Policy by Pink Slip?

Imagine if President Bush favored the legalization of marijuana. Now, imagine he was able to get the House of Representatives to support his position, but found resistance in the Senate. A bipartisan coalition of Senators blocked his scheme on the grounds that it would be harmful for America’s youth. Instead of respecting the legislative process, President Bush decided to start firing key personal at the FBI, Department of Justice, and other important agencies. It would provoke quite a bit of outcry.

Well, this outrageous form of policy by pink slip seems to be the new strategy for Estate Tax elimination. Last week, the New York Times reported that the Internal Revenue Service was planning to eliminate up to half of the positions that are responsible auditing the tax returns of the ultra-rich. The policy implications are pretty simple: if there are fewer people to look for tax cheaters, less tax cheaters will be caught.

Linda Beale, a law professor at the University of Illinois, pointed out that this decision will hurt the ability of the federal government to find and prosecute tax cheaters:

As for collection efficiency, one need not look further than the IRS's own statistics. As noted in the Times article, "10 percent of the estate audits brought in 80 percent of the additional taxes." In other words, wealthy people are the ones with the most to gain from cheating, and estate tax is one of the ways they can cheat most easily, with fake family partnerships and ridiculously low prefab valuations of their valuable property

According to sources cited by the article, the decision to eliminate these positions was purely political. There is a great of opposition within the IRS and also from the National Treasury Employees Union. According to the national union president, “''If these lawyers are not there to audit the gift and estate tax returns, then a lot of taxes that should be paid will go uncollected, and that impacts every taxpayer who is paying their fair share.''

Eliminating positions is simply a bad way to execute public policy. Instead of just firing people who do a job he doesn’t like, President Bush should respect the will of the Congress and abandon the idea of repealing the Estate Tax.

Estate Tax Repeal: The Kitchen-Sink Strategy

Yet another loss for proponents of estate tax repeal this week, as Senate Majority Leader Bill Frist has announced he has given up trying to shoehorn estate tax language into a pension reform bill. To hear Senate Democrats tell it, the GOP has basically been holding needed pension reforms hostage to their agenda for high-end tax cuts.

Of course, one man's logroll is another man's unprincipled bribe, but GOP leaders have thrown everything but the kitchen sink at Democrats in an effort to find some way to buy off estate tax opponents. It's worth reflecting briefly on the tricks the Congressional leadership has pulled so far to try to ram through a provision the public simply doesn't support.

Before the pension linkage, House lawmakers attached estate tax cuts to an unprincipled tax giveaway for profitable timber companies in a naked effort to court pro-estate-tax Senate Democrats from timber states (read: Washington State). CTJ has a good summary of why this was a reprehensible idea here.

Now that the pension linkage has failed, which star will the estate tax wagon get hitched to next? Try "extenders," a package of expired temporary tax breaks that Congress routinely extends for one or two years at a time but has been unable to push through this year.

The most notorious element of the extenders package is the Research and Experimentation Tax Credit; CTJ's overview of what's wrong with the R&E credit can be found here. But the bigger threat, from the perspective of those who think estate tax repeal should be debated on the merits, is a proposal to extend a temporary federal income tax itemized deduction for sales taxes. This optional deduction, first enacted for tax years 2004 and 2005, expired on January 1 of this year. Like the timber tax break idea, this marriage of convenience between estate tax repeal and the sales tax deduction is aimed right at the two Washington State Senate Democrats, Cantwell and Murray, who have so far opposed estate tax repeal.

And this one might be harder for them to say no to: the sales tax deduction was enacted to benefit wealthy itemizers living in the nine states (including Washington) that don't have a broad-based income tax. Upper-income taxpayers in these states don't have a state income tax to deduct and therefore find itemizing less useful than residents of other states. The Center on Budget and Policy Priorities has a good explanation of why this is a problematic tax reform here.

Most of the extenders enjoy more widespread support than the failed timber-tax giveaway. So there's a very real danger that lawmakers who oppose complete repeal of the estate tax will fall in line with the GOP leadership when the estate tax legislation is combined with extenders. Let your lawmaker know that this important source of tax fairness should be evaluated on its merits!

How High Are US Corporate Taxes?

Anti-taxers in Congress are once again dragging out the old canard that US corporate income taxes are higher than those of other developed democracies worldwide. The evidence? Higher top marginal rates. The Tax Foundation points out that among OECD nations, only Japan has a higher top corporate tax rate. Pretty strong stuff-- until you look behind the rates at actual tax collections. As CTJ has pointed out in the past (see here for numbers and here for a chart), US corporate taxes as a share of corporate profits are among the lowest among the OECD nations.

Now, the Tax Foundation researchers are smart enough to acknowledge this point-- but they're still leading with the "rates are too high" argument. And it's unfortunately only the "high rate" part of the argument that folks in Congress seem to have absorbed.

In an excellent New York Times article, Edmund Andrews presents both halves of the analysis:

But official tax rates are not the same as actual tax burdens. What American companies lose in high tax rates they more than make up in higher tax breaks...There are plenty of problems with the corporate tax code — rococo complexity, perverse incentives, antique ideas — but overly high taxes is not one of them.

The recent short-term bump in federal corporate revenues (driven largely by higher corporate profits and federal tax deferrals that shifted tax collections from the first half of this decade to the second) shouldn't blind us to this underlying flaw in the corporate tax. It's OK to fight about whether the US corporate tax rate is somehow "too high." But anyone who makes this argument without confronting the loophole-driven low yield of this "high-rate" tax should be laughed out of the room.

For empirical evidence on how profitable Fortune 500 companies faced with a 35 percent federal corporate tax rate have managed to pay less than half of that in taxes, check out CTJ's fall 2004 report, Corporate Income Taxes in the Bush Years.

Bush Stumps Against the Estate Tax

Yesterday President Bush spoke at the NAACP's annual convention, and slipped in a plug for current Republican efforts to permanently repeal the federal estate tax. Turns out that Bush and his pal Robert Johnson (founder of the Black Entertainment Television network) really see eye to eye on this issue:

He believes strongly, for example, that the death tax will prevent future African American entrepreneurs from being able to pass their assets from one generation to the next. He and I also understand that the investor class shouldn't be just confined to the old definition of the investor class.

It's no mystery that a billionaire like Johnson would get grumpy about coughing up any of his fortune--or that he would resort to specious arguments to prove his point. As Michael Kinsley pointed out years ago, Johnson has repeatedly expressed his shock at the "double taxation" inherent in the estate tax despite the fact that much of his net worth has never been taxed-- so Johnson is clearly not gonna let the facts get in a way of a good argument. But it still irritates to hear the guy asserting that the estate tax is punishing "African American entrepreneurs" when he really just means "Bob Johnson."

Of course, he could well actually "believe" that the BET empire will be broken up to pay his estate tax someday. And that's a big part of the problem. Thanks to years of disinformation from the anti-estate tax crowd, the distinction between what people believe about the estate tax and what the truth is, is pretty huge. But Bush at least should know the difference, if only because he should have policy folks there to explain all this to him.

Full text of Bush's speech is on the White House's website here.

Ohio Legislators Propose Tax Breaks for Wealthy

Rep. Charles Calvert has introduced a bill into the Ohio general assembly that would reduce the tax rate on capital gains from the current 6.55% to 3%. A new study released by the Institute on Taxation and Economic Policy shows that the proposal would benefit only a tiny fraction of Ohio's wealthiest, while depriving the state coffers of revenue.

The study shows that lowest-income 40% of Ohio’s population would receive nothing under the cut. The next 20% would receive an average of $1 over three years. The top 1% of Ohio’s population, however, with an average 2007 income of $812,000, would receive an average of $7,124. In fact, the study found that three-quarters of the total tax cuts over three years would go to the top one percent, and 92 percent would go to the top five percent.

Republicans who sponsored the bill, are arguing that these tax cuts will boost Ohio’s economy. Capital gains are profits made from the selling of investments, typically the stocks and bonds of large companies. It is likely that most of the money saved under lower capital gains taxes would simply be reinvested in the stock market, instead of benefiting Ohio’s economy. Tim Fogarty, an economics professor at Case Western Reserve University who was contacted by the Akron Beacon Journal to comment on the bill said"if the state wants to encourage spending in Ohio, it would be better to cut taxes for the poor because they spend locally, and they do it immediately".

Not only is it unlikely the bill would increase investment significantly in Ohio, it also deprives the state coffers of needed revenue, while sending more money in taxes to the federal government. In fact, according to the ITEP study, in the first three years alone, $97 million of the tax cuts will be sent to Washington, D.C., in the form of higher federal income taxes. When a taxpayer itemizes instead of taking the standard deduction, the taxpayer can deduct the amount spent on state taxes from their federal income taxes. The lower state capital gains tax means that the deduction will also be lower, so much of the “saved” money will simply be sent to the government in Washington instead of the one in Ohio.

The G.O.P. in Ohio has championed this bill as a way to boost Ohio's economy. However, since much of the money would end up reinvested nationally, the bill simply redirects money from the state coffers to out-of-state stock markets and the federal government. The vast majority of taxpayers would receive little or nothing. This bill is a blatant attempt to help the richest one percent of Ohioans at the expense of everyone else.

Indiana: Connecting the Dots Between Tax Cuts and Bond Ratings

From Indiana, yet more evidence that there's no free lunch. Earlier this year, state lawmakers enacted a property tax cap law which limits the tax on a residential property to 2% of its assessed value. The cap, oddly called a "circuit breaker" although it has virtually nothing in common with the property tax circuit breakers used in most other states, will also apply to business properties starting in 2010. For Indiana local governments, this means a fiscal "perfect storm," with tax caps biting at the same time that the state has cut aid to local governments in order to balance its budget.

No big deal, say Republican House leaders. Ways and Means Chairman Jeff Espich asserts that this one-two punch to locals is "not a real problem." But bond rating agencies are dissenting from this view. As the Indianapolis Star reports (sorry, no link):

Bond rating agencies, such as Moody's Investors Service and Standard & Poor's, are viewing the new law negatively because it also caps property taxes that pay off loans, thus limiting the pool of money available to pay off debts. The negative outlooks from rating agencies already are starting to drive up interest rates and the cost of borrowing. Southwest Allen County Schools was one of the first affected by the new law and a higher interest rate. The district will have to pay an additional
$97,000 in interest on $5.7 million in bonds sold last week to pay for additional elementary school classrooms. That was after Moody's gave them a lower-than-expected bond rating, citing the new circuit breaker law. In addition, the district couldn't buy bond insurance to insure its loan because only one company would offer a quote, and the premiums were too expensive.

At the federal level, it's a bit easier to pretend that unfunded tax cuts have no consequences. But at the state and local level, tax cuts do have to be paid for. And the easy tax-cutting choices made by state lawmakers just two months ago are already boomeranging back to hit local leaders.

New Jersey: Up and Running!

Last week, New Jersey's Governor Jon Corzine and the Legislature agreed to a compromise budget that includes raising the sales tax from 6 to 7 percent and using at least some of the increased revenue for property tax relief.

This compromise ended a 6-day government shutdown that left many in New Jersey without state services. The Governor and state legislators did not make public any specifics about how the property tax relief would be structured. For a look at other options to reform the sales tax without raising the rate, read this report from New Jersey Policy Perspectives.

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

So how are residents of the state reacting to their state government being function again? Check out this interesting article to learn more.

Parts of this post were originally published in CTJ's Tax Digest, a weekly email that highlights state and federal tax trends across the country. If you'd like to subscribe to the digest send an email to: ctj@ctj.org

$100 Gift Cards for Georgia Teachers - Part II

In January, Georgia Governor Sonny Perdue proposed giving $100 gift cards to Georgia teachers to use for school supplies during the state's sales tax holiday weekend. His proposal is become a reality.

According to this article, just days from now on July 18 approximately 108,000 - $100 Classroom gift cards will have been distributed to Georgia teachers for use during the sales tax holiday weekend from August 3rd to the 6th. Here's the letter from the Governor to teachers about the classroom gift cards.

This topic has caused quite a stir on this very blog. Click here to read a past blog post and various comments. Most of the comments previously offered appear to be from teachers who have spent and, from the sounds of it, will continue to spend lots of their own hard earned money providing supplies, assisting students, and even providing lunch money. The sacrifices of Georgia teachers and teachers everywhere certainly should be appreciated. Local communities and states should work to acknowledge the "extras" that teachers contribute.

Clearly some readers are thankful for the gift cards and admit that while it's a drop in the bucket it is helpful.

However, I can't help but think that Georgia teachers and students deserve better. Why stop at a $100 gift card? Why not work to fund the school system well enough so that teachers aren't expected to spend their own money on supplies, etc.

Again, I ask - What do you think?

On a side note, it's interesting that if a teacher is unable to use the gift card during the sales tax holiday weekend, they are advised to "cut up the card and discard."

99% of Americans Are Net Losers Under Bush Tax and Spending Policies

Last week Citizens for Tax Justice released a very telling study which finds that the "borrow-and-spend" fiscal policies of the Bush administration have saddled most Americans with a debt burden that far exceeds the value of the meager tax cuts they've received since 2001.

The study takes a close look at how the Bush administration’s fiscal policies through 2006 affect Americans. It compares the tax cuts — generally small for most families — to the gigantic debt burden imposed by these unfunded tax cuts. The analysis shows that for all but the very wealthiest United States residents, the Bush tax cuts between 2001 and 2006 are outweighed by a dramatic increase in the burden of debt on American families.

Some of the most interesting findings include:

• From 2001 to 2006, the typical middle income American has received a tax cut totaling $1,855 per family member. But that family’s share of the added national debt burden is $8,936 per person.
• This means that the net impact of the Bush fiscal policies on the middle 20 percent is an added burden of $7,081 per American—or $28,322 for a family of four.

To view a full analysis of this study and for a fact sheet about your own state click here.

This report was discussed by the Director of the Center on Tax and Budget Accountability, Ralph Martire in his Chicago Sun-Times column. To read his column click here.