight states tax their wealthiest residents at effective tax rates as high as the poorest taxpayers are required to pay... Most states tax the wealthy at rates that are much lower than the rates on middle- and low-income families.

Increasing the income tax load paid by higher-income earners addresses the reality that most state voters recognize: the wealthy are not paying their fair share of taxes. A report by the Center on Budget and Policy Priorities and EPI emphasizes that making state tax systems more progressive is also a way to mitigate the broader trend of growing before-tax economic inequality.

Addressing that deep sense of political and economic unfairness is the first step necessary to any broader commitment by the public to fund the long-term investments we need for economic recovery and growth.

Resources
Progressive States Network - Stop Rightwing Tax Campaigns
Ballot Initiative Strategy Center - Investment/Taxes Issues
ITEP - Who Pays? A Distributional Analysis of the Tax Systems in All 50 States
Center on Budget and Policy Priorities and EPI - Pulling Apart: A State-by-State Analysis of Income Trends

Dos and Dont's of Coping With State Budget Crises

Nathan Newman — Tue, 19 Feb 2008 06:40:14 -0500

The budget news is grim in some states. Twenty states face a combined budget shortfall of at least $35 billion for 2009, according to analysis by the Center on Budget Policy & Priorities (see CBPP graph below). Another 8 states will likely have budget problems next year or the year after.

The impulse by some state leaders is to slash state spending, but that could be disastrous for the economy if multiple states lay off state workers and cut-off help to those in need just as private spending is falling.

In fact, the right kind of revenue increases may be just what is needed for economic recovery. As Nobel Prize winning economist Joseph Stiglitz of Columbia University, and Peter Orzag, now the director of the Congressional Budget Office, have emphasized, budget cuts during a recession will usually hurt state economies far more than tax increases, since cuts come dollar-for-dollar out of the economy, while tax increases, especially if targeted at the wealthy, often "reduce saving rather than consumption, lessening its impact on the economy in the short run."

This Dispatch is designed to be a primer on what states can do to ease the burden on working families in distress, while asking wealthier taxpayers and corporations to shoulder their fair share during tough times.

More Resources

Have Wealthy Pay Fair Share, Cut Taxes for Working Families

The sad truth is that almost every state tax system requires working families to pay a higher percentage of their income in taxes than their wealthier citizens. In fact, as the Institute on Taxation & Economic Policy detailed in their 2003 study, Who Pays?: "[O]nly four states require their best-off citizens to pay as much of their incomes in taxes as middle-income families have to pay." As the graph below from ITEP shows, the average family pays significantly more of their income in state taxes than the wealthy.

States can actually raise revenue, protect social services and actually make the tax system fairer all at the same time.

Strengthen Progressive Income Tax: Creating higher tax brackets for wealthier taxpayers should be the prime tool for easing budget crises. For example, back in 2004, as New Jersey struggled with both a budget deficit and calls to lower the property tax burden, the state created a new 8.97% tax bracket for those making $500,000 per year or more. Only 30,000 households saw a tax increase, even as 1.8 million households saw a tax cut. Similarly, the Minnesota legislature approved a plan last year -- unfortunately vetoed by their governor -- that would have cut taxes for 90% of the populace while raising revenue with a new 9% tax rate for married couples making $400,000 per year or more. Both of these examples show that a fairer tax system can help middle class families without gutting social spending.

One other tool to help increase fairness in the tax code is creating or increasing State Earned Income Tax Credits to ease the tax burden on lower-income working families. It is worth remembering that in an economic slowdown, such tax cuts for working families will have the most immediate impact on the economy, since low-wage working families invariably have to spend those tax savings on immediate needs, usually at local retailers or other local services to strengthen local economies.

Circuit Breakers, Not Property Tax Caps: With the housing market meltdowns, we are seeing more proposals for across-the-board caps on property tax rates-- a bad idea that delivers most of the tax benefits to wealthier property owners who least need the help. Instead, a better approach are Property Tax Circuit Breakers, which limit property taxes to a percentage of a taxpayer's income, while fully taxing the property of wealthy homeowners. A new study from Connecticut emphasizes why circuit breakers, along with other reforms, are far better than a tax rate cap proposed by the governor in that state.

Broader-Based Sales Taxes: While sales taxes often contribute to tax inequality, they can be made fairer by broadening the tax base of goods and services covered, especially with an eye to taxing legal and financial services used more heavily by richer consumers. In dealing with its budget crisis last fall, Michigan approved a new budget that combined an increased income tax with expanding the sales tax to cover more services. See this New Jersey Policy Perspectives report on the wide range of services that different states tax.

More Resources

Cut Corporate Loopholes, Not Social Services

One reason social services face funding crises is that since 1980 state corporate income tax revenues have dropped from 9.7% of all state taxes down to just 5.7% by 2000. A 2005 study by Citizens for Tax Justice found that 252 of America's largest corporations failed to include two-thirds of their U.S. profits on state tax returns, avoiding an estimated $41.7 billion in state corporate income taxes over three years. (See CTJ chart to right for the low effective tax rate on corporations).

Corporate income taxes are often the main tax that out-of-state corporations and their shareholders pay for the public benefits enjoyed by those companies, so many states are increasingly using a variety of tools to have corporations pay their share.

Combined Reporting: States are increasingly requiring companies to use combined reporting, listing profit reports for all subsidiary companies together on state tax forms to prevent shell games where companies hide profits through phony transactions among different corporate entitites. Wal-Mart alone may have avoided $2.3 billion in state taxes between 1999 and 2005 through such gaming of the tax system--- something combined reporting can shut down.

Docoupling: States can save revenue just by refusing to automatically grant special interest tax breaks handed out by the federal government by "decoupling" their tax code from the feds. For example, at least 23 states would save $1.7 billion in revenue if they refuse to implement the "bonus depreciation" corporate tax break put into the recent federal stimulus package. Similarly, some states have already rejected one particular federal loophole, the "Qualified Production Activities Income" (QPAI) deduction, because it threatens to cost states over $1 billion per year as it is phased in.

Oil windfall taxes: A number of groups have advocated state Windfall Profits Taxes to capture the outsized oil company profits. Such a tax could raise billions for state coffers-- $500 million per year for the State of Washington alone according to the Economic Opportunity Institute, revenues which could be used to offset many of the environmental costs of fossil fuel use.

Tax disclosure: To highlight exactly which companies are abusing the tax code, states should require all large corporations to disclose whether they are paying their fair share of taxes on profits earned. In Requiring Corporate Tax Disclosure, the Center on Budget Policy & Priorities has outlined a model plan for how states can design such tax disclosure policy to allow legislators and tax authorities to identify likely corporate abuses more easily.

More Resources

Prune Economic Development Subsidies, Protect Social Investments

Too often, state leaders think handing out fat economic development checks to large companies is the route to economic growth. However, as author Robert Lynch outlined in Rethinking Growth Strategies, state and local taxes and development subsidis are too small a part of a typical company's costs to determine plant location, so any cuts in public services needed to pay for them are likely to cost more jobs than any jobs potentially attracted by economic development subsidies.

The worst thing to do during temporary hard times is to cut back on the investments in education, university research, physical infrastructure, and worker training that DO determine where companies want to do business in the long term. As CFED's A Progressive Economic Development Agenda for Shared Prosperity argues, low-tax strategies are a "get poor" strategy where the better approach to "local competitiveness needs to focus on meeting the workforce and infrastructure requirements of the New Economy..."

Unfortunately, billions of dollars are offered to large corporations in exchange for only a handful of jobs, instead of using those funds to invest in long-term upgrading of human and physical capital that could payoff in far more job creation.

The organization Good Jobs First has been the national leader in highlighting the problem of economic development giveaways. For example, its Illinois affiliate publicized problems in the Illinois subsidy program and then helped pass groundbreaking accountability legislation in 2003. One result of the new law is the Illinois Corporate Accountability website which tracks reports on every firm receiving different kinds of tax subsidies, the jobs they promised to create or retain, and the results year to year. Other leading states like Minnesota and Maine have enacted disclosure laws to track individual economic development deals and make the information accessible to the public. (See this study evaluating disclosure in different states.)

Good Jobs First also promotes model subsidy reform legislation with language requiring reporting and disclosure of subsidy information; the creation of quality jobs and a cap on the total subsidy amount; and recapture of subsidies in cases where companies are found noncompliant. When states enact legislation to review and disclose these deals, they then have the information needed to eliminate or reform overly generous subsidy programs to better serve a variety of community needs. And if states dump all the bad corporate giveaways, they'll actually have the funds for more effective economic growth programs.

More Resources

Conclusion

All of the above are key guidelines for managing shortfalls in revenue without cutting social services or long-term investments in state growth. As economic slowdowns hit state revenues, cutting off support for those whose family budgets are taking a hit themselves is not the answer. Instead, the real solution is to ask those who have done especially well during the good times to contribute more when things get tougher-- and gives states a chance to make regressive tax systems just a bit fairer over the long-term.

More Resources