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

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."

Critics Resisting New Jersey Governor's Push for Further Privatization

Last month, New Jersey Gov. Chris Christie unveiled his $29.3 billion FY2011 budget proposal -- an extremely regressive plan that would only exacerbate the economic pain for the state's working and middle class families.  The Governor's budget relies on 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, letting an income tax surcharge on high-end earners expire, closing psychiatric hospitals, proposing a constitutional amendment to lower the 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.  As state Sen. Stephen Sweeney concisely stated, "The wealthy people in New Jersey got a tax cut.  The middle class and the poor are going to get a tax increase.  It’s that simple."

Push to Privatize:  One of the more troubling aspects of the budget is the broad effort to privatize state services.  In early April, Gov. Christie established a privatization panel by Executive Order, seeking to identify $50 million in savings.  The state’s troubled history with privatization is well-documented.  In a recent hearing on the issue, the Executive Director of the state’s Commission of Investigation, Alan Rockof, cited the Motor Vehicles Commission distributing contracts to politically connected vendors in the 1980s, millions of dollars wasted on contractors for vehicle inspections, and the imprudent implementation of the E-Z Pass toll system that was fraught with high cost and delays due to private contractors.  He commented, “[i]f one common theme runs through all these disturbing case studies, it’s this: waste and abuse of the public treasury and public property can flourish if no one is minding the store on the public’s behalf.”

It is quite telling that the Governor's push coincides with the release of a report revealing the dangers of privatization.  SEIU Local 32BJ commissioned the Clarion Group to analyze contracts and financial data of 10 school districts that outsource their food services to two companies, Chartwells and Sodexo.  In the report, Hard to Swallow: Do Private Food Service Contractors Shortchange New Jersey Schools?, the group found that the corporations overcharged the 10 districts by $320,000 and "if the approximately 378 New Jersey school districts using FSMCs (food service management companies) are also being overcharged at the same rate, the total amount of taxpayer money being misappropriated would come to $12 million, or enough to pay the annual salaries of 186 New Jersey teachers."

These troubling numbers mirror the general pitfalls of privatization.  As PSN has noted previously, the policy often leads to the the loss of public control, lack of oversight and transparency, inability to establish standards, policy driven by profit rather than actual public need, endangerment of vulnerable populations, increased costs, eventual loss of public revenue, and inferior and unreliable service provision.  Dealing with the aftermath of the greatest economic downturn since the Great Depression, states can ill-afford to pursue costly, inefficient, and potentially damaging privatization schemes.

Youth Registration Law Approved in Maryland

With a vote on the final day of the Maryland legislative session and an expected governor's signature, Maryland will become the fifth state with 16-year-old youth voter pre-registration.  The bill, HB 217, is expected to create thousands of new voters and encourage participation among young people.

"This is a big victory for democracy," said its sponsor, Senator Jamie Raskin, "With this legislation, we can now register young people before they graduate and are off into the work force or to college or the military.  All the studies show that, when people register, they vote." 

Other states with 16-year-old pre-registration include Hawaii, Florida, North Carolina and Rhode Island.