From the Dispatch

Maine Voters Reject Tax Reform Initiative, but Approve Infrastructure Investment

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

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

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

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

The ballot defeat additionallyindicates that while the current sales tax in most states is outdated and designed for an industrial economy in which most consumer spending went to buying goods, expanding the sales tax to services is still a challenging message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

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

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

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

Tea Party protests are purportedly an indication of Americans demanding tax and spending cuts. Yet, last Tuesday, Arizonans overwhelmingly approved Proposition 100 to temporarily increase the state's sales tax by one percent for the next three years. The measure is estimated to generate $1 billion in additional revenue per year. In spite of opposition to the tax cuts by many of the Legislature's conservative leaders, Republican Gov. Brewer campaigned diligently for the increase, emphasizing, "If we don't get the revenue we will have to cut another billion dollars."

This vote in Arizona, a state whose Legislature is so tax averse that it has enacted 42 tax cuts to its three major revenue sources since 1992, not only highlights the depth of the fiscal crisis, but additionally demonstrates that voters across the political spectrum recognize that budget shortfalls cannot be solved solely by budget cuts. The approval of the Arizona sales tax increase follows a strong vote for raising income and corporate taxes in Oregon in January.

As this Dispatch will detail, these votes mirror actions taking place in both conservative and progressive states and localities around the country. In 2009 and 2010, states have enacted a wide-ranging set of revenue increases to cope with cumulative 2010 and 2011 deficits of approximately $375 billion. Although revenue forecasts are improving, states are still reeling from historic declines in the past year.

What is remarkable is that the anti-tax movement has racked up such regular failures in the crisis, as even many state leaders previously signing "no taxes" pledges have reneged on them. Instead, popular demand for new revenue to avert budget cuts has driven legislative movement on progressive tax and budget policy.

Adding to the general public support has been research consistently showing that progressive revenue increases during a downturn is a better alternative to cuts in order to promote growth and protect vulnerable populations suffering during the recession.

Finally, this Dispatch will outline some of the effective messaging and research to demonstrate to voters that progressive measures and tax increases are economically sound and go to the programs they want preserved -- the critical step in the success of revenue campaigns.

Table of Contents:

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

- Wave of High-Income Tax Increases

- Eliminating Corporate and Business Tax Loopholes

- Raising and Reforming Sales and Excise Taxes

- Challenging Regressive Budget Actions

- Making the Case for Progressive Tax Policy

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

- The Need for Continued Federal Support

- Conclusion

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

On top of the vote in Arizona, the Kansas Legislature recently approved a one cent sales tax increase that will take effect July 1 and bring in over $3 million in revenue to avoid cuts in school programs. Despite a vitriolic Tea Party campaign against revenue generation, St. Louis, Missouri passed a half-cent sales tax increase to restore bus lines that had been defunded and to eventually expand the city's mass transit system.

In South Carolina, the House recently voted to override Gov. Mark Sanford's veto of HB 3584 and approved an increase of the state's cigarette tax by 50 cents. Several conservative South Carolina lawmakers, who had previously signed on to an Americans for Tax Reform letter to not raise taxes, refused to abide by it and voted for the tax as well. Similarly, two Kansas House members who had signed the pledge were the margin of victory for passing the sales tax in that state. Though regressive, the new sales and excise taxes will provide funding for education and other essential services.

And even in fervently and vocally anti-tax Georgia, the Legislature imposed a temporary 1.45 percent hospital fee and raised other fees to cut the budget deficit.

Myth of an Anti-Tax Electorate: Many of these conservative leaders are just following the lead of voters across the country. Even before Arizona and Oregon votes this year, voters and lawmakers have continually rejected anti-tax initiatives, such as the so-called "Taxpayer Bill of Rights" (TABOR), over the last five years. Just last November, voters in Maine and Washington disapproved of these types of deleterious measures. In 2008, similar initiatives were defeated in Massachusetts, North Dakota and Oregon. In all three states, proposed initiatives that would have slashed or, in the case of Massachusetts, completely eliminated the income tax, were rejected at the polls. In 2006, voters in Maine, Nebraska and Oregon each rejected TABOR ballot initiatives.

In response, legislatures have increasingly taken their cue from voters, not the empty threats of the anti-tax ideologues. Of the 28 right-wing attempts to introduce TABOR legislatively, Colorado is the only state that has adopted this disastrous policy. As the Ballot Initiative Strategy Center finds, "[t]he Grover Norquist, Club for Growth, Glenn Beck, Tea Party crowd tried to use the bleak budget picture as an opportunity to ratchet down even harder as states look to find the revenue necessary to protect priorities, create jobs, and get their economies going -- but voters rejected that failed approach."

Raising Taxes is the Norm in Recessions: In 2008 and 2009, over 30 states increased taxes as a response to the recession, as the March 2010 map above displays-- with additional states like Arizona, South Carolina, Georgia and Kansas filling in additional states since then. As CBPP indicates, this parallels a general trend of states increasing revenue during recent economic downturns--"[i]n the recession of the early 1990s, some 44 states raised taxes; in the early 2000s, some 30 states did so." Raising revenue is typical during recessions.

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

Wave of High-Income Tax Increases

In 2009 alone, California, Connecticut, Colorado, Delaware, Hawaii, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, and Wisconsin instituted either a permanent or temporary reform of personal income taxes. Many of these states have increased revenue by over 5 percent.

This session, the Hawaii Legislature capped itemized deductions at $50,000 for joint filers with income over $300,000, or at $25,000 for individuals earning over $150,000. The move will generate $33 million next fiscal year. This follows the state's high-end income tax increase last year after the Legislature overrode the Governor's veto to raise three top rates, with the highest increasing from 8.25 to 11 percent. The increase only applies to the top 2.6 percent of tax filers in the state.

At the end of January 2010, voters in Oregon overwhelmingly approved two ballot initiatives that ratified legislative action last year to increase high-end personal income and corporate taxes. The initiatives will only affect 2.5 percent of the state -- the richest individuals and corporations -- and generate over $700 million in the upcoming fiscal year to protect vital services.

William Gates Sr., father of Bill Gates, is leading an effort in Washington to create a state income tax for wealthy state residents. I-1098 would impose a 5 percent tax on joint filers above $400,000, and individuals making over $200,000, and a 9 percent on families making over $1 million. The proposal would also increase the business and occupation tax. In a recent article, Gates, along with Gerald Grinstein and Michael DeBell, writes, "this proposal offers a clear choice to voters: assist small businesses, cut taxes for the middle class and support much needed investments in our schools and in health care — or keep the status quo, which penalizes small business and shortchanges our children and families." If 241,153 valid voter signatures are successfully gathered by July 2, the measure will appear on the ballot in November.

In Washington DC, Councilmember Michael Brown has proposed the creation of two new income tax brackets, 8.9 percent over $250,000 and 9.4 percent over $1 million.

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

Eliminating Corporate and Business Tax Loopholes

Corporate income tax revenue as a share of all taxes has fallen dramatically. In 1979, the corporate income tax accounted for 10.2 percent of total state tax revenue. Just last year, 11 states considered or enacted business tax increases to help deal with budget deficits and others have enacted or considered them this session. States have strategically responded to corporate tax erosion by a number of approaches, from combined reporting to eliminating wasteful tax credits.

Wisconsin enacted combined reporting in the 2009-2010 session. Combined reporting requires multi-state corporations to report profits from all entities, including subsidiaries, for tax purposes. Furthermore, combined reporting is a key policy to restrict tax avoidance and nullify certain tax shelters. Currently, over 20 states have implemented the policy.

This session, the Iowa Legislature approved HF 2527/SF 2380, which enacts modest tax credit reform, including a process to regularly examine credits, temporarily suspending the film tax credit, and in total, reducing inefficient credits by $115 million. Unfortunately, many states still pursue costly and misguided expenditures without properly assessing their value or the total revenue loss to the state.

CBPP finds that certain credits, such as those utilized for job creation, do not benefit states economically. They report, "[j]ob-creation tax credits raise a number of issues of cost and effectiveness. While 22 states have broad, statewide credits similar to those being proposed, and about another 12 states have narrower credits targeting specific industries or areas of the state, there is no evidence that these states’ economies are doing better than other states’ economies...Indeed, a state-level effort to stimulate the economy in this way can inadvertently create a fiscal drag on the state and national economy."

Tax Credit and Budget Transparency: One key step to reform is augmented transparency of how much money states are actually losing on tax credits, subsidies, contracts and corporate tax giveaways. This session, Colorado Rep. Sal Pace and Sen. Morgan Carroll introduced HB 1350, which requires any entity that receives public funds for the purpose of economic development to file an annual report to the Colorado economic development commission on jobs created, wages paid, and other important categories. If the state finds that a recipient of an economic incentive has not complied with requirements, it has the authority to “clawback,” or recapture any public money expended on the economic incentive. The measure passed the House, but ultimately failed in the Senate.

However, Gov. Bill Ritter issued Executive Order D 2010-009, which contains similar principles as the bill and directs the Colorado Economic Development Commission to compile a report on how the state can effectively track grants, loans, or tax credits issued for economic development and job creation purposes.

In late April, the Massachusetts House unanimously passed the Revenues and Expenditures Transparency Act, H 2972, to create a searchable, online database that details state spending and revenue sources. Lawmakers also approved an amendment to create greater taxpayer accountability by providing increased transparency around some business tax credits. As House Chairman of the Joint Committee on Revenue Rep. Jay Kauffman explains, "[p]ublic access to the way we raise and spend money is essential, enabling us to make more-informed decisions for the tax-paying constituents who elect us to serve on their behalf."

As U.S. PIRG comprehensively details in Following the Money: How the 50 States Rate in Providing Online Access to Governm ent Spending Data, which analyzes and ranks each state on their development of comprehensive, one-stop, one-click budget accountability and accessibility, some of the major benefits of corporate transparency, include promoting sound fiscal practices, identifying spending inefficiencies, reducing corruption, and encouraging a more focused budget process.

Several lawmakers across the country have introduced various transparency efforts in order to safeguard taxpayers, foster better budgeting practices, promote good jobs, and garner savings. PSN has model corporate transparency legislation that aims to collect comprehensive information regarding state subsidy allocation, contract distribution, tax expenditures, and corporate taxation trends.

Resources:
Center on Budget and Policy Priorities - A Majority of States Have Now Adopted a Key Corporate Tax Reform — “Combined Reporting”
MASSPIRG - House Adopts State Spending Website
U.S. PIRG - Following the Money: How the 50 States Rate in Providing Online Access to Governm ent Spending Data

Raising and Reforming Sales and Excise Taxes

Similar to last year, a number of states are pursuing sales and excise tax increases. Some are more targeted, such as Wyoming taxing wind energy, while others are drilling down on particular products or on Internet retailers.

Candy and Soda Taxes: This year marked a great interest in pursuing taxes on candy and soda as both Colorado and Washington State raised taxes on the products. New York Gov. David Paterson has led an effort both this year and last to assess higher taxes on sugary beverages while reducing taxes on diet drinks. New York City Mayor Michael Bloomberg, who supports the effort, stated, the "proposal will discourage consumption of high-calorie beverages while simultaneously making lower-calorie beverages more affordable, which will help lead to major gains in public health ."

Cigarettes and Alcohol Taxes: So far this year, South Carolina, Hawaii New Mexico, Utah, and Washington state raised cigarette taxes. In 2009, sixteen states enacted cigarette tax increases, while six others raised alcohol taxes.

"Amazon Tax": States lose billions every year due to the failure to collect sales taxes that are legally due on purchases made over the Internet. This hurts not only state budgets but local retailers and local job creation, as purchases shift from main street to out-of-state retailers.

In 2008, New York became the first state to require online retailers to collect sales tax on purchases to customers in the state. The state changed its tax code to mandate that an out-of-state retailer with more than $10,000 a year in sales generated through sales affiliates in the state has nexus and must collect sales and local taxes. After the bill's passage, Amazon.com immediately sued, but lost the case. The state expects to generate $47 million from the "Amazon tax."

Rhode Island and North Carolina followed New York's lead and passed the Amazon tax last year. This year, New Mexico Rep. Eleanor Chavez sponsored HB 50 to extend the state's gross receipts tax to online sales. In February, Colorado enacted HB1193 to apply the sales tax on out-of-state retailers. Showing a petty vindictiveness, Amazon canceled all business relationships with affiliates in the state in retaliation, even though there is "no connection between the affiliate program and the new law."

Resources:
Center on Budget and Policy Priorities - The Zero-Sum Game: States Cannot Stimulate Their Economies by Cutting Taxes
Center on Budget and Policy Priorities - Expanding Sales Taxation of Services: Options and Issues
Stateline.org - States Plug Budget Holes, For Now

Challenging Regressive Budget Actions

Unfortunately, some states illustrate the extremely regressive proposals and budget recklessness that come into play when states fail to raise the revenue needed.

With its requirements of a two-thirds vote threshold to pass new revenue, California has remained hamstrung in closing its massive budget crisis. In response to the downturn, Gov. Arnold Schwarzenegger proposed discontinuing the state's entire welfare program, most subsidized child care, a 60 percent cut to mental health services, $750 million cut to in-home services, reducing K-12 education funding by $2.8 billion, and slashing services for the elderly and disabled. Yet, he refuses to eliminate corporate tax breaks that amount to a loss of $2.1 billion in revenue annually.

Using Strategic Revenue Increases to Target Right-Wing Governors: In New Jersey, newly-elected Gov. Chris Christie unveiled his $29.3 billion FY2011 budget proposal--an extremely regressive plan that, rather than renewing an income tax surcharge on high-end earners, cuts taxes for the wealthy while imposing severe reductions to municipal and county aid, discontinuing property tax rebates, completely eliminating funding for grants to support clinical family planning services, cutting aid to school districts, closing psychiatric hospitals, proposing a constitutional amendment to lower the property tax cap to 2.5 percent that may be placed on the November ballot, and reducing the state workforce by over 1,300 workers.

The Legislature responded to the Governor by restoring the state's millionaire's tax and property tax rebate program, forcing the governor to veto them. As state Sen. Stephen Sweeney described the Governor's position this Spring, "The wealthy people in New Jersey got a tax cut. The middle class and the poor are going to get a tax increase," since property taxes will inevitably rise with local aid cut and property tax rebates are eliminated. In response to the veto and the proposed budget cuts, 35,000 New Jerseyans flooded downtown Trenton to denounce the Governor, the largest rally in the state capitol's history. Along with an approval rating for the Governor that has dropped to 33 percent, this backlash shows that voters don't buy the argument that protecting the wealthy justifies slashing funding for working families.

In Minnesota, the Legislature agreed to 85 percent of the budget cuts proposed by the Gov. Tim Pawlenty, but also enacted a 1.3 percent increase in the income tax rate on joint taxable income in excess of $200,000. Yet the Governor still chose to veto the bill, forcing a budget deal that merely delays $1.9 billion in payments to local schools--a solution that will just push the crisis forward into next year. However, many of the candidates hoping to succeed Pawlenty have made the tax on high-income individuals a fixture of their campaign, emphasizing the way progressives can capitalize on popular support for taxing the wealthy.

Hypocrisy of Right as they Increase Taxes on Working Poor: In Georgia, the Legislature approved a bill that eliminates the refundability of the state’s low-income tax credit, which provides much needed tax relief and wage support for workers who make less than $20,000 per year, even as legislators enacted a long-term tax cut for the state's wealthiest taxpayers. If the Governor signs the bill, it would impact 1 million low-income working and elderly Georgians.

Similarly, Virginia this year enacted a cut to the state's Earned Income Tax Credit (EITC) that will cost 114,000 low-income families a total of $6 million. have moved forward with very harmful cuts to credit programs that assist low-income families. Gov. Christie in New Jersey similarly has proposed a reduction in the state's EITC. And Gov. Pawlenty cut funding for a renters tax credit in Minnesota, that will cost 300,000 low- and moderate-income residents $51 million, even as he fought increased taxes on the wealthy.

What stands out is that almost all states with EITCs have maintained full funding for tax relief for working families, but some rightwing governors have pushed for higher income taxes on low-income families just to protect wealthy tax payers from sharing in the burden of solving the budget crisis.

Center on Budget and Policy Priorities - Some States Scaling Back Tax Credits for Low-Income Families
Georgia Budget and Policy Institute- Revenue Increases Help Balance the Budget in the Short Term, but Tax Cuts Will Lead to Deficits in the Long Term

Making the Case for Progressive Tax Policy

Progressives have emphasized some key messaging and research in making the case for new revenues.

Spending on Programs that Assist Low and Middle Income Families is Effective Recovery Policy:

During an economic downturn, progressive revenue generation is far preferable to deep cuts, as it allows states to provide funding for essential programs, pump money into the economy, and protect working families. A budget that relies too heavily on cuts will not only force layoffs of state employees, but will also diminish crucial services and reduce spending in the private sector.

By assisting working families, who will more readily spend their funds on basic needs, the government is boosting short-run demand and fostering market activity. A report by the Economic Opportunity Institute details:

Every dollar of state spending generates $1.41 of economic activity...Cutting state spending means fewer purchases from suppliers, reduced contracts with service providers, less money from public and private employee paychecks circulating through local businesses – and of course, fewer public services."

On the other hand, cuts are extremely damaging to the economy. Further reductions will diminish state workforces, decrease spending on crucial programs, curb economic growth, and exacerbate the effects of the downturn. The Economic Policy Institute details the danger of state budget cuts as they impact employment, economic activity, and investment in both the public and private sector.

Taxes Do Not Undermine Economic Growth:

As PSN has highlighted in previous Dispatches, research consistently shows that there is no link between tax increases and job loss. Moreover, states with higher personal income tax rates experienced significant job growth in the past decade, have more innovative new economy industries as a result of crucial investments in long-term growth industries, and sustain higher income growth.

The Overall Tax Burden Is Low:

Despite intense rhetoric from the right, the Bureau of Economic Analysis reports that "[f]ederal, state and local taxes—including income, property, sales and other taxes—consumed 9.2% of all personal income in 2009, the lowest rate since 1950." In fact, the average rate has decreased 26 percent since the national recession began in late 2007. The Center on Budget and Policy Priorities (CBPP) reported similar results in a recent study, finding that as a result of tax cuts included in the American Recovery and Reinvestment Act (ARRA) and other tax changes at the federal level, middle class families are paying the lowest proportion of federal taxes as a percent of income in decades.

But the Rich Pay Far Less of Their Income in State Taxes than Working and Middle Class Families:

The richest taxpayers have not been contributing their fair share for years. When you factor in sales and excise, property, and income taxes, states tax working families far more heavily than richer individuals, contrary to common notions about taxation. The Institute for Taxation and Economic Policy (ITEP) finds that on average, the lowest 20 percent of earners pay about 11 percent of their income in state and local taxes while the top 1 percent pay a little over 6 percent of their income to state and local governments.

Taxes on the Wealthy Are the Most Effective Response to the Recession:

Given that the wealthy are already paying a lower percentage of their income in state taxes, it makes both economic and moral sense to raise revenues by creating a more equitable burden of taxation between wealthier and lower-income state residents. Raising income taxes on high-income individuals is the most direct way to accomplish this.

Progressive Taxes Don't Cause Out-Migration of Wealthy Residents:

And to respond to a favorite talking point of the right-wing, states that have increased the top rate in recent years have not experienced any significant out-migration of wealthy residents. For example, after the New York temporarily raised income taxes on the wealthy from 2003 to 2005, the number of high income tax returns grew 30 percent, from 250,000 to 325,000 in the state. Similar trends occurred in California and New Jersey.

Resources:
Progressive States Network - Revenue Options in 2010: Making the Case and Debunking the Myths
Center on Budget and Policy Priorities - Raising State Income Taxes on High-Income Taxpayers
Center on Budget and Policy Priorities - Federal Income Taxes on Middle-Income Families at Historically Low Levels
Center for Working Families and Fiscal Policy Institute - Back on Track: Why Progressive Tax Reform is an Essential Part of New York's Budget Solution
California Budget Project - Budget Cuts or Tax Increases: Which are Preferable During an Economic Downturn?
Center for American Progress report, State of American Political Ideology, 2009: A National Study of Values and Beliefs
Institute on Taxation & Economic Policy - Who Pays?
Princeton University Policy Research Institute for the Region - Trends in New Jersey Migration: Housing Employment and Taxation

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

Polling conducted by the Center for American Progress (CAP) indicates that 79 percent of the public believes "[g]overnment investments in education, infrastructure, and science are necessary to ensure America’s long-term economic growth." Other significant findings of the study include:

69 percent believe "[g]overnment has a responsibility to provide financial support for the poor, the sick, and the elderly" - with 33 percent strongly agreeing.
60 percent of the public agree that "[r]ich people like to believe they have made it on their own, but in reality society has contributed greatly to their wealth" - with 30 percent strongly agreeing.
62 percent believe "[t]he gap between rich and poor should be reduced, even if it means higher taxes for the wealthy."
Over 60 percent believe government should "take care of people who can't care for themselves" and "guarantee food and shelter for all."

During an economic downturn when so many working families are struggling, voters are likely to support policies to raise revenue, specifically increases on the wealthiest individuals and corporations that have a much smaller tax burden than lower-income families and small businesses. They are also likely to support measures that strengthen public structures, invest in programs that benefit society collectively, and provide safeguards to those who have been hurt the most by the recession.

Need to Message the Effectiveness of Government Action: As we highlighted last fall, while the public supports government action, they are often skeptical that it will deliver on the promises of elected officials, with up to 61 percent of the public believing that "government spending is almost always wasteful and inefficient" and even more, 65 percent, fearing that government policies will "serve the interests of corporations and the wealthy" rather than regular voters.

To counter these fears, a recent policy brief, Promoting Broad Prosperity, by the Topos Partnership and Demos details some key messaging on how to discuss government:

Don't talk about government in the abstract.
Emphasize that “public structures” created and maintained by government are foundational to prosperity and economic stability, as well as the strength of the middle class.
True prosperity rests on collective success, not just individual opportunity or success.
Public structures (like the FDIC, community colleges and Social Security) are built collectively and yield collective benefits.
Explain how government policies direct the flow of money to different parts of our society and help people focus on how policies lead to particular social and economic outcomes.

Since the public retains skepticism about government in the abstract, emphasize talking about new revenues to support specific public institutions like schools or other concrete programs that people support and utilize daily.

The strongest point of optimism is that younger voters, so-called Millennials, are more committed to progressive goals and notably less cynical of the effectiveness of government as a tool for achieving those ends.

Resources:
Center for American Progress - State of American Political Ideology, 2009: A National Study of Values and Beliefs
Progressive States Network - Progressive Values Dominant -- But Need to Rebuild Trust in Effectiveness of Government Action
Progressive States Network - Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth
Topos Partnership and Demos - Promoting Broad Prosperity

The Need for Continued Federal Support

Even as states raise revenue at home, states will continue to face shortfalls in the coming year and millions of Americans remain out of work. Mark Zandi, Chief Economist at Moody's Economy.com, reports that the revenue drop last year was "the largest decline on record going back to just after World War II." Furthermore, as Stateline.org points out, budget gaps in recent years greatly surpass those during the 2001 recession.

The crisis requires swift and bold action by federal lawmakers on job creation. Without further federal assistance, states will slash hundreds of thousands of jobs and reduce health care, education and public safety services even further than they have already.

Congress will be considering the Promoting American Jobs and Closing Tax Loopholes Act of 2010, H.R. 4213, a jobs bill that will help boost economic recovery and assist people out of work. This will result specifically in $26 billion in sorely needed funding for state and local governments health programs, known as federal medical assistance percentages (FMAP).

The legislation would also extend unemployment insurance (UI) and subsidized COBRA health coverage for those out of work, provide additional fiscal relief to states, continue expanded temporary assistance for needy families (TANF) and fund summer jobs for young workers. On top of that, the bill would close a corporate tax loophole that allows Wall Street hedge funds to have their earnings taxed as capital gains instead of as ordinary income.

If you are a state lawmaker, please sign onto this letter calling on the President and Congress to enact a comprehensive jobs plan, including relief to states and local governments to foster economic growth and create and maintain jobs.

Resources:
AFL-CIO - Act Now: Tell House to Pass Badly Needed Jobs Bill
Stateline.org - States Plug Budget Holes, for Now
Economic Policy Institute - Dire States--State and Local Budget Relief Needed

Conclusion

PSN has outlined progressive options for revenue generation and balanced budgets in previous issues of the Dispatch. The Tax Fairness Organizing Collaborative also provides guidelines for closing recessionary budgets, which should include raising money available to state governments, making tax increases and reform one in the same, and encouraging augmented federal-state revenue sharing.

Resources:
Center on Budget and Policy Priorities - Tax Measures Help Balance State Budgets
Progressive States Network - Revenue Options in 2010: Making the Case and Debunking the Myths
Tax Fairness Organizing Collaborative - Solutions that Work for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps

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

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

Last Tuesday, Oregonians overwhelmingly approved two ballot initiatives that ratified legislative action last year to increase high-end personal income and corporate taxes. The initiatives, put on the ballot by corporate interests, will impact just 2.5 percent of the state -- the richest individuals and corporations -- and generate over $700 million in the upcoming fiscal year to protect vital services.

The failure of the anti-tax movement in Oregon is one more in a long stream of right-wing initiatives rejected by voters at the ballot box. In fact, progressive revenue generation as part of a balanced approach to addressing state deficits has been popular with both voters and legislatures for years. This Dispatch will provide both the facts and messages to debunk opposition to smart revenue options, while outlining a few of the best revenue approaches to filling budget holes.

The right-wing may try to pretend that voters oppose taxing the wealthy or that voters prefer to cut education or health services instead of raising needed revenue, but recent history actually shows broad rejection of anti-tax initiatives. Economic reports have consistently shown that states that have raised revenue have not suffered lower growth than states that have relied predominantly on cutting services. Raising revenue in a progressive manner is sound, politically feasible, and popular with the public, especially compared to massive cuts in investments in education, infrastructure, and health care that endanger a state's economic and social vitality.

Demand Federal Help on State Revenues
Beyond raising taxes in the states, swift and bold action by federal lawmakers on job creation and state fiscal relief is also needed. PSN encourages legislators to sign on to our letter calling on President Barack Obama and the US Congress to enact a new, broad-based job plan, including fiscal relief to states and local governments to foster growth and create jobs across the nation. Advocates can email legislators encouraging them to sign the letter using this online tool.

Demand Federal Help on State Revenues

Beyond raising taxes in the states, swift and bold action by federal lawmakers on job creation and state fiscal relief is also needed. PSN encourages legislators to sign on to our letter calling on President Barack Obama and the US Congress to enact a new, broad-based job plan, including fiscal relief to states and local governments to foster growth and create jobs across the nation. Advocates can email legislators encouraging them to sign the letter using this online tool.

Table of Contents:

- Public Support for Progressive Taxation & The Failure of the Anti-Tax Movement

- Debunking Myths that Taxes Undermine Economic Growth

- New Revenue is Needed to Invest in Economic Recovery

- Corporate Tax Reform and Eliminating Wasteful Economic Subsidies

- Corporate Transparency in State Budgets

- Expanding the Sales Tax Base

- Conclusion

Public Support for Progressive Taxation & The Failure of the Anti-Tax Movement

By approving Measures 66 and 67 this week, Oregonians not only expressed their desire to protect services, but became the latest state to reject the hollow manipulations of right-wing anti-tax rhetoric.

Just last November, voters in Maine and Washington rejected anti-tax initiatives , including so-called "Taxpayer Bill of Rights" (TABOR) initiatives meant to impose a rigid strait jacket on revenue options for state legislatures.
In 2008, similar measures were defeated overwhelmingly in Massachusetts, North Dakota and Oregon. In all three states, proposed initiatives that would have slashed or, in the case of Massachusetts, completely eliminated the income tax, were rejected at the polls.
In 2006, voters in Maine, Nebraska and Oregon each rejected TABOR ballot initiatives. This came on top of judges and other officials rejecting TABOR initiatives in Michigan, Montana, Nevada, Oklahoma and Missouri due to fraud and manipulation by anti-tax campaigns.
In 2005, voters in Colorado--the only state ever to approve a TABOR initiative--decided by initiative to significantly weaken the TABOR rules. This followed years of declining education and health standards due to the state's as a result of the implementation of the TABOR.

State Legislatures Reject Anti-Tax Rhetoric: The string of failures of the anti-tax movement at the ballot box is paralleled by state legislatures passing revenue increases across the country. In 2009 alone, California, Connecticut, Colorado, Delaware, Hawaii, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, and Wisconsin instituted either a permanent or temporary reform of personal income taxes. Another 11 states considered or enacted business tax increases to help deal with budget deficits and even more states raised other taxes or fees to address the fiscal crisis in state across the country.

The Ballot Initiative Strategy Center (BISC) notes that out of the 28 right-wing attempts by to introduce TABOR legislatively, Colorado is the only state that has adopted this disastrous policy. State lawmakers have watched as Colorado's experience with TABOR has led to an increase in the number of adults and children without health insurance and a severe decline in education funding.

Empty Threats by the Anti-Tax Right: While right-wing leaders like Grover Norquist and his Americans for Tax Reform like to make threats of punishing legislators who raise taxes, anti-tax forces have largely revealed themselves to be weak paper tigers. After New Jersey increased taxes on the wealthy in 2004, the Democratic House majority increased to its largest size in three decades the following year, while progressives in Maryland and Minnesota continued to maintain and grow strong legislative majorities in the wake of approving increased taxes on high-income earners in 2008 and 2007.

In 2009, BISC found that "[t]he Grover Norquist, Club for Growth, Glenn Beck, Tea Party crowd tried to use the bleak budget picture as an opportunity to ratchet down even harder as states look to find the revenue necessary to protect priorities, create jobs, and get their economies going-- but voters rejected that failed approach."

Even many conservative politicians have rejected these type of policies. For instance, Tom Slade, the former head of the Florida Republican party, dismisses Norquist's ideas and finds his anti-tax pledge to be illogical and dangerous. Slade states, "[y]ou don't know how wide or deep the river's going to get. Saying I'm never going to use a life boat seemed foolish to me." After a Republican State Senator from Virginia, Robert Hurt, voted for a $1.4 billion tax increase, Norquist vowed to back a primary challenge against him. Despite this, the Senator won re-election and is now favored to win the party's nomination for Congress.

Public Opinion Supports Funding Public Investments: Polling shows that 79 percent of the public believes "[g]overnment investments in education, infrastructure, and science are necessary to ensure America’s long-term economic growth." Accordingly, during an economic downturn when so many working families are struggling, voters are likely to support policies to raise revenue, strengthen public programs, and provide safeguards to those who have been hurt by the recession.

Resources:
Ballot Initiative Strategy Center - Fiscal/Budget Issues
The Oregonian - Oregon voters pass tax increasing measure by big margin
Center on Budget and Policy Priorities - Raising State Income Taxes on High-Income Taxpayers
Center on Budget and Policy Priorities - Tax Measures Help Balance State Budgets
Center for American Progress report, State of American Political Ideology, 2009: A National Study of Values and Beliefs

Debunking Myths that Taxes Undermine Economic Growth

One reason states are readily raising revenue as an alternative to more cuts is that they can turn to a wealth of examples to debunk the rhetoric that raising taxes to fund services in a state is harmful to the economy.

Taxes Do Not Undermine State Economic Growth: As we've highlighted in previous Dispatches, research consistently shows that, contrary to right-wing rhetoric, there is no link between tax increases and job loss.

States with higher personal income tax rates experienced significant job growth in the past decade, as the Fiscal Policy Institute and Center for Working Families point out in their report, Back on Track and as the Center on Budget and Policy Priorities found in a similar report.
Moreover, according to a 2008 Information Technology & Innovation Foundation analysis, states with some of the higher marginal income tax rates, including New York and Maryland, have more innovative new economy industries. Likely as a result of larger investments in infrastructure, education, and technology, these states are better suited to foster economic growth that is sustainable and well-paying in an increasingly fierce global competition for jobs.
This builds on analysis by the Institute on Taxation and Economic Policy (ITEP) detailing that states that collect the highest percentage of personal income in taxes actually sustain higher income growth.
Similarly, an older study by the California Budget Project (CBP) analyzed state economies and concludes, "[s]tates that enacted large tax cuts between 1994 and 2001 – reducing revenue by at least 7 percent – subsequently experienced weaker growth in jobs and personal income and larger increases in the unemployment rate, on average, than other states."

Progressive Taxes Don't Cause Out-Migration of Wealthy Residents: Opponents of progressive income tax reform like to argue that tax increases cause wealthy residents to leave a state. In fact, states that have increased the top rate in recent years have not experienced any significant out-migration of wealthy residents:

California: The California Budget Project found that there was a significant growth in millionaire households after California passed higher PIT rates in the 1990s and again in 2004. In fact, the number of California millionaires increased by 37.8 percent between 2004 and 2006.
New Jersey: A Princeton University report discovered that the passage of a higher top rate in 2002 had "little effect on migration patterns among half-millionaire households.”
New York: After the state temporarily raised income taxes on the wealthy from 2003 to 2005, the number of high income tax returns grew 30 percent, from 250,000 to 325,000.

A New York Times article, entitled "Taxes Not Seen as Making the Rich Flee New York" succinctly articulates:

[T]here is surprisingly little evidence to support the proposition that rich New Yorkers would bolt if forced to pay higher income taxes. Though tracking the movement of wealthy taxpayers from state to state is difficult, experts on public finance and migration say they have yet to document a substantial 'rich drain' in states that have raised income taxes in recent years.

Resources:
Progressive States Network - Taxing High-Income Residents: Better than Budget Cuts, Better for Economic Growth
Progressive States Network - Right-Wing Fraud Derails Tax Revolt
Center for Working Families and Fiscal Policy Institute - Back on Track: Why Progressive Tax Reform is an Essential Part of New York's Budget Solution
California Budget Project - Budget Cuts or Tax Increases: Which are Preferable During an Economic Downturn?
California Budget Project - The Number of High-Income Taxpayers Increased During a Period With 10 Percent and 11 Percent Tax Rates on High-Income Earners
Princeton University Policy Research Institute for the Region - Trends in New Jersey Migration: Housing Employment and Taxation
Institute on Taxation and Economic Policy - High Income Tax States Have Strong Economies

New Revenue is Needed to Invest in Economic Recovery

As 48 states confront monetary shortfalls this fiscal year, the budget will undoubtedly be the predominant focus of lawmakers. In fact, the Center on Budget and Policy Priorities (CBPP) estimates that states will face cumulative deficits of approximately $350 billion in 2010 and 2011. The downturn has also taken an enormous toll on tax revenue. Mark Zandi, Chief Economist at Moody's Economy.com, reports that state and local tax revenues have dropped 9 percent from last year, "the largest decline on record going back to just after World War II."

During an economic downturn, progressive revenue generation is far preferable to deep cuts, as it allows states to provide funding for essential programs, pump money into the economy, and protect working families in this time of hardship. A budget that relies too heavily on cuts will not only force layoffs of state employees, but will also cut off funding for crucial services and reduce spending in the private sector.

Peter Orszag, Director of the Office of Management and Budget, and Nobel prize winning economist, Joseph Stiglitz confirm:

[T]ax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.

As a recent report by the Economic Opportunity Institute denotes, "every dollar of state spending generates $1.41 of economic activity. Much of that spending – 62%, or 88 cents – boosts the private sector. Cutting state spending means fewer purchases from suppliers, reduced contracts with service providers, less money from public and private employee paychecks circulating through local businesses – and of course, fewer public services."

Spending on programs that assist low and middle-income families is smart economic policy. By assisting working families, who will more readily spend their funds on basic necessities, the government is boosting short-run demand and fostering market activity. For instance, Zandi finds that increasing food stamps spending creates $1.73 in demand for each dollar spent by the federal government.

Cuts Hurt the Economy: Unfortunately, several states have responded to the fiscal crisis with deep service cuts:

28 states instituted cuts that will limit low-income children's access to health care
24 states have slashed services for the elderly and disabled
36 states have reduced funding for higher education
42 states implemented cuts that affect state employees, including 26 that have hiring freezes, 14 that have announced layoffs and 26 that have decreased wages

If new revenues are not generated, further cuts will continue a cycle of job layoffs by states, lower spending on crucial programs, diminished economic growth, and deep budget cuts. The Economic Policy Institute (EPI) provides the following chart illustrating the danger of state budget cuts as they ripple through the economy; teachers, nurses and police are laid off, state funds supporting private sector activity are reduced, and individuals receiving state support stop spending in their local communities.

Working and Middle Class Families Have the Highest Tax Burdens On Average: A common misconception about state and local taxes is the idea that the wealthy have incredibly high tax burdens. The reality is the richest taxpayers have not been contributing their fair share for years. When you factor in sales and excise, property, and income taxes, states tax working families far more heavily than richer individuals, according to Who Pays?, a report from ITEP. As the graph below highlights, the lowest 20 percent of earners pay about 11 percent of their income in state and local taxes while the top 1 percent pay a little over 6 percent of their income to state and local governments.

Resources:
Additional Federal Fiscal Relief Needed to Help States Address Recession's Impact
Economic Policy Institute - Dire states--State and local budget relief needed
National Governors Association and the National Association of State Budget Officers - Fall 2009 Fiscal Survey of States
California Budget Project - Budget Cuts or Tax Increases: Which Are Preferable During An Economic Downturn?
California Budget Project - The Number of High-Income Taxpayers Increased During a Period With 10 Percent and 11 Percent Tax Rates on High-Income Earners
Fiscal Policy Institute - Balancing New York State’s 2009-2010 Budget in an Economically Sensible Manner
Institute for Taxation and Economic Policy - Who Pays?
The New York Times - Taxes Not Seen as Making the Rich Flee New York
Princeton University - Trends in New Jersey Migration: Housing, Employment and Taxation

Corporate Tax Reform and Eliminating Wasteful Economic Subsidies

Corporations should also be paying their fair share in taxes. They benefit from state investments in education, infrastructure, and public safety, but unfortunately, corporations have repeatedly and excessively exploited the tax system.

Corporate income tax revenue as a share of all taxes has fallen dramatically. In 1979, the corporate income tax accounted for 10.2 percent of total state tax revenue. In 2005, the figure fell to 6.5 percent.
The Iowa Fiscal Partnership reported that approximately half of Iowa corporations with at least $1 million of sales in state pay no corporate income tax.
Similarly, the Oklahoma Tax Commission revealed that only 35 percent of corporations filing tax returns in 2000 reported positive taxable income— almost an anomaly considering the economy experienced substantial gains that year.
The problems are similar at the federal level. A Government Accountability Office report, Comparison of the Reported Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-2005, found almost two-thirds of all corporations reported no tax liability from 1998 to 2005.

Accordingly, there are a variety of corporate taxation policy options legislators can pursue to ensure businesses are contributing adequately to a state.

Close Tax Loopholes: Ending some of the egregious corporate tax loopholes that businesses abuse should be a top priority for lawmakers. States lose billions of dollars each year as a result of these loopholes. For instance, states should opt out of the "domestic production deduction" tax break that was passed by the federal government in 2004 and subsequently incorporated into the tax code in several states. Currently, 25 states allow the deduction, which by 2011, will cost states $500 million annually and favors large corporations over small businesses. States can also eliminate Net Operating Loss “Carryback” Deductions, reform the “cancellation of debt income” (CODI) provision, and reform the tax treatment of S-Corporations and Limited Liability Companies.
Combined Reporting: 23 states have implemented combined reporting, which requires multi-state corporations to report profits from all entities, including subsidiaries, for tax purposes. Combined reporting is a key policy to restrict tax avoidance. The policy makes the tax system fairer, brings in greater revenue, and does not impede economic growth. In fact, CBPP finds, "combined reporting states are well-represented among the most economically-successful states in the country."

The Film Tax Credit as Case Study of Corporate Giveaways: Several states are dealing with ineffective expenditures, a notorious recent example being the proliferation of film tax credits. In 2002, only three states offered incentives to the film industry. Currently, of the 44 states that offer some type of movie production incentive, 28 provide tax credits. The Tax Foundation provides a graphic that depicts states with incentives and the year in which they were approved.

Following an explosive scandal involving members of the Department of Economic Development and abuse of the film tax credit, Iowa Gov. Chet Culver ordered a review of credits the state provides. In early January, Iowa released the Tax Credit Review Report that recommended the state:

Provide greater transparency of tax credits;
Develop an effective return on investment calculation for all tax credits;
Establish a five-year sunset for all tax credits;
Cap all currently uncapped tax credits;
And eliminate certain tax credits.

Reports by many other advocacy organizations and government bodies, including the Oregon Center for Public Policy, Connecticut Voices for Children, New Mexico Fiscal Policy Project, the Massachusetts Department of Revenue and the Wisconsin Department of Commerce, indicate that offering these tax credits are ineffective and provide little to no economic benefit to a state or its residents. The Tax Foundation writes that states are greatly overestimating the impact of providing film tax credits and basing decisions "on fanciful estimates of economic activity and tax revenue (leading to) small returns and unnecessary risks with taxpayer dollars."

Other states have taken tangible steps to address these problems:

Connecticut: Gov. M. Jodi Rell estimated that a $25 million cap for film tax credits would save the state $70 million in the next two years.
Massachusetts: Rep. Steven D'Amico introduced legislation, HB 3854, to limit state spending on incentives for the film industry.
Michigan: Gov. Jennifer M. Granholm proposed reducing the 42% refundable tax credit to approximately 37%.
Wisconsin: Gov. Jim Doyle offered a plan to completely eliminate the state's 25% film tax credit and replace it with a two-year, $1 million grant program to create permanent film industry jobs
New Mexico: Rep. Dennis Kintigh has sponsored HB52 to limit the state's spending on film tax credits.

Discontinue Excessive Corporate Subsidies: Even as states confront massive gaps, many are still doling out huge subsidies to corporations. Many times, these subsidies do not produce long-term growth and may even result in lost revenue. In North Carolina, for instance, a Dell plant closed just a few years after it received a promise of up to $300 million in grants, an amount more than twice the cost of building the plant. As Good Jobs First explains, states waste money competing for firms to locate within their borders by providing extremely costly and ineffective incentives, rather than on fostering entrepreneurship and new jobs. The report details:

[T]ax reductions, exemptions or credits exert a very small marginal influence on corporate investment decisions... For the vast majority of companies, tax breaks are windfalls, not determinants, and are therefore wasted.

As government officials look to eliminate wasteful spending, they should also rethink allocating enormous and often inefficient business tax breaks as a better option than cutting programs for their most vulnerable residents. The public money squandered through tax credits and corporate subsidies demonstrates that blind giveaways are not a sustainable model for economic growth and a more transparent budget process is needed in the future.

Resources:
Center for American Progress - The Corporate Tax Dodge
Center on Budget and Policy Priorities - A Majority of States Have Now Adopted a Key Corporate Tax Reform - "Combined Reporting"
Center on Budget and Policy Priorities - States Can Opt Out of the Costly and Ineffective "Domestic Production Deduction" Corporate Tax Break
Citizens for Tax Justice - Judging Tax Expenditures
Good Jobs First - Growing Pennsylvania's High-Tech Economy: Choosing Effective Investments
Good Jobs First - More States Yell 'Cut" on Film Tax Credits
Iowa Fiscal Partnership - Revitalizing Iowa's Corporate Income Tax
New Jersey Policy Perspective - Big Firms Get Big Breaks
U.S. PIRG - Close Corporate Loopholes
Citizens for Tax Justice - State Film Tax Credits: Next on the Cutting Room Floor?
State of Iowa - Tax Credit Study Review Report
Tax Foundation - Movie Production Incentives: Blockbuster Support for Lackluster Policy

Corporate Transparency in State Budgets

Problems due to lack of transparency in subsidy distribution, contract allocation, and hidden tax breaks are well-documented. Almost every week there is a story relating to states distributing subsidies with little to nothing to show for it, failing to save money from utilizing contractor services rather than state employees, and providing huge tax breaks to large corporations that often do not reflect the greater public interest. Additionally, states have been losing millions of dollars from declining corporate tax revenue.

Lawmakers should enact more enhanced transparency requirements. PSN is advancing a model corporate transparency bill that aims to foster more comprehensive reporting of subsidy allocation, contract distribution, tax expenditures, and corporate taxation trends. For analysis of recent cases, ideas for messaging, fact sheets, reports, and a list of allied organizations, visit the campaign resource page.

There is significant bipartisan consensus that transparency is needed for a more targeted and equitable budget process. Lawmakers across the country have been moving corporate transparency bills.

Last week, Hawaii Sen. Les Ihara, Jr. and Rep. Roy Takumi introduced a corporate transparency bill, SB2868/HB2750, intending to augment disclosure of subsidies, contracts, tax expenditures, and corporate tax trends.
This month, New Mexico Sen. Tim Keller and Rep. Eleanor Chavez introduced bills to require the state to publish an annual tax expenditure budget, SB 23 and HB82. Sen. Keller additionally sponsored SB47, which establishes transparency guidelines for economic development subsidies and mandates that the state provide a list of taxpayers receiving incentives.
Former New Jersey Gov. Jon Corzine signed S3153 into law last month, requiring the Governor to include a tax expenditure report in the annual budget address. The bill's main sponsor, Sen. Barbara Buono commented, “[w]ithout an annual accounting for the cost and effectiveness of tax expenditure spending, New Jersey lawmakers cannot develop a full understanding of the State’s fiduciary obligations and expenses, and cannot act to end ineffective and costly programs. This new law will make sure that when reviewing the State’s annual budget, we have all the information we need to put together a complete profile of expenditures.”
In 2008, the Ohio legislature passed legislation that requires the state attorney general to review economic development awards received by entities. Attorney General Richard Codray's office began the process this past October by informing over 3,000 entities that they must provide his office with information, such as actual jobs created, efforts to attract minority or disadvantaged workers, and wage law compliance.

Resources:
Progressive States Network - Corporate Transparency in State Budgets

Expanding the Sales Tax Base

If states facing yawning deficits do need to enact broader-based revenue increases, another option is to extend the state sales tax to more services and to goods purchased over the Internet.

Broadening the Sales Tax by Including Services: The current sales tax in most states is outdated, designed for an industrial economy where most consumer spending went to buying goods, rather than services which remain largely untaxed in most states.

Services represent a broad range of industries that increasingly represent a much larger share of market activity including, medical, dental, automotive, telecommunications, home care, consulting engineer, dry cleaning, physical training, real estate, personal care, and residential utility services. As CBPP explains, expanding the sales tax to services, "makes state tax systems fairer, more stable, more economically neutral, and easier to administer."

Moreover, because state sales taxes are a major source of funding for schools, universities, health care, public safety, and other functions of state and local government, adding services to state sales tax bases can help states maintain their support for those functions, for instance during an economic downturn when state revenues are declining." Expanding the sales tax base will also help states avert unfavorable tax increases down the road. CBPP estimates that broadening the sales tax base could yield a total of $87 billion nationwide.

In the past few years, lawmakers proposed or enacted sales taxation on certain services.

Nebraska Sen. Cap Dierks introduced LB 1066, a measure to broaden the sales tax to services this January. Some of the services outlined in the bill include garment alterations, armored-car services, barber and beauty services, all farm-equipment repairs, financial institution, dating services, garbage collection and recycling services.
In June 2009, Maine passed legislation to broaden its sales tax to amusement, entertainment, recreation, installation, repair, and personal property services. The measure is estimated to generate $41 million in FY2010, representing 4.4 percent of projected sales tax revenue collections.
New Jersey implemented an expansion of its sales tax to some services in 2006.

Implement the "Amazon tax": States lose billions every year due to the "inability to collect all sales taxes that are legally due on purchases made over the Internet." In 2008, New York became the first state to require online retailers to collect sales tax on purchases to customers in the state. The state changed its tax code to mandate that an out-of-state retailer with more than $10,000 a year in sales generated through sales affiliates in the state has nexus and must collect sales and local taxes. After the bill's passage, Amazon.com immediately sued, but lost the case. The state expects to generate $47 million from the "Amazon tax." Rhode Island followed New York's lead and passed the Amazon tax last year. This year, New Mexico Rep. Eleanor Chavez sponsored HB 50 to extend the state's gross receipts tax to online sales.

Resources:
Center on Budget and Policy Priorities - Expanding Sales Taxation of Services: Options and Issues
Center on Budget and Policy Priorities - Maine Could Tax more Services under Its Sales Tax
Center on Budget and Policy Priorities - Amazon’s Arguments Against Collecting Sales Taxes Do Not Withstand Scrutiny
Center on Budget and Policy Priorities - New York's "Amazon Law": An Important Tool for Collection Taxes Owed on Internet Purchases

Conclusion

Given the fiscal and economic crisis facing states, public investments in jobs and services for those in need are critical. Lawmakers should not be intimidated by the virulent rhetoric of the anti-tax movement and ensure that everyone, including corporations and wealthy individuals, are contributing their fair share. Progressive approaches to raising revenue is not only effective and economically productive, but also popular with the public, especially compared to the alternative of slashing needed education, health, public safety and infrastructure investments.

Big Business Already Giving Big to Take Down Oregon Tax Increase

PSN — Thu, 13 Aug 2009 10:50:17 -0400

Courtesy of Citizens for Tax Justice.

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

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

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

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

Progressive Revenue Measures Approved or Moving in Oregon and Other States

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

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

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

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

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

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

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

Tax Relief to Help Low-Wage Washington Residents

Nathan Newman — Thu, 31 Jan 2008 09:55:15 -0500

Because it lacks a state income tax, Washington State creates one of the highest tax burdens on poorer families, but some relief is being proposed, as the Washington State Budget & Policy Center outlines in this policy brief, in the form of a Working Families Credit which would give 350,000 Washington residents the equivalent of 10% of their federal Earned Income Tax Credit (EITC) refund.

This would reduce the tax bill for low-wage Washington workers by as much as 30% and, in combination with the federal credit, boost a minimum-wage worker's earning by up to 31%. If enacted, this would make Washington the first state without an income tax to enact an EITC.

Twenty-three states have enacted EITCs, and Washington will be joined this year by efforts in Connecticut, Kentucky, and Pennsylvania. Maryland during its recent special session expanded the refundable part of its EITC from 20% of the federal EITC up to 25%. Pennsylvania is debating a 30% EITC that has been larded up with business tax giveaways that has dismayed advocates who worry about lost revenues and plan to support an unamended version in the state senate. Colorado has an EITC that is only distributed in certain years under the state TABOR law, so advocates are working to create a more consistent EITC for working families in the state.

State Earned Income Tax Credits are one of the most important tools for offsetting the regressive tax structures of most state tax systems, so this progress is encouraging.

More Resources

Welfare "Reform": Ten Years Later

PSN — Mon, 18 Sep 2006 09:24:08 -0400

It's now ten years since the 1996 welfare law promised to end "welfare as we know it." That goal may have been accomplished, but the results have been decidedly mixed, both for poor families and for state lawmakers coping with changing federal mandates.

As this Dispatch will detail, it was less the 1996 law than other changes in state and federal law that have given poor families any chance to thrive -- and still, many lives have been made worse because of the 1996 changes in welfare law. But states are finding innovative ways to expand the anti-poverty agenda in the wake of those changes.

Evaluating the Results of Welfare Law Changes

Evaluating the results is complex, but the basic facts are clear (see resources below for data sources, especially the Urban Institute's "A Decade of Welfare Reform: Facts and Figures"):

While the booming economy in the late 1990s made initial cuts in welfare case loads relatively easy as job growth surged, the real test came when the 2001 recession hit. And the result was that, after a reduction in poverty and some gains in income by the poor in the 1990s, child poverty began climbing again in the last few years.
And the new Temporary Assistance to Needy Families (TANF) program in many cases was no longer there to help. Where there were 4.6 million families receiving cash benefits in 1996, only 2.1 million were receiving benefits by 2002 -- and estimates are that over half that reduction (57%) came from cutting off families still in need but no longer receiving help from TANF programs.
Of families receiving welfare, the good news was that more were finding work: 39% finding some work in the preceding 12 months in 2002 versus 31% back in 1997. But a large number of single-adult families had no work and no longer received any help. By 2002, one in five former welfare recipients had no job and no cash welfare, a total of 1 million poor single mothers in this "no work, no welfare" group across the country.
A Johns Hopkins study of current and former recipients in three cities found that when all former TANF recipients are considered â€” those with jobs and those without jobs â€” the average income gains of those who left TANF were about the same as those who had not left the TANF program.
Even most families previously on welfare that have found work have ended up in dead-end jobs, with median hourly wages hovering around $8.00 in 2002, and only one-third of these workers have health insurance through their jobs. As the Urban Institute writes, "Research suggests that many of these families will never 'grow out' of low-income status with age and experience."

Some apologists for these meager results of welfare "reform" -- and for the decided suffering of those left worse off -- concentrate on the benefits to the relatively small number of families that have moved from welfare to well-paying jobs.

While those gains are laudable, these mixed results pale compared to broad success of the often-derided "war on poverty" launched in the 1960s. It's worth remembering that between 1959 and 1973, the percentage of people living in poverty in the United States was cut in HALF--falling from 22.4% of the population down to just 11.1%. (See this table and graph). As aid to the poor was cut under the Reagan administration, poverty rates jumped to over 15% in the 1980s and early 1990s, only to fall a slight amount in the last decade. With 12.6% of the American population still in poverty in 2005, anti-poverty gains in the last ten years have not come close to matching the success of American liberalism a generation ago.

And as will be discussed in the next section, if some families are doing better post-1996, it has less to do with the 1996 welfare law than with states and the federal government stepping up with alternative spending for working poor families.

More Resources

How Progressive Spending Eased Implementation of 1996 Law

In talking about gains for the working poor in the 1990s, many pundits focus on the 1996 welfare law, but more significant was the expansion of the Earned Income Tax Credit (EITC) in 1993, along with state EITCs enacted as well in the last decade, the passage of federal and state SCHIP laws expanding health care for children, expanded child care subsidies for working families, and the raising of the minimum wage in states across the country. By 2002, federal and state governments were spending $131 billion on Medicaid, SCHIP, food stamps, child care subsidies and the EITC, 28 percent more than in 1996 in inflation-adjusted dollars.

EITC: The federal EITC was $39.6 billion in 2005 and was supplemented by state EITCs in nineteen states, a significant factor in easing the lives of the working poor, especially in conjunction with increases in the minimum wage.

Health Care: Making it easier for families in low-wage jobs without health insurance, most states now subsidize health care for children in families up to 200% of the poverty line. Only 22 percent of families with subsidized health coverage return to TANF, while 33 percent of families without Medicaid or SCHIP return to the program- highlighting the gains from increased spending on health care for the working poor.

Child Care: Along with new child care subsidies, TANF dollars increasingly help fund child care, a crucial support for former welfare recipients entering the workforce. Studies show that 28 percent of former recipients who did not receive government child care assistance return to TANF, compared with only 20 percent of those who receive child care assistance.

One other welcome change is that all but three states have changed their rules to allow TANF recipients to earn more income without losing TANF benefits. Because of these changes, by 2003 a single parent with two kids could work 20 hours a week at the federal minimum wage and still receive TANF benefits in most states.

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The New Federal Threat to TANF Recipients

Unfortunately, just as many states have begun expanding support for the working poor after the budget constraints due to the post-2001 recession, new federal TANF rules mandated by last fall's Deficit Reduction Act (DRA) are further restricting state's flexibility in administering TANF in their states.

Many programs that help recipients get training or education to improve their chances of getting a job will no longer qualify as welfare-to-work activities; recipients will be limited to 12 months of vocational educational training and no more than 30 percent of a state's welfare-to-work participants will be allowed to participate in such programs. As the Center on Budget & Policy Priorities (CBPP) notes, the incentives are perverse, since "The cheapest and easiest way for a state to meet the new work rules and avoid fiscal penalties is to assist fewer poor families."

Some states like Georgia are already taking this punitive approach. Between 2000 and 2005, welfare rolls in Georgia fell from roughly 30,000 recipients down to fewer than 8,000, despite the fact that most families that leave Georgia's TANF program have not found employment.

However, other states are pursuing alternative strategies that accommodate the new rules without hurting the poor. Arkansas is dealing with the regulations by keeping more working people on the rolls after they get jobs, thereby increasing the overall "work-participation rate" from 28 percent to nearly 45 percent this year. California and some other states are moving those least likely to get jobs, such as those with mental and physical disabilities or those with disabled children, into non-TANF state programs so that they don't count against their work-participation rates.

The Center on Budget and Policy Priorities and CLASP have developed a broad set of strategies for states to implement the new regulations in ways that benefit all working families rather than punishing the families whose parents cannot find work.

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Conclusion: The New Progressive Anti-Poverty Agenda

In some ways, the greatest benefit from the 1996 welfare law was that it seems to have diminished the rhetorical attacks on the poor and encouraged the growing alternative federal and state spending to combat poverty. Instead of attacks on "welfare queens" and other racially-tinged attacks, there has emerged a real debate on the rise of economic inequality in America and how best to help all working families, including those at the bottom of the economic system.

The debate on poverty is increasingly merging into the broader debate on how to create decent-paying jobs for all Americans and how to provide the health and child care support that all families need. The recent success of campaigns to raise the minimum wage highlights the broad support by the public for promoting a living wage for the working poor, just as the growing debate on universal health coverage shows similar public support for ending the gaping hole in health access for many working families. The result is a new progressive anti-poverty agenda that links a helping hand for the poorest in our society with campaigns to assure a social safety net for all families looking for help in coping with job dislocation and loss of health care coverage in our changing economy.