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Tax and Budget Reform: Policy Options for 2011 to Address the Revenue Crisis in the States
Altaf Rahamatulla on July 23, 2010 - 11:26am
Introduction: Tax and Budget Reform Policy Options in 2011 to Address the Revenue Crisis in the States
Although the recession may have technically subsided at the national level, states are still reeling from historic budget shortfalls, stubbornly high unemployment, and significant revenue declines and will continue to face fiscal challenges in the upcoming year. The lingering effects of the downturn have forced state lawmakers to consider extreme fiscal measures to confront budgetary constraints. What’s more, states have already utilized a substantial portion of the federal funds available for state fiscal relief through the American Recovery and Reinvestment Act (ARRA).
These dire circumstances merit progressive tax and budget policy as a means to provide essential services, make critical investments in long-term growth areas, support working and middle-class families who have been disproportionately hit by the impact of the downturn, and ensure that all taxpayers are contributing their fair share.
Polling indicates strong public support to achieve these ends and at the same time, general skepticism that government serves wealthy and corporate interests over the needs of working families. In fact, a 2009 poll found 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.”
Unfortunately, in recent decades, the policy debate has been unduly influenced by vehement right-wing rhetoric that, in several cases, has resulted in unsustainable budget cuts, misguided privatization schemes, and federal and state taxation structures that are overwhelmingly regressive, placing a heavier burden on low and middle-class families.
Nevertheless, progressive lawmakers and advocacy groups have persistently advanced responsible revenue increases to support state programs and working families.
Accordingly, this climate provides progressives a strong opportunity to reclaim the fiscal and economic conversation. This specifically points to implementing policies to create a fairer and more accountable budget process as well as encourage robust economic growth and job creation. Research and historical precedent demonstrate that 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.
In the past two years, states have enacted a wide-ranging set of reforms to cope with cumulative 2010 and 2011 deficits of approximately $375 billion, including targeted revenue increases, augmenting transparency of state spending, easing the tax burden of working families, making sure corporations are being held accountable, and limiting privatization. The following report will assess and analyze various tax and budget issues including, appropriate messaging highlighting the importance of responsible tax policy during an economic downturn, progressive revenue generating mechanisms, fighting right-wing tax campaigns, reforming ineffective subsidies and excessive contracts, restricting privatization, and encouraging transparency and accountability in the budget process.
States Raising Revenue to Alleviate Fiscal and Economic Constraints of the Downturn
In 2008 and 2009, over 30 states increased taxes to alleviate fiscal pressures due to the recession. As the Center on Budget and Policy Priorities (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.
Source: Center on Budget and Policy Priorities, State Tax Changes in Response to the Recession
Red State Tax Increases and the Failure of the Anti-Tax Movement: Tea Party protests are purportedly an indication of Americans demanding tax and spending cuts. Yet, in May 2010, Arizonans overwhelmingly approved Proposition 100 to temporarily increase the state's sales tax by one percent for the next three years.
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.
This increase mirrors actions taking place in both conservative and progressive states and localities around the country. Popular demand for new revenue to avert budget cuts has driven legislative movement on progressive tax and budget policy.
Ballot Initiative Strategy Center - Fiscal/Budget Issues
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
Progressive States Network - Public Support for Progressive Taxation & The Failure of the Anti-Tax Movement
Progressive States Network - Right-Wing Fraud Derails Tax Revolt
Center on Budget and Policy Priorities – State Tax Changes in Response to the Recession
Center on Budget and Policy Priorities - Tax Measures Help Balance State Budgets
Revenue Generation vs. Tax Cuts During a Downturn: Trends, Research, and Messaging
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: Research consistently shows that, contrary to right-wing rhetoric, 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.
- States with higher personal income tax rates experienced significant job growth in the past decade, as documented by an FPI and CWF report and as CBPP found in a similar policy brief.
- 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 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 an ITEP study detailing that states that collect the highest percentage of personal income in taxes actually allow for higher income growth.
- Similarly, a study by the California Budget Project (CBP) analyzed state economies and concluded , “[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.”
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.
Peter Orszag, Director of the Office of Management and Budget, and Nobel Prize winning economist, Joseph Stiglitz confirm:
tax 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.
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 explains:
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.
California Budget Project - Budget Cuts or Tax Increases
Center on Budget and Policy Priorities - Budget Cuts vs. Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?
Economic Opportunity Institute - Creating Jobs and Boosting Our Economy
Economic Policy Institute - Policy responses to long-term unemployment
The Information Technology & Innovation Foundation - The 2008 State New Economy Index
Institute on Taxation and Economic Policy - High Income Tax States Have Strong Economies
Budget Cuts Damage the Economy: 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 (EPI) details the danger of state budget cuts as they impact employment, economic activity, and investment in both the public and private sector.
Source: Economic Policy Institute, Dire States
The Center for Economic Policy Research further finds that if states were to utilize budget cuts as 40 percent of the policy response to current deficits, the country would lose over 900,000 jobs. If cuts comprised the total approach to budget gaps, over two million jobs would be lost.
Center on Budget and Policy Priorities - The Zero-Sum Game: States Cannot Stimulate Their Economies by Cutting Taxes
Center for Economic Policy Research - More Budget Belt-Tightening Means More Job Losses for States
Economic Policy Institute - Dire States
Progressive Taxes Don't Cause Out-Migration of Wealthy Residents: Opponents of progressive income tax reform 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: CBP found that there was a significant growth in millionaire households after California passed higher personal income tax 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.
Source: 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.
California Budget Project - Budget Cuts or Tax Increases: Which Are Preferable During An Economic Downturn?
Fiscal Policy Institute - Balancing New York State’s 2009-2010 Budget in an Economically Sensible Manner
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
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. CBPP reported similar results, finding that as a result of tax cuts included in 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.
Center on Budget and Policy Priorities - Federal Income Taxes on Middle-Income Families at Historically Low Levels
Progressive States Network - Tax Day: With Middle Income Families Paying Less Federal Taxes, States Have More Leeway for Revenue Increases
The Public Supports Progressive Investments: 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 and 33 percent strongly agree that “[g]overnment has a responsibility to provide financial support for the poor, the sick, and the elderly”
- 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”
- 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.
Center for American Progress - State of American Political Ideology, 2009: A National Study of Values and Beliefs
Need to Message the Effectiveness of Government Action: 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.
Lawmakers must articulate how government benefits voters in their day-to-day lives. Some people are not aware of how much investment in public structures impact society and hold skepticism regarding government intervention.
To counter these fears, Promoting Broad Prosperity, a Topos Partnership and Demos policy brief, 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.
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
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.
Even many conservative politicians have rejected these types 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.
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.”
Policies to Make Tax Systems More Progressive
Decades of income polarization and regressive tax policy at both the state and federal level have contributed to one of the largest gaps between the rich and the poor in this nation’s history. In fact, according to a 2009 study by economists Thomas Piketty and Emmanuel Saez, there has been an unprecedented drop in progressivity in the federal tax structure as wealthy households have realized tax cuts and great income growth, while middle and lower income families experienced minimal income increases and a greater tax burden. As of 2007, the top 10 percent of all earners in this country controlled 50 percent of total income, surpassing the level of disparity in 1927. On top of that, between 1992 and 2007, IRS data indicates that the after-tax income of the wealthiest 400 American families grew by 476 percent, while their federal taxes fell by a third.
At the state level, similar regressive patterns are endemic. 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 the Institution for Taxation and Economic Policy (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. As the Fiscal Policy Institute (FPI) and the Center for Working Families (CWF) further notes in their report, Back on Track, “[a]lthough a high income resident may pay a larger gross amount in taxes, it does not represent a greater portion of their income.” Clearly, the wealthy have not been contributing their fair share for years.
Source: Institute for Taxation and Economic Policy, Who Pays?
As a result, to promote equity and dynamic economic growth among all sectors of society, state lawmakers must institute reforms that will strengthen the progressivity of tax structures and protect the middle class.
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
Emmanuel Saez - Striking it Richer: The Evolution of Top Incomes in the United States
Institute for Taxation and Economic Policy - Who Pays?
Promoting Fair Income and Estate Taxes
State taxation trends mirror the abysmally regressive and shockingly inequitable disparity at the federal level. As a response to the downturn, several states have advanced efforts to create more equitable personal income tax structures.
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.
In 2010, 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. This follows the state's high-end income tax increase in 2009 after the Legislature overrode the Governor's veto to raise three top rates, with the highest increasing from 8.25 to 11 percent.
At the end of January 2010, voters in Oregon overwhelmingly approved two ballot initiatives that ratified legislative action in 2009 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 millions of dollars to protect vital services.
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
Stateline.org - States Plug Budget Holes, For Now
Earned Income Tax Credit (EITC): Creating or increasing state EITC programs to ease the tax burden on lower-income working families is another tool to help increase fairness in the tax code. These reward work by low-income families by adding some additional payment on top of the federal EITC, usually as a percentage of the federal credit. During a downturn, these credits 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 that strengthen local economies.
Twenty-three states and the District of Columbia have enacted EITCs. Maryland recently expanded the refundable part of its EITC from 20 percent of the federal EITC up to 25 percent. States without an income tax can create a “Working Families Credit” like Washington State’s SB6809. Passed in 2008, the bill will give 350,000 Washington residents the equivalent of 10 percent of their federal EITC refund.
2010 Earned Income Tax Credit Outreach Campaign
Center on Budget and Policy Priorities – State Earned Income Tax Credits
Center on Budget and Policy Priorities - State Low-Income Tax Relief in the Absence of an Income Tax
Progressive States Network – Earned Income Tax Credit
State EITC Online Resource Center
Washington State Budget & Policy Center – The Working Families Tax Rebate
Estate Taxes: Preserving taxes on wealthy estates is another area where states are working to maintain tax fairness and raise sorely-needed revenue. While some states have followed federal law as the estate tax has been rolled back, many others are “decoupling” their estate tax from federal law changes. And while a few high-income folks duck out of state to avoid state estate taxes, “the number is modest and not nearly enough to offset the revenue gained by keeping an estate tax,” as Joel Slemrod of the University of Michigan Business School and Jon Bakija of Williams College detailed through their research.
Center on Budget and Policy Priorities - Research Findings Cast Doubt on Argument That Estate Taxes Harm State Economies
Progressive States Network – Raising Revenue through Fair Taxes
Reform Property Taxes
The property tax is a significant means of funding education and other local services. However, the tax is inherently regressive and can lead to an inequitable school funding disparity between richer and poorer communities. Accordingly, progressive lawmakers must utilize tools to maintain funding for schools and local programs, while easing the burden on working families.
Property Tax Circuit Breaker: Conservatives have attempted to exploit the housing market collapse by advancing across the board property tax caps, an effort that has been proven to be ineffective, fiscally irresponsible, and overwhelmingly favors wealthy families. A more sustainable and equitable approach is a property tax circuit breaker, which limits property taxes to a percentage of a taxpayer’s income. Over the last few decades, a majority of states have instituted some form of a circuit breaker, as illustrated by the map below.
Source: Lincoln Institute, Property Tax Relief: The Case for Circuit Breakers
The basic idea is straightforward. Instead of the typical proposal to cap property taxes at some percentage of the property value, which disproportionately benefits the wealthy, a circuit breaker caps property taxes at a percentage of a taxpayer’s income. Different states restrict circuit breaker caps to various groups, such as the elderly and the poor, and others include renters in the program.
- Illinois grants up to $700 per year to help low-income elderly and disabled homeowners and renters pay property taxes or rent. Renters can count 25 percent of their rent as accrued property taxes under the state formula.
- Massachusetts provides a tax credit to homeowners over the age of 65 if they pay more than 10 percent of their total income for real estate taxes, including water and sewer debt charges. Renters can count 25 percent of their rent as real estate tax payments. In 2007, the maximum credit was $900.
Center on Budget and Policy Priorities – The Property Tax Circuit Breaker
Fiscal Policy Institute – Property Tax Resources
Institute for Taxation and Economic Policy - Property Tax Circuit Breakers
The Lincoln Institute - Property Tax Relief: The Case for Circuit Breakers
Property Tax Deferral Programs: A variation on the circuit breaker idea are programs that defer payment of property tax increases for certain homeowners until the property is sold, allowing owners to wait until the profits from selling the land make paying the taxes less of a burden. Similar to other taxpayer relief and protection initiatives, they are generally restricted to certain populations, like:
- Minnesota’s Green Acres Tax Deferment program for owners of farm land
- Colorado’s Property Tax Deferral program for those age 65 or older
Many argue for more comprehensive programs to permit a wider array of taxpayers to defer paying property tax increases until they can cash out their property values at a sale.
University of Wisconsin-Madison - The Middle Way to Property Tax Reform
Property Tax Homestead Exemptions: Forty states exempt a certain amount of a home’s value from tax. Unfortunately, many states restrict the exemption in ways that deny tax relief to many working families. Also, several exemptions are not indexed to housing inflation, so their value can rapidly erode in times of housing price booms. A key strategy for progressives should be to expand these tax relief programs to include more middle class families.
Institute for Taxation and Economic Policy - Property Tax Homestead Exemptions
Broaden Sales Tax Base
If states facing yawning deficits 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: While sales taxes impact 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.
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. The fact that most sales taxes do not cover services skews the tax burden towards those, often the poorest consumers, who spend more on physical goods rather than services. Broadening the base of services taxes can allow a state to lower the overall sales tax rate. For example, Hawaii and New Mexico, which have relatively low state sales taxes, tax more of the 168 services surveyed by the Federation of Tax Administrators than any other 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 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.
Center on Budget and Policy Priorities - Expanding Sales Taxation of Services: Options and Issues
New Jersey Policy Perspective – Making the Sales Tax Pull Its Weight
The 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 in 2009. In February 2010, Colorado enacted HB1193 to apply the sales tax on out-of-state retailers. Showing a petty vindictiveness, Amazon canceled all business relationships with affiliates in the state in retaliation, even though there is"no connection between the affiliate program and the new law."
Center on Budget and Policy Priorities - 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 Collecting Taxes Owed on Internet Purchases
Candy and Soda Taxes: 2010 marked a great interest in pursuing taxes on candy and soda as both Colorado and Washington State raised taxes on the products. A majority of states now impose sales tax on candy and gum. As the Washington Budget and Policy Center points out, “there is little reason to exempt unhealthy products like candy or soda – both of which have been linked to the growing obesity epidemic.”
Source: Washington Budget & Policy Center, Washington Joins 30 Other States in Taxing Candy
Stateline.org – Some states like the sweet taste of soda and candy taxes
Washington Budget & Policy Center – Washington Joins 30 Other States in Taxing Candy
Cigarettes and Alcohol Taxes: So far in 2010, New York, 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.
Make Corporations Pay Their Fair Share
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. 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.
States have strategically responded to corporate tax erosion by a number of approaches, from combined reporting to eliminating wasteful tax credits. Just in 2009, 11 states considered or enacted business tax increases to help deal with budget deficits and others have enacted or considered them this session.
Combined Reporting: States are increasingly requiring companies to use combined reporting, which 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. To give one example, Wal-Mart alone may have avoided $2.3 billion in state taxes between 1999 and 2005 by gaming the tax system—something combined reporting can shut down. The key to many of the tax evasion strategies used by Wal-Mart was to manipulate the reporting of national profits and expenses by reporting them in different states to minimize the taxes owed.
Currently, over 20 states have implemented the policy and as CBPP finds, “combined reporting states are well-represented among the most economically-successful states in the country.”
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
Iowa Fiscal Partnership - Revitalizing Iowa's Corporate Income Tax
Institute on Taxation and Economic Policy - Combined Reporting of State Corporate Income Taxes: A Primer
Multistate Tax Commission, Model Statute for Combined Reporting
New Jersey Policy Perspective - Big Firms Get Big Breaks
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.
Center for American Progress - The Corporate Tax Dodge
Citizens for Tax Justice - Corporate Tax Avoidance In the States Even Worse Than Federal
U.S. PIRG - Close Corporate Loopholes
Decoupling: States can save revenue by not automatically granting special interest tax breaks handed out by the federal government, a tool referred to as decoupling. For example, some states have prohibited one particular federal loophole, the Qualified Production Activities Income" (QPAI) deduction, deemed to be one of the largest breaks for corporations when enacted in 2004. The tax break permits corporations to claim a deduction based on qualified production activities, which includes manufacturing, food production, filmmaking, and a broad spectrum of business actions. States that have rejected the loophole have collectively saved billions of dollars.
Center on Budget Policy & Priorities - How States Can Avoid Revenue Loss From Federal Stimulus
Center on Budget Policy & Priorities - Protecting State Revenue By Decoupling from Federal Tax Legislation
Progressive States Network – Make Corporations Pay Their Fair Share
Oil Windfall Taxes: A number of groups have advocated for 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 EOI. These revenues could then be used to offset many of the environmental costs of fossil fuel use.
Financial Industry Bonus Recapture and Windfall Profits Tax: In response to the abuses of the financial sector that contributed to the Great Recession, the unprecedented government support and taxpayer resources that financial firms received to alleviate their woes, record profits posted by financial firms, and the 17 percent increase in Wall Street bonuses in 2009, FPI and CWF proposed a bonus recapture tax, based on the United Kingdom’s model, on bonuses over $50,000 paid to employees receiving total annual compensation of $250,000 or more, and a one-time windfall profits tax over a certain threshold. An April 2010 Sienna College survey found that a majority of New York voters support a temporary tax on bonuses for individuals with income above $250,000.
Center for Working Families and Fiscal Policy Institute – New York Has the Ways and Means: How and Why Wall Street Should Give Back to Main Street
Better Enforcement of Tax Code: While states lose tax revenue as a result of manipulation of loopholes, state coffers are also hit by corporations and individuals deliberately evading and cheating the tax system. States are responding with a variety of strategies for catching these tax cheats and recovering revenue.
- Cracking Down on Abusive Tax Shelters: A 2001 Multistate Tax Commission report estimated that tax shelters designed to illegally evade taxes cost states as much as $12 billion per year. Facing the largest losses in the nation, California pioneered legislation requiring new reporting on the details of suspicious shelters, enacting heavy fines for using illegal shelters, and creating an amnesty program to promote voluntary compliance. The amnesty program brought in a cascade of revenue: over $1.4 billion from 1,202 taxpayers, or an average payment of over $1 million per taxpayer, reflecting the widespread tax cheating among this wealthy population. Other states are following suit.
- Multi-State Collaboration: Going beyond the occasional cooperation between state auditors, eight states, led by Massachusetts, created a multi-state agreement to share data in a project called the Clearinghouse, which compares information on nonfilers and discrepancies in claimed tax credits. For their efforts to identify fraud, the initiative garnered the 2007 Outstanding Compliance Program award from the Federation of Tax Administrators.
- Shaming Tax Cheats: To encourage payment by delinquent taxpayers or those caught violating the law, more than a dozen states have begun publishing lists of businesses and individuals owing taxes on the Internet. Connecticut pioneered this high-tech shaming strategy in its Top 100 list, which collected more than $161 million in overdue tax debts over its first seven years. Other states have been collecting similar amounts with their own programs.
California Legislative Analyst's Office - Abusive Tax Shelters: Impact of Recent California Legislation
Multistate Tax Commission - Model Statute on Disclosure of Reportable Transactions
Multistate Tax Commission - Model Statute on Compilation of State Tax Return Data
Multistate Tax Commission - Model Statute for Tax Avoidance Transaction Voluntary Compliance Program
Fight Right-Wing Tax Campaigns
Unfortunately, some states are considering regressive proposals and budget recklessness advanced by the right. For instance, conservatives have managed to manipulate strong public sentiment and frustration around property taxes to advance property tax caps that limit a localities’ ability to fund needed public services. California’s Proposition 13 remains the highest profile of example of the property tax revolt, but most lawmakers can attest as to how contentious the property tax issue can become.
Challenging Property Tax Caps: Since housing costs consume a higher portion of low-income Americans’ budgets, property taxes are regressive –hitting those who can least afford them the hardest. Second, in some cases people have little control over their own property’s values. External factors can drive up property values, sometimes forcing individuals to choose between paying taxes they cannot afford and leaving a home full of memories. Finally, right-wing moves across the country to provide tax cuts for the wealthy and shift costs to cities and counties have resulted in mounting property tax bills and an increased burden on the middle class, as property taxes are one of the few revenue options that these local governments have.
Progressives can begin to challenge these tax caps by presenting research showing the regressive nature of property tax caps in a compelling way. A more aggressive approach appeared in Montana in 2006 and 2007, where progressive Gov. Brian Schweitzer put the state’s right-wing on the defensive regarding their property cap proposals. Schweitzer countered the right by proposing a one-time flat rebate of $400 for every Montana resident homeowner, ensuring that virtually all Montana homeowners (more than 99 percent) received a larger refund without giving disproportionate gains to rich landowners or out-of-state corporate property owners.
How Tax “Limitation” Laws Entrench Tax Loopholes: One other dangerous form of tax limitation laws are rules that require supermajorities to pass any tax increase. In such cases, special interests may be able to enact a tax break for themselves with a simple majority, but then can often block repeal of the tax loophole as a “tax increase” that can be blocked by a minority of legislators CBPP outlined this problem in an analysis of a Kansas proposal to require a supermajority to raise revenue in that state, emphasizing how so-called “taxpayer rights” laws are often just special interest protection legislation in disguise.
Fighting TABOR: One of the most disastrous tax policies in recent decades was Colorado voters’ approval of the so-called Taxpayer Bill Of Rights (TABOR) in the early 1990s. TABOR created a rigid cap on increases in state spending tied to inflation and economic growth, decimating the state’s investments in education, health care, and social services. Voters partially repealed the tax limits in a referendum in 2005, but not before Colorado had fallen to 47th in the nation in K-12 education funding as a share of state income and 50th in the nation in immunization rates. The repeal campaign successfully tapped voters’ desire to invest in those human needs and highlighted the damages from such rigid tax rules.
Despite strong funding for similar measures in 2006 by people like super-wealthy New York developer Howard Rich, a strong funder of right-wing causes, all those measures failed that year after mobilization by progressive groups.
- In November 2009, 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.
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.
Reforming Failed Economic Development Subsidies
Too often, state leaders think that providing lavish corporate subsidies is the route to economic growth. However, subsidies are a minute factor in a firm’s location decision. In fact, utilizing state revenue to entice new companies to relocate within a state’s borders is generally wasteful, inefficient, and compromises funds that could be used for essential service provision. 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.
Unfortunately, states offer large corporations billions of dollars each year in exchange for only a handful of jobs, instead of using those funds to invest in long-term upgrades of human and physical capital that could payoff in greater job creation and robust economic growth. Several high profile instances of these problems highlight the need for reform, including the closure of a Dell plant in North Carolina just a few years after it received a promise of up to $300 million in grants in 2004, an amount more than twice the cost of building the plant.
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...Indeed, a state-level effort to stimulate the economy in this way can inadvertently create a fiscal drag on the state and national economy.”
In a literature and econometric research review, the EPI discovered that these types of credits do not spur growth or create jobs in a cost-effective manner.
Accordingly, states are increasingly reevaluating these economic development subsidy programs, since much of that money could be better spent on alternative economic growth programs or shoring up education, transportation, and social programs. States are further augmenting disclosure requirements to ensure that companies receiving state funds are creating quality jobs.
Center on Budget and Policy Priorities – The Zero-Sum Game
Economic Policy Institute – Rethinking Growth Strategies
Good Jobs First - Growing Pennsylvania's High-Tech Economy: Choosing Effective Investments
Review and Sunset Tax Expenditures
The fact that billions of dollars in corporate subsidies are hidden in the tax code rather than clearly listed in annual budgetary allocation documents like other spending programs represents a core problem that undermines sound fiscal planning. As an ITEP brief outlines, tax subsidies end up being a privileged kind of government spending:
- Tax expenditures often have no built-in cost limits, and generally there are no annual appropriations or oversight processes.
- There’s often no review of a company’s use of a tax subsidy; all they do is file a tax return and get the subsidy with no questions asked.
- Whether tax loopholes benefit the public through long-term job growth is rarely if ever evaluated
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.
Film Tax Credit as a Case Study: A notorious example of wasteful and ineffective state spending is 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.
In Wisconsin, the Commerce Department released an analysis of the state’s film tax credit program and found several structural flaws. For instance, the credit is biased toward out-of-state labor and not cost effective. The Department found that the program was 75 times less effective at creating jobs than the “next least effective” state economic development program. The Department’s report includes the following graph charting the hypothetical loss to the taxpayer from the Wisconsin credit.
Source: Wisconsin Department of Commerce, Cost Benefit Analysis of Wisconsin Film Tax Credit Program
Assessing the fiscal impact of film incentive programs in different states, the Massachusetts Department of Revenue determines that in twelve states that administer a film tax credit, the return is extremely meager. The Department finds, “studies estimated that state revenues generated by new film production activity ranged from $.0.07 to $.0.28 per dollar of tax credit granted.”
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.”
Following an explosive scandal involving members of the Department of Economic Development and abuse of the film tax credit, the Iowa Legislature approved HF 2527/SF 2380 this session, 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.
Citizens for Tax Justice - State Film Tax Credits: Next on the Cutting Room Floor?
Good Jobs First - More States Yell 'Cut" on Film Tax Credits
Massachusetts Department of Revenue – A Report on the Massachusetts Film Industry Tax Incentives
State of Iowa - Tax Credit Study Review Report
Tax Foundation - Movie Production Incentives: Blockbuster Support for Lackluster Policy
Wisconsin Department of Commerce - Cost Benefit Analysis of Wisconsin Film Tax Credit Program
Disclose Economic Subsidies
In a digital age, citizens expect to be able to find detailed websites with information about government operations. Yet while some states are promoting online transparency, many states are failing on public disclosure. Good Jobs First, which has been extensively documenting government giveaways of taxpayer money to corporations for years, ranked states on transparency with respect to economic development subsidies, contracts, and lobbying in their report, The State of State Disclosure.
The organization is also the national leader in pushing states to better disclose economic development giveaways. For example, the group publicized problems in the Illinois subsidy program and crafted groundbreaking accountability legislation in 2003. A direct result of this initiative was 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. Minnesota and Maine have also enacted disclosure laws to track individual economic development deals and make this information available to the public.
Colorado - Executive Order D 2010-009
Good Jobs First – Accountable Development
Good Jobs First – Key Reforms
Illinois Statute – Corporate Accountability for Tax Expenditures Act (PA 93-0552)
Minnesota Statutes – Regulating Local and State Business Subsidies (Minnesota §116J.994)
Maine Public Laws - An Act To Implement the Recommendations of the Office of Program Evaluation and Government Accountability Regarding Economic Development in Maine
Require Job Quality Standards and Other Reforms for Subsidy Recipients
Certain states are making sure that companies receiving subsidies deliver on promises to create decent jobs or face “clawbacks” of the funds distributed. They are also requiring subsidy recipients to pay a living or prevailing wage. At least forty-three states and localities have attached some type of wage requirement to at least one subsidy program, but additional reforms are needed to ensure job quality standards.
Good Jobs First - Examples of Clawback Provisions in State Subsidy Programs
Good Jobs First – Clawback blog
Stop Tax Subsidy Bidding Wars
On top of subsidizing wealthy corporations, states and localities often engage in bidding wars to lure companies to a certain location. Good Jobs First documents in a study on “job piracy” in the Twin Cities Metro Area, that this trend wastes taxpayer money and deepens economic inequality. A parallel study by Brookings found that Michigan’s economic subsidies were causing exacerbating urban sprawl and subsidizing wealthier communities at the expense of central cities.
Arizona offers one example of how to deal with tax subsidy wars. Following the massive revenue loss that occurred following municipalities competing for firms through corporate tax giveaways, the Legislature passed HB 2515 in 2007 to prohibit communities in Maricopa and Pinal counties from competing with each other in distributing tax breaks to retail businesses to relocate.
Restrict Privatization with Contractor Accountability
As states grapple with the recession and search for the best methods to alleviate economic and budgetary pressures, some lawmakers continue to propose privatization as an effective policy. In the past few months, there have been proposals to privatize functions across the board: water infrastructure, county zoos, libraries, custodial services, parking enforcement, youth shelters, group homes, ambulance services, airports, and transit networks. Wisconsin, for instance, has increasingly privatized the construction engineering services. Just in the past two years, the state outsourced 125 construction engineering jobs, each of which could have been completed by a state worker at a lower cost. Unfortunately, some officials are embracing this “everything must go” attitude towards public assets and services.
Privatization: Undermining Services, Costing Taxpayers
Even in light of the state’s troubled history with private contractors, New Jersey Gov. Chris Christie established a privatization panel by executive order in early April, seeking to identify $50 million in savings. In a hearing, the Executive Director of the state’s Commission of Investigation, Alan Rockof, cited several disturbing cases of corruption and abuse of taxpayers’ dollars and 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.”
Federal Officials Critical of Privatization Debacles in States: In a meeting with Texas officials, Kevin Concannon, Under Secretary of Food, Nutrition, and Consumer Services at the United States Department of Agriculture (USDA), claimed that there had been a drastic reduction in the timeliness and accuracy of food stamp provisions in the state following the implementation of a privatized system. In fact, Texas now has the worst performing food stamp program in the entire country.
In 2005, Texas granted Accenture an $899 million contract to operate the state's food stamp eligibility program. However, the venture quickly turned sour, leaving thousands of people without benefits for which they were eligible, prolonging working families' food insecurity. Under Secretary Concannon finds that the failed privatization system resulted in "a five-year slide" in processing food stamp applicants.
Other critical failures occurred with privatization deals in the state, such as a massive computer crash that destroyed hundreds of the Texas Attorney General's records, including eight months of work and evidence in 81 Medicaid fraud cases. Texas officials had not been informed of issues that should have raised concern, such as lags in reporting and record retrieval failure.
Privatization Hurts Working Families Who Have Been Hit Hardest by the Recession: Under Secretary Concannon's comments mirror a letter he wrote in November 2009 to each state Supplemental Nutritional Assistance Program (SNAP) Commissioner to highlight the pitfalls of privatization and contracting-out social services. In the letter, he urges states to be mindful of the economic crisis and the impact on families in need. He further acknowledges the astronomical increase in case loads at a time when state resources are limited. He also discourages states from contracting out the food stamp intake and application process to for-profit entities. The letter concludes:
These (privatization) projects encountered severe problems in meeting critical performance standards and many eligible SNAP applicants have suffered as a result. Based on the evidence, we do not regard these projects as successfully furthering the purpose of the Program. We do not support the furtherance of such projects, and believe that they put public funds and our clientele at risk.
Vital public programs, such as Medicaid and food stamps, provide working families, who have been disproportionately affected by the downturn, with a lifeline during these tough economic times. Efforts to privatize fail to save money, increase efficiency or manage caseloads, and most importantly, fail families that need assistance. In order to provide protections to vulnerable residents and guarantee that families have appropriate support during a time of economic uncertainty, social service provision should be handled by the government rather than a private contractor.
Privatization hampers economic activity: Under Secretary Concannon additionally reveals that Texas could be receiving $1 billion more in federal food stamp funds and serve over 650,000 additional applicants if it approved more applications of eligible Texans. Currently, three million Texans receive food stamps, which is about 55 percent of all eligible for the program. This is significantly lower than the national average of 67 percent. Furthermore, Texas supermarkets are losing approximately $1 billion annually in food sales because of the problems with food stamp provision in the state.
The Major Pitfalls of Privatization: Although these projects purport substantial savings and a way for officials to generate short-term revenue, U.S. PIRG finds, there are several pitfalls of privatization, including:
- Loss of public control, transparency, proper government oversight, and ability to set standards;
- Transportation planning driven by profit rather than public needs;
- The eventual loss of public money;
- Private entities potentially enter into risky and unstable financial investments;
- Unreliable and excessive toll and fare increases.
AFSCME - Safety Net for Sale: The Dangers of Privatizing Social Services
Illinois PIRG - Privatization and the Public Interest
Progressive States Network - Congressional Leaders Warn Against State Highway Privatization
Progressive States Network - Privatization During an Economic Downturn: Still Inefficient and Problematic
U.S. PIRG – Private Road, Public Costs
U.S. PIRG - Road Privatization: Explaining the Trend, Assessing the Facts, and Protecting the Public
United States Department of Agriculture (USDA) - Letter to SNAP Commissioners
Measure and Disclose the Costs of Public Contracts
The lure is the supposed promise that privatization will deliver a short-term budget fix. Yet many privatization efforts have cost taxpayers hundreds of millions of dollars and botched services for the public. That privatization continues to move forward despite such a poor track record reflects pure ideology that the private market delivers the most efficient outcomes, even without demonstrable results. Some states may also be making the more cynical decision to pursue immediate infusions of capital in pursuit of short-term electoral gains. In any case, privatization comes at the expense of long-term investments in the community, sustainable budget policy, and public accountability.
States Need To Provide More Effective Reporting on Contractors: States systematically fail to collect reliable data on privatization and rarely even track what percentage of state revenue is directed for contracting out services.
States must make more of an effort to provide concise and meaningful data on the use of contractors and the extent of privatization.
In The State of State Disclosure, Good Jobs First finds that states provide some level of disclosure of contracts, but that there is significant “room for improvement.” Increasing transparency in the budget process is an essential reform to encourage progressive change at the state level. To better serve constituents, ensure effective use of public revenue, and promote a fairer and more sustainable budget process, lawmakers must work towards more stringent transparency and reporting requirements.
AFSCME - Power Tools for Fighting Privatization
Council on State Governments - Privatization in State Government: Trends and Issues
Economic Policy Institute, Privatization: Trends, evidence, and alternatives
Progressive States Network - Privatization During an Economic Downturn: Still Inefficient and Problematic
Progressive States Network - Privatizing in the Dark: The Pitfalls of Privatization & Why Budget Disclosure is Needed
Strengthen Contractor Accountability
Over a decade ago, Massachusetts passed a law prohibiting private contracting of government services unless private companies proved they could perform those functions more efficiently than government workers. Multiple studies found that the bill saved Massachusetts from the typical bilking suffered by other states that have privatized public services under the pressure of corporate lobbying.
Rhode Island updated its Privatization of State Services law (Chap 42-128) in recent years to require clear comparisons of the costs of work performed by contractors and public employees, a prohibition on contracting out unless costs and quality exceed that already achieved “in-house,” and a built-in legal appeal process to block any privatization violating the law.
Other states put a range of restrictions on privatization of various services. Reforms include establishing civil services protections for anyone evaluating eligibility for public benefits, promoting affirmative action, reviewing how outsourcing impacts community economies, screening out corporate law-violators from bidding on contracts, and opening up the bidding process to public scrutiny.
AFSCME - Legislative Approaches to Responsible Contracting
Rhode Island Government Oversight and Fiscal Accountability Review Act
Enforce Wage Standards on Contractors
A chronic issue that arises with privatization is that private contractors pay low wages or weaken guarantees for full-time work. These practices not only undermine work morale but also the quality of service provision. For example, one recent study of 500 governments in both cities and counties found that private sector contracting results in full-time employees being replaced by more part-time workers.
Where private companies do perform public functions, the tighter the standards for the bidding processes, the less likely incompetent or corrupt companies can buy the bid with campaign contributions. Vendor-performance requirements help protect taxpayers from being ripped off, while prevailing or living wage laws and responsible contractor laws screen out shady employers who cut corners on public services. New Jersey and Arizona have flatly prohibited companies that offshore jobs from bidding on their state contracts.
With the privatization of many public services in recent decades, state and local governments now purchase over $400 billion of goods and services from the private sector, so conditioning those purchases on contractors meeting decent wage standards will assure both quality government services and have a powerful influence in strengthening wage standards throughout the economy. Such contract standards include a variety of approaches.
- Prevailing Wage for Public Works: Predating even the minimum wage are federal and state laws, which require that work done on public infrastructure, primarily transit and public building construction, and meet prevailing wage standards, usually the union wage for any occupation. Some critics worry that prevailing wage laws might drive up costs for state government, but most studies show that paying a decent wage leads to a more skilled workforce, less turnover, and higher quality work –and ends up saving the government money in the long run.
- Prevailing Wage Laws for Other Government Contracts: While less common, state and local prevailing wage laws have been extended in a number of states to other kinds of government contracts. A number of state and local governments, such as Denver and New Jersey (Chapter 379 in 2006), cover janitors and other building service workers under a prevailing wage law. Illinois has a separate Procurement Code that sets prevailing wage rates for janitorial, window cleaning, food service, and security service workers in the state.
- Living Wage Laws: Maryland became the first state to enact a living wage law, HB 430, requiring government contractors to pay their employees a decent wage, up to $11.30 an hour in areas of the state with higher costs of living. Maryland followed the 120 local governments around the country that have required that public money go to companies that pay their workers above the poverty line. The California Legislature approved a state living wage bill in 2003, only to see it vetoed by its governor. Notably, the local governments that have implemented living wage laws have seen little if any increased costs from contractors to pay higher wages, as evidence by several studies. They have often saved money since the employees of contractors are less likely to end up needing local welfare or health care services.
- Sweatfree: Many elected leaders and their constituents are demanding that new standards be imposed on government purchasing decisions. Cities such as Portland and Berkeley have enacted "Sweatfree Procurement resolutions”, while governors from the states of Maine, New Jersey, and Pennsylvania have signed on to calls for the Sweatfree Consortium to strengthen those efforts and expand them to new jurisdictions. Sweatfree Communities, a force behind this movement, has just released a new Model Sweatfree Procurement Policy along with other resources that provide help to make sure that when governments spend money, they aren't adding to the problems they are supposed to be solving.
- Protecting Union Rights: A number of communities and states use Project Labor Agreements on public work projects that require a combination of union contracts and no-strike clauses to ensure that workers are treated well and public projects are not disrupted by strikes.
AFL-CIO Building & Construction Trades Department - Prevailing Wage Law Studies
SPIN Project - Winning Wages: A Media Kit for Successful Living Wage Strategies
Jen Kern and David Reynolds - Living Wage Campaigns: An Activists Guide to Organizing a Movement for Economic Justice
ACORN Living Wage Resource Center
Sweatfree Communities - Resources
State Building & Construction Trade Council - Project Labor Agreements
Restrict Asset Privatization
In recent years, private firms, like Goldman Sachs have pursued the acquisition of publicly owned assets like highways and state lotteries. These companies are using current fiscal woes to try to convince states to accept a bit of up-front money in exchange for long-term costs that future generations will be stuck paying for. When the state is auctioning off assets, the political payoff is obvious: today’s politicians get to spend the money, and the economic loss is only realized by taxpayers denied the ongoing revenue in the future. And that political calculation means that today’s politicians often offer these assets at fire-sale prices, since the economic losses will show up down the line on someone else’s watch.
How Asset Privatization Rips Off Future Generations: In December 2008, Chicago leased its parking meter system to a private corporation for 75 years for approximately $1.15 billion. The deal was pushed through the City Council at a furious pace -- Mayor Richard Daley introduced the plan only two days before its approval by city aldermen. Not only was the deal hastily moved through the Council, but meter rates immediately rose and they are expected to increase drastically over the next few years. A report by the Inspector General discovered that the City ultimately received $1 billion less than it should have, citing the system's worth as $2.13 billion over the 75-year period. The Inspector General also found that city lawmakers failed to properly deliberate the plan in Council, search for other methods of revenue generation, or calculate whether or not the deal was in the best interest of Chicago residents.
Similarly in Indiana in 2006, the state hastily approved a contentious plan to hand over control of its toll highways to an Australian-Spanish consortium for $3.8 billion, part of a trend across the country of decades-long leases of highways to private corporations. The Indiana deal was sold based on the state receiving the $3.8 billion up front, but the new corporation gets to keep all toll proceeds for the next 75 years. The company will recoup the purchase price in 17 years, and make $21 billion in profits over the next 58 years. Essentially, the state forfeited tens of billions of dollars in future toll revenues in exchange for less than $4 billion up front, indicative of the of the short-sighted nature of many privatization deals.
Stop Pay to Play on Government Contracting
A significant issue with privatization is the potential corruption that results from the revolving door between private contractors and state departments. Most recently, the Dallas Morning News revealed that a key figure who contributed to the privatization of Texas' food stamp eligibility program is now receiving taxpayer dollars to help fix the problems that the private system created. Gregg Phillips, who was Deputy Commissioner at the Texas Health and Human Services Commission (HHSC) and led the push for privatization a few years ago, now heads AutoGov Inc., a company that has received $207,500 from the state government in the past four months to assist in eliminating the errors in the provision and eligibility determination of the state's food stamp program.
Before landing a key role at the Texas HHSC, he performed a similar function in Mississippi, “where he... handed out a major state contract and then gone to work for that firm. Phillips hired Chris Britton as a consultant for designing the bidding process, after which Britton went on to work for Accenture, the winning bidder. After Phillips himself left government service, Britton’s company joined with one founded by Phillips to land a $670,000 state contract from the Texas government.”
States can restrict this problem by banning contractors doing business with the state from making campaign contributions and avoiding the “pay to play” relationships that corrupt government.
State Action to Restrict Privatization: Much like Texas, Indiana initiated an overhaul of its welfare system and granted IBM a $1.34 billion contract to provide services in 2007. Due to implementation errors, thousands of Hoosiers needing assistance were denied access despite qualifying for services from the state. From the outset, several Indiana lawmakers and advocacy organizations recognized the inherent faults in such a system, and called for an immediate halt to further privatization. In fact, two Republican legislators, Rep. Suzanne Crouch and Sen. Vaneta Becker, drafted legislation, HB 1691, which sought to prohibit the Family and Social Services Administration from expanding welfare privatization until a complete review was conducted to examine the effects and progress of the program.
The system was so problematic that Indiana officials announced that they would be canceling the state's contract with IBM this past October. Republican Gov. Mitch Daniels admitted that the privatization initiative was a "flawed concept that simply did not work out in practice." He further cited lack of face-to-face contact and county-based case management, inefficiency of welfare call centers, high error rates, and poor timeliness as the major problems created by the privatized system.
To protect families and ensure that the most vulnerable state residents are receiving necessary services, Indiana Rep. Gail Riecken introduced HB 1003, a bill intended to prohibit the state from privatizing Medicaid and food stamps. Assessing the issues with the privatized system, she stated, "[t]he system they created wasn’t saving the people of Indiana any money, and there were too many cases of lost documents, delays in determining eligibility and problems in actually getting assistance. There is no point in allowing these kinds of mistakes to continue, and we should not tolerate any involvement by entities that have a spotty track record.”
As states grapple with the recession and search for the most appropriate methods to alleviate fiscal pressures, some lawmakers will likely propose privatization as an effective policy to garner a short-term infusion of capital. However, privatization is an unsustainable policy that comes at the expense of long-term community investments and sound budgeting. Fortunately, at both the state federal level, there is a growing recognition that privatization often leads to inferior service provision, substantially higher costs, and lost transparency.
Enact Corporate Transparency in the State Budget Process
A confluence of factors have contributed to the augmented legislative and activist interest in pursuing transparency, including: the lingering effects of the economic downturn, budget shortfalls and plummeting revenues, cuts to essential services, voter outrage over corporate and financial abuses and tax structures that direct public money to the economically privileged, the transparency requirements in the Recovery Act, and the diligent work of advocacy and policy organizations.
Within this framework, progressive state legislators have been advancing transparency and accountability initiatives across the country in order to safeguard taxpayers, foster better budgeting practices, promote good jobs, and garner savings. 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. Codray remarked, “[o]ur goal...is to ensure that tax dollars are being used as intended in these awards. Promises were made by businesses and organization to create and save jobs in Ohio and those promises must be kept.”
2010 started positively with New Jersey's passage of S3153, which requires the Governor to include a tax expenditure report in the annual budget address. The report will include information, such as an estimate of the amount of State revenue loss for the last completed fiscal year, determination of the effectiveness of the expenditure, the impact of the expenditure on the “equity of the distribution of the tax burden,” and the public and private costs of the expenditure’s administration. The bill's main sponsor, Sen. Barbara Buono commented, “[t]his 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.”
Furthermore, as U.S. PIRG notes in their publication, Following the Money: How the 50 States Rate in Providing Online Access to Government Spending Data, “[i]n the past five years, states across the nation have made significant progress in budget reporting and accountability,” though there is substantial room for improvement. U.S. PIRG furthers the point by explaining the major benefits of corporate transparency, which “can be used by citizens and government officials to identify inefficiencies, promote best practices, check corruption, and help to avoid another financial crisis. Providing cutting-edge checkbook-level transparency will also help to restore the trust in government that has been compromised during the budget crisis.”
Center on Budget and Policy Priorities - A Balanced Approach to Closing State Deficits
Oklahoma Policy Institute - Let There Be Light: Making Oklahoma's Tax Expenditures More Transparent and Accountable
U.S. PIRG – Following the Money: How the 50 States Rate in Providing Online Access to Government Spending Data
Why Corporate Transparency Matters
At the basic level, people deserve to know how businesses that benefit from public contracts, subsidies, or tax expenditures are spending tax dollars. Lawmakers must make sure that these businesses are creating jobs, saving the state money, and best serving the public interest. To foster a more targeted budget process, increase efficiency, and allow for future savings, states must adopt more stringent corporate disclosure and transparency legislation.
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.
Dealing with the aftermath of the steepest economic contraction since the Great Depression, declining tax revenues and massive budget gaps, states cannot afford to hand out enormous subsidies or award lavish contracts with nothing to show in return. States must enact transparency to garner a more comprehensive understanding of spending and trends in corporate income taxation.
To that end, PSN has worked with allies to produce model legislation that aims to augment disclosure of state spending on subsidies, contracts, tax breaks and expenditures, and corporate taxation trends. The bill would require applicants and recipients of contracts and subsidies to submit information regarding jobs, wages, employee benefits, past legal compliance, projected and actual costs, and other relevant categories. The legislation would additionally require the state to comprehensively report on the amount it spends on tax expenditures, property tax abatements and reductions. Finally, the bill requires corporations to file disclosure statements with a state government.
Model Bill Summary
Drum Major Institute for Public Policy - Accounting for Economic Development Subsidies
Center on Budget and Policy Priorities State Corporate Tax Disclosure
CALPIRG's Sunshine for California: Shining Light On Corporate Tax Secrecy For Healthier State Budgets, Investments and Markets
Progressive States Network – Corporate Transparency in State Budgets
Benefits of Transparency
The public overwhelmingly favors transparency: Not only is corporate transparency a smart policy, it is also popular politically.
For example, a survey conducted by Lake Research Partners, in collaboration with Topos Partnership, found substantial support for stimulus transparency and oversight. 76 percent of voters thought “a national website where citizens can see what companies and government agencies are getting the funds, for what purposes, and the number and quality of jobs being created or saved” would have an important impact on the success of the stimulus. Similarly, 76 percent of voters believe state websites to track the stimulus were important and 34 percent believed this initiative was “very important.”
Knowing that representatives and government officials are being responsible stewards of public funds overwhelmingly resonates with voters across the political spectrum. The survey on stimulus transparency found that, “Republicans, Independents, and Democrats alike strongly support the inclusion of tracking and reporting requirements to ensure...money is effectively spent and has a positive impact on the economy.”
Corporate transparency is needed to address the fiscal crisis and budget gaps: One of the most critical components of messaging around this campaign will involve the national fiscal crisis and state deficits.
- Better budgeting with minimal to no dollar impact on the budget: Transparency allows for more focused and fairer review of state spending going to private corporations. Lawmakers and the public will be able to see where exactly taxpayer dollars are going and judge if tax expenditures, subsidies, spending on contracts, or corporate tax breaks are benefiting the state.
- Greater equity in state spending: Monitoring tax expenditures, subsidies, contracts, and tax breaks will allow lawmakers to properly assess whether or not those dollars are being spent efficiently. With this knowledge, legislators can make more informed spending decisions, provide funding where it is truly needed, and appropriately invest in long-term growth.
- Future budget savings: More precise analysis of state spending will undoubtedly reveal some areas of wasteful spending. This will empower lawmakers to make better budget decisions in the future and increase savings for the state. For instance, states often pay for services or subsidies to companies that do not deliver on their promises. By tracking the performance of state subsidies, Minnesota and Illinois have both been able to recapture money from numerous projects that failed to deliver promised results.
- Corporate transparency can help economic recovery by identifying which programs are delivering good quality jobs and which are not: By requiring subsidy recipients and government contractors to report the number of jobs created, the wages paid, their location and other key economic information, transparency will help policymakers redirect funds to alternative programs delivering high quality, high-wage jobs in their states.
- Expose corporate outsourcing that is ineffective: As states grapple with the recession and search for the best methods to alleviate economic and budgetary pressures, some government officials continue to propose privatization as an effective policy. In the past decade, some states have scrambled to increase outsourcing and privatization of services, even without tangible evidence demonstrating efficiency. Many privatization efforts have cost taxpayers hundreds of millions of dollars, botched services for the public, and even led to charges of corruption.
- Strengthen workers' rights: By requiring that corporate recipients of state funds disclose how many jobs are being created, what type of wages they pay, what type of health care is offered, and other information related to the quality of workers lives, transparency can provide information needed to hold companies accountable for workers rights abuses. The same information can be utilized to identify programs that actually do provide significant economic development and good jobs for the community.
- Maintaining online spending transparency is inexpensive: US PIRG notes that creating and maintaining transparency web sites is very affordable. For instance, California’s transparency website cost $21,000 to make, while Kansas utilized $100,000 from existing funds to create its comprehensive online transparency resources.
Lake Research Partners and Topos Partnership - New National Poll finds Strong, Bipartisan Demand for Transparency in Economic Recovery Package
DEMOS - By, or for, the people?: A Meta-analysis of Public Opinion of Government
The Pew Research Center - Independents Take Center State in the Obama Era: Trends in Political Values and Core Attitudes: 1987-2009
Combined Reporting: This policy requires multi-state corporations to report profits from all entities, including subsidiaries, for tax purposes, which helps restrict corporate tax avoidance and nullify certain tax shelters.
- Multistate Tax Commission Proposed Model Statute for Combined Reporting
- The Multistate Tax Commission model regulation defining a “unitary business” for combined reporting purposes (pgs. 5-14 of the document )
Corporate Transparency in State Budgets: This legislation would provide for comprehensive reporting of subsidy allocation, contract distribution, tax expenditures, and corporate taxation trends.
Clawback: A clawback grants the state the authority to recapture any public money expended on an economic incentive if the state finds that a recipient of an economic incentive has not complied with requirements and set standards.
- Good Jobs First - Examples of Clawback Provisions in State Subsidy Programs
- Colorado, HB1350
Establish/Expand State Earned Income Tax Credits (EITC): Creating or increasing state EITC programs to ease the tax burden on lower-income working families is another tool to help increase fairness in the tax code. These reward work by low-income families by adding some additional payment on top of the federal EITC, usually as a percentage of the federal credit. During a downturn, these credits 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 that strengthen local economies.