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Altaf Rahamatulla on February 3, 2011 - 2:56pm
2011 presents states with a stark choice: austerity and inequality or progress and growth.
This Dispatch will address three key progressive policy options for legislators to promote economic security by rebuilding prosperity in the states: Corporate Transparency, Progressive Tax Reform and Revenue Generation, and proactive Economic Development policies.
While Wall Street and the rich are enjoying historic profits, the economic downturn’s impact is still being felt on Main Street, where the middle class continues to struggle. Unemployment remains abysmally high and prospects for further federal job creation measures are slim to none. With states facing another year of unprecedented budget pressures, conservatives continue their corporate welfare crusade by attempting to take money out of the pockets of working families to benefit the affluent. With an agenda that places the interests of private industry over the public, they are advancing damaging and regressive policies, including reckless budget cuts, privatization, and huge tax breaks for the rich, which will only cause more damage to the economy and the middle class.
Meanwhile, Americans view government policies as favoring large corporations over the needs of average families. A July 2010 Pew poll revealed that 74 percent of the public said that government had done either a "great deal" or a "fair amount" to help banks and 70 percent thought similarly of the government's support of big business. Similarly, a Gallup poll last month revealed that 62 percent Americans want big business to have less influence in the country.
While the Right fights to bankrupt states to benefit their corporate backers, progressives can fight to rebuild prosperity for our states and our families.
Progressives at the state level have a significant role to play in placing the country on a sustainable road to recovery by championing the needs of the middle class and working families. To that end, Progressive States Network recently released our 2011 Blueprint for Economic Security, a series of policy options to encourage growth, create jobs, and forge an equitable and sound path toward recovery.
The Rebuilding Prosperity section of the initiative includes a set of sound fiscal and economic options, such as Corporate Transparency, Progressive Tax Reform and Revenue Generation, and proactive Economic Development policies. While conservatives focus on slash-and-burn cuts and reckless tax breaks, progressives can use these solutions to advocate for economic recovery and prosperity: making government more accountable to citizens, providing protections for taxpayers, levelling the playing field for small businesses, reducing the unfair burden on the moderate and low-income families, supporting the growth of a vibrant middle class, and ensuring sound investments in public structures.
Many legislators are already acting to foster recovery in the states. Last month, Illinois lawmakers approved legislation to raise the state corporate and personal income tax. In explaining the need for the effort, Gov. Pat Quinn explained that the state's "fiscal house was burning." Faced with a revenue shortfall of $15 billion, legislators garnered the political will to enact sensible means to generate sorely-needed revenue. Though the state faces a number of structural budget issues, compared to the short-term fiscal gimmicks used in the past, this action is undoubtedly a responsible step in the right direction.
Here are some other ways states are working towards recovery and prosperity in 2011:
Transparency and Accountability Reforms
Context: The precarious economic and fiscal circumstances states confront in 2011 merit a more detailed review of spending on economic development subsidies and contracts. Near double-digit unemployment, massive revenue shortfalls, and a slow recovery continue to batter state budgets and dim growth prospects. Even with this backdrop, states continue to give away millions of taxpayer dollars to corporations with little to no accountability in place. For example, last year, the Missouri State Auditor discovered that from 2005 to 2009, the state spent over $1.1 billion in excess of the projected cost for 15 of the state’s largest tax credit programs. More recently, New Mexico state Sen. Tim Keller, describing the need for enhanced transparency mechanisms in his state, said, "right now [New Mexico's] tax policy looks like Swiss cheese. Every industry has a hole and we basically don't know which [tax credits and exemptions] are good and which ones are bad."
Just last month, Evergreen Solar declared that it would close its Massachusetts-based operation and move to China even after the state doled out $58 million in corporate tax incentives to the company. Lawmakers failed to include accountability requirements as terms of the subsidy and as a result, could not ensure the creation of good jobs, will not be able to recoup the amount of the subsidy, and 800 people will be out of work - left with no choice but to receive state unemployment benefits instead of paying state income taxes. This story is unfortunately not a rare instance, and has occurred time and time again across the country. Nonetheless, this is indicative of the dire need for further accountability legislation and the ineffectiveness of this type of approach to economic development. Handing out millions of dollars to a company does little to influence their location decision or to stimulate economic growth. As Good Jobs First, the leading national group on budget transparency, explains, "tax breaks are (corporate) windfalls, not determinants, and are therefore wasted."
Just as disturbingly, conservative governors in many states are pursuing privatization of public functions across the board, including state economic development and commerce departments. Good Jobs First details in Public-Private Power Grab: The Risks in Privatizing State Economic Development Agencies, “rather than making economic development activities more effective, privatization is often little more than a power grab by governors and politically connected business interests” - a power grab that can lead to misuse of taxpayer dollars, corruption, conflicts of interest, and lost accountability. For instance, Michigan, a state that has a semi-privatized commerce department, distributed $9.1 million in tax credits to a convicted embezzler last year. Generally, privatization comes at the expense of long-term investments in the community, sustainable budget policy, taxpayer protections, transparency, and public accountability.
Why this Matters: Several factors have contributed to greater legislative and advocate interest in pursuing transparency, including: the lingering effects of the economic downturn, budget shortfalls and plummeting revenues, the abuses of the financial sector and their major role in the recession, and the transparency requirements in the Recovery Act.
At the basic level, people deserve to know how businesses that benefit from public contracts, subsidies, or tax expenditures are spending their tax dollars. Lawmakers must make sure that these entities are creating jobs, saving the state money, and best serving the public interest. Dealing with the aftermath of the recession and continued shortfalls, states cannot afford to hand out enormous subsidies or award lavish contracts with nothing to show in return. Without needed accountability reforms, states are placing taxpayers, budget sustainability, and economic recovery at risk.
In essence, the path to prosperity begins with transparency. As U.S.PIRG notes, “the ability to see how government uses the public purse is fundamental to democracy. Spending transparency checks corruption, bolsters public confidence in government, and promotes fiscal responsibility.”
Messaging: Transparency enjoys bipartisan support, is extremely popular with the public, and lends itself to effective messaging. Even in an extremely partisan environment, transparency is a winning issue, as it is the foundation for a more functional and efficient government and builds voter trust. Knowing that representatives and government officials are being responsible stewards of public funds overwhelmingly resonates with voters across the political spectrum. A survey on Recovery Act 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.”
Further, outrage over corporate abuses in the financial sector has increased demand for accountability and transparency to explicitly reveal how public policy directs money to the economically privileged. A March 2010 Bloomberg poll found that 57 percent of Americans had a mostly unfavorable or very unfavorable view of Wall Street, and 60 percent had a negative opinion of insurance companies. 56 percent additionally said that Wall Street "should be punished by the federal government" for their actions in creating the crisis.
Although voters are relatively skeptical of government and political officials, championing transparency allows lawmakers to earn public trust and advance reforms to make government more accountable, encourage job creation and innovation, and guarantee an efficient use of taxpayer dollars.
Accordingly, messaging should emphasize that transparency and accountability:
- Protects public investment and taxpayer dollars
- Promotes the public interest
- Tracks job creation and economic growth goals, ensuring public money is directed to the creation of good, quality jobs
- Reduces corruption
- Identify ineffective spending and highlight savings, allowing the state to invest more locally
- Ensures a more effective and equitable budget process
- Brings more light/”sunshine” to a system of economic development spending that has traditionally been shrouded in secrecy
It is important to label subsidies, contracts, and tax expenditures as "spending" as the public normally does conceptualize them as having an impact on state budgets. This also permits restructuring the idea of "waste" to include ineffective tax credits, subsidies, or contracts.
The following is a video of Iowa Sen. Joe Bolkcom framing the need for tax credit reform. The content of his statement provides significant insight on effective messaging and framing on the issue.
"Accountability will give legislators the information they need to make smart decisions about tax credit spending. If you haven't heard the public's anger about tax credit abuses, you just simply haven't been listening... We've started the process of making state government leaner, more accountable to the public and better able to serve the taxpayers... Dollars will be shifted away from large Wall Street companies and moved to support struggling Iowa main street businesses. These small businesses are the businesses creating jobs and benefiting Iowans. When it comes to accountability, tax credit spending will no longer be a secret to Iowa taxpayers. The money we spend on tax credits will no longer be on automatic pilot. Iowans will know that the money spend on tax credits is producing the promised jobs and economic growth."
Legislative Momentum: 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 that “this new law will make sure that when reviewing the State’s annual budget, we have all the information we need to put together a complete profile of expenditures." Legislators in other states have introduced a range of legislation, including economic development subsidy accountability, transparency of contracts, tax expenditure budgets, and sunsetting ineffective tax credits.
A strong bill was also introduced in Colorado last session: Sen. Morgan Carroll and Rep. Sal Pace's HB1350 required any entity that received public funds for the purpose of economic development to file an annual report to the Colorado economic development commission on the number of jobs created, wages paid, and other important categories. If the state finds that a recipient of an economic incentive has not complied with requirements, it has the authority to “clawback,” or recapture any public money expended on the economic incentive.
This year, lawmakers in several states, including Maine, Vermont, New York, Colorado, New Mexico, and Washington State, have already introduced various types of transparency legislation.
Progressive Tax Reform and Revenue Generation
Context: Although the recession may have subsided at the national level, 2011 still finds states reeling from historic budget shortfalls, high unemployment, and significant revenue declines, and will continue to face fiscal challenges in the upcoming year. The lingering effects of the downturn and subsequent revenue shortfalls 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).
Why this Matters: These dire circumstances merit progressive tax and budget policy as a means to provide essential services, make critical investments in public structures and long-term growth areas, support working and middle-class families who have been disproportionately hit by the impact of the downturn, alleviate the disturbing regressivity of state tax structures, and ensure that all taxpayers are contributing their fair share.
Some states and localities have unfortunately reverted to regressive proposals that will only exacerbate economic pain. For instance, conservative officials in some states are proposing providing large corporations with enormous tax breaks and reducing or even eliminating corporate, personal income, and estate taxes. In Michigan, lawmakers are attempting to push through over $1 billion in corporate tax breaks and considering cutting the state’s earned income tax credit (EITC), a tax credit that not only assists working families, but also has a direct positive impact on the economy. Similarly, Arizona Gov. Jan Brewer aims to balance her state’s budget on the backs of the vulnerable. Brewer has expressed her intent to cut health care for 280,000 Arizonans, while advocating for a slew of imprudent business tax cuts. These proposals would do little more than exacerbate fiscal pain, halt economic growth, and increase the burden on the middle class and working families.
While the right-wing continues on its anti-tax crusade, Colorado’s experience with the so-called Taxpayer Bill of Rights, or TABOR, exposes the fallacy of their manipulative rhetoric on the economic impact of tax cuts. In 1992, the state instituted TABOR, which places extremely strict limits on state and local revenue growth. Following implementation, TABOR resulted in: enormous declines in K-12 education funding and investments in students, increased tuition rates, the elimination of an affordable housing loan and grant program, an exponential rise in the number of children and adults who lacked health insurance, hindered essential services for vulnerable populations in the state, and limited the ability of the state to invest in infrastructure and other public structures that contribute to a healthy economy. Coloradans, including a range of elected officials and business leaders, were extremely dissatisfied with the insidious policy and, in 2005, voted to weaken TABOR rules.
Research and historical precedent demonstrate that raising revenue in a progressive manner is economically 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 security and social vitality.
States should institute tax reforms that benefit the middle class. While the Right commonly argues that the tax onus falls squarely on the high-income families, the reality is that the richest have not been contributing their fair share for years. When you factor in sales and excise, property, and income taxes, states tax working families far more heavily than richer individuals, according to Who Pays?, a report from the Institute for Taxation and Economic Policy. 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:
Source: Institute for Taxation and Economic Policy, Who Pays?
Moreover, corporate income tax revenue as a share of all taxes has fallen dramatically. In 1979, the corporate income tax accounted for 10.2 percent of total state tax revenue. In 2005, the figure fell to 6.5 percent. At the federal level, two thirds of American corporations and foreign corporations doing business in the United States pay absolutely no taxes, despite taking $2.5 trillion in sales.
The public also views the tax system as skewed to benefit the affluent. Sixty percent of voters say that “upper income people” are not paying their fair share, while 67 percent say that corporations are not.
Additionally, common-sense revenue solutions are needed to invest in the economy. As a report by the
Economic Opportunity Institute denotes, "every dollar of state spending generates $1.41 of economic activity. Much of that spending – 62%, or 88 cents – boosts the private sector. Cutting state spending means fewer purchases from suppliers, reduced contracts with service providers, less money from public and private employee paychecks circulating through local businesses – and of course, fewer public services."
Polling suggests strong public support to achieve these ends. In fact, a 2009 poll found that 79 percent of the public believes “government investments in education, infrastructure, and science are necessary to ensure America’s long-term economic growth.”
A joint statement released by the AFL-CIO and Chamber of Commerce -- two organizations that are usually on opposite ends of the ideological spectrum from one another -- expressed a similar sentiment on the need for investment and improvement in infrastructure. This illustrates that investment in economic growth is not a partisan issue -- it is a necessary step to prosperity that should garner support from both progressives and conservatives. As the statement reads, "whether it is building roads, bridges, high-speed broadband, energy systems and schools, these projects not only create jobs and demand for businesses, they are an investment in building the modern infrastructure our country needs to compete in a global economy... we hope that Democrats and Republicans in Congress will also join together to build America's infrastructure."
Messaging: Polling indicates general support for tax reform to lessen the burden on the middle class. Additionally, recent national polls have indicated that Americans are open to raising taxes on high-income earners to lessen the pressure of the downturn. For instance, when asked what methods they would prefer to balance the budget, 61 percent of respondents said they would rather increase taxes on the rich.
Furthermore, though voter skepticism and distrust of government remains high, support for services provides an opening for lawmakers to highlight the need for reform and action. Messaging should reinforce voter values, stress the need for a balanced approach to tax reform, link public policy to economic outcomes, recognize frustration and target anger to the actors responsible for the current economic and fiscal circumstances, and provide constituents with optimism and resolution to a sound policy response.
Messaging should include:
- Linking Policies to Economic Outcomes
- Highlight public structures, including infrastructure, schools and communication networks, as the bedrock of our economic and national prosperity
- Frame the conversation with a connection to values, such as jobs, education, and small business
- Explain how government policies direct the flow of money to different parts of our society and lead to particular social and economic outcome
- Talk about people, not programs, to relate the human impact of a specific policy or fiscal action
- Provide specifics about how cuts hurt middle class families, small businesses and the economy
- Label cuts-only proposals as “irresponsible” and “reckless” as well as “short-sighted” in terms of putting our long-term future at risk
- Explaining the Downturn and Why It Merits the Need for Bold, Progressive Action
- Target voters' anger to the real culprits of the economic downturn, including Wall Street, CEOs, corporate lobbyists, and feckless politicians who facilitated their actions
- Highlight that state revenues have crashed
- Champion working families values and link prosperity to public structures
- Connecting Values to Policies
- Stand Up for Transparency and Accountability
- Advocate Balanced Approach to Budgets, Including Raising Taxes on the Rich and Closing Corporate Tax Loopholes
Drew Westen, psychologist and consultant for a number of presidential and Congressional campaigns, offers the following talking points to connect with voters on progressive tax reform:
- “It’s time we tax fairly and cut wisely, not tax the middle class and cut services to our children, seniors, and public safety.”
- “Americans should be working their way into the middle class, not falling out of it.”
- “The best way to reduce the deficit is to put Americans back to work. “
- “In times like these, millionaires should be giving to charity, not getting it.”
- “I want to see the words "Made in America" again.”
Westen additionally provides some messaging tips:
- Focus on the shrinking middle class and small business vs. the rich and big corporations
- Focus on taxing those who’ve caused the problems we’re facing
- State whose taxes you aren’t going to raise (the middle class) before saying whose taxes you are (the rich, big corporations)
- Start with who should pay more or less (fairness) and then turn to why we need taxes, not the other way around
- Focus on values that support essential services (e.g., security, leadership, education, protecting dignity in later years)
Legislative Momentum: This January, Illinois lawmakers approved legislation to raise the state corporate and personal and tax. In explaining the need for the effort, the plan will raise $6.5 billion over the next year and consists of temporarily increasing the state's flat personal income tax, from 3 to 5 percent, and corporate tax, from 4.8 to 7 percent. This the first time in 22 years that the state has raised its income taxes.
Illinois’ actions mirror developments that have occurred in other states in the past few years. 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 - “in 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
- In 2009 alone, California, Connecticut, Colorado, Delaware, Hawaii, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, and Wisconsin instituted either a permanent or temporary reform of personal income taxes. Another 11 states considered or enacted business tax increases to help deal with budget deficits.
- 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.
- 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 last session as well. 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.
- Further, several traditionally red states enacted revenue increases last year, including Arizona, South Carolina, and Kansas.
- Several other states have defeated several heinous, anti-tax initiatives, such as TABOR, in recent years.
Other states have considered or implemented a range of other policy options, such as closing corporate tax loopholes through common-sense reforms like combined reporting, which requires multi-state corporations to report profits from all entities, including subsidiaries, for tax purposes. Currently, a majority of states have implemented the policy and as CBPP finds, “combined reporting states are well-represented among the most economically-successful states in the country.” Most recently, Wisconsin enacted the policy in the 2009 session.
Progressive State Network’s Tax and Budget Reform: Policy Options for 2011 explores several other progressive tax and budget options.
Economic Development Banks
Context: Though large corporations have posted historically high profits in recent months, small businesses are still reeling from the impact of the downturn. Unemployment remains high and states do not have the necessary revenue to invest in infrastructure, education, and other vital areas of growth.
Why this Matters: The economic downturn hit small businesses hard. Bank lending additionally declined dramatically in recent years, exacerbating the increasingly weak position that many small firms confronted. Wall Street and large financial institutions sharply reduced lending to small businesses.
The Main Street Alliance (MSA) explains, “as the United States continues to experience the worst economic downturn since the Great Depression, small businesses are seeing their sources of credit dry up. Normally an economic engine, they now face severe setbacks in their role as job creators and sustainers. Given the key role of small businesses in our economy, their experiences should be of particular concern to policymakers… These costs have a ripple effect... Across the country, small business owners have stated that the lack of adequate credit has prevented them from hiring new staff as they had planned, leaving communities without needed jobs. Equally troubling, small businesses have reported that lack of available credit has damaged their ability to buy inventory sufficient to meet demand.”
A recent MSA publication, Direct from Main Street: Oregon Small Business Views on Credit and Lending, surveyed small businesses and found:
- 46 percent of small business owners reporting credit needs have decided not to seek a bank loan because they were discouraged
- 67 percent of small business owners reporting problems with access to credit had delayed or canceled expansion plans in response
- 67 percent believe elected officials have not done enough to support small businesses and economic recovery
This dynamic has undoubtedly contributed to unemployment as well. Progressive leaders in many states are considering proactive economic development policies to confront this ongoing issue. One of the most innovative is the creation of a development bank, similar to North Dakota’s - the only state in the country to have its own bank.
At the basic level, a development bank is capitalized by state money, publicly governed, can serve as a depository for state revenue, and returns a portion of its profits to the state. Rather than sending state funds to big banks, the development bank would keep deposits in-state. As such, a development bank reduces state dependence on large financial corporations and allows states to invest dollars in local communities rather than line the pockets of Wall Street CEOs.
A development bank would also be a source of job creation. The Center for State Innovation finds that such a bank could create or save up to 13,500 small business jobs in Oregon - about 6,700 of which would be supported by the augmented loan activity and ability to invest in local industry that the bank would permit. It would also increase state revenues. In 2009, the Bank of North Dakota “delivered a $30 million dividend to the state.” Interestingly, North Dakota has one of the lowest unemployment rates in the country and is one of the states with a budget surplus in recent years.
Messaging: Recent polling indicates strong public and small business support for a development bank. In Maryland, people were asked, "The state of Maryland keeps billions in tax dollars in big out-of-state banks like Bank of America and M&T. Would you favor or oppose the state using these funds to create a public bank that will keep Maryland tax dollars at home, create more local jobs and support local banks that provide credit to small businesses in Maryland?" In total, 67 percent of respondents favored the idea, with 42 percent strongly favoring the policy. Further, MSA polling found that 75 percent of small businesses polled would support the creation of an Oregon state bank like North Dakota’s.
Messaging around economic development banks should emphasize that state development banks:
- Team up with local banks to keep public dollars in the community
- Create jobs and encourage economic growth
- Increase state revenues and keep money in-state
- Strengthen local and community banks by improving access to capital
- Decrease debt costs for local government
- Reduce state dependence on Wall Street
Washington State Rep. Bob Hasegawa, provides a useful frame to discuss the policy: "A simple concept that will reap huge benefits for Washington. The concept (is) to keep taxpayers' money working here in Washington to build our economy. Currently, all tax revenues go into a 'Concentration Account' held by the Bank of America. BoA makes money off our money and we never see those profits again. Instead, we can create our own institution and keep taxpayers' dollars here in Washington, working for Washington."
Legislative Momentum: Lawmakers across the country, from Maine to Oregon, are moving on the concept. Washington State Rep. Bob Hasegawa recently introduced HB1320 to create the Washington Investment Trust.
For more information and resources on these policies, please visit PSN’s Rebuilding Prosperity.
Full Resources from thisArticle
CALPIRG - California Budget Transparency 2.0: Online Tools for Better Government
Center on Budget and Policy Priorities - States Continue to Feel Recession’s Impact Center on Budget and Policy Priorities - State Tax Changes in Response to the Recession
Bank of North Dakota