Everyone knows that federal taxes take a huge bite out of our paychecks, but we can't overlook the role of state and local taxes. The size of the state and local tax burden varies by state, of course, and changes over time within each state.
In a new Tax Foundation Special Report, "State-Local Tax Burdens Dip As Income Growth Outpaces Tax Growth," senior economist Gerald Prante computes each state's combined state-local tax burden, accounting for taxes paid out of state.
The nation as a whole paid 9.7% of its income in state-local taxes, down from 9.9% in 2007 primarily because income grew faster than tax collections between 2007 and 2008.
New Jersey residents paid 11.8%, topping the charts. New Yorkers were close behind, paying 11.7%, and Connecticut was third at 11.1%. The top ten were rounded out by Maryland (10.8%), Hawaii (10.6%), California (10.5%), Ohio (10.4%), Vermont (10.3%), Wisconsin (10.2%) and Rhode Island (10.2%).
Alaskans pay the least, 6.4 percent in 2008, but Nevada is close at 6.6 percent. In four states the residents pay between 7 and 8 percent of their income in state-local taxes: Wyoming (7.0%), Florida (7.4%), New Hampshire (7.6%) and South Dakota (7.9%). Four other states round out the bottom ten: Tennessee (8.3%), Texas (8.4%), Louisiana (8.4%) and Arizona (8.5%).
Tax Foundation rankings are sometimes confused with rankings based on Census Bureau's tallies of state and local tax collections. The difference is out-of-state tax payments. When state and local governments collect large amounts from non-residents, whether as tourists, commuters, businesses or property owners, Census counts those payments in the collections of the taxing state; the Tax Foundation study counts them in the residential state of the taxpayer.
John McCain has been taking shots at Barack Obama's tax plan (the one that raises taxes on the investment income and labor income of high-income households), arguing that such a plan would cost American jobs (typical political rhetoric), which he says we cannot afford to do in the current economic situation. Yesterday, McCain said this: "Raising taxes in a bad economy is about the worst thing you can do because it will kill even more jobs when what we need are policies that create jobs."
But McCain, who has demonstrated that tax policy is not his greatest area of expertise throughout this campaign, is mixing business cycles (short-run macroeconomy) with policies that mainly affect long-run economic growth. Investment, by its very definition, is for the future. Raising the corporate income tax or taxes on capital gains and dividends may not be good policy, but such policies are not going to destroy the short-run economy. Such policies would likely lead to lower standards of living in the long-run (ignoring the effect that the deficit could have on national savings), but saying that our economy cannot afford them given the current economic situation is nonsense.
And with regard to the "jobs" terminology, McCain ignores the fact that in a free market over the long-run, much of the change will be on the wage side rather than the quantity (# of jobs) side.
At the stroke of midnight on January 1, Allegheny County, Pennsylvania slapped a 10 percent tax on poured drinks, on top of all other taxes. Like many other heavy taxes on arbitrary items, the tax is more about generating revenue from a popular-to-target item rather than internalizing an externality:
This proposal makes little sense in terms of sound tax policy. First, why should alcohol and car rentals be targeted as the only possible other sources of local tax revenue? Why not tax potato chips or ketchup or even Steelers merchandise? Those may sound like ridiculous targets, but they're just as legitimate as arbitrarily picking alcohol. Or even better -- why not put every consumer item in a hat and pick out one item to impose a heavy tax upon?[...]
[P]oliticians need to stop targeting single items for taxation (or possible taxation), despite their political appeal, and those citizens who believe in individual liberty need to ask these policymakers to explain why they want to target alcohol. Do they want to bring prohibition back? If they say no, then ask them what tax rate they would prefer and make them justify that amount on that specific item.
This week, organizers delivered more than the 23,000 signatures needed to put a repeal initiative on the ballot. One proponent said that if they kept petitioning, they would have ultimately obtained signatures from a majority of the electorate. But, seeking to undermine and confuse this effort, Allegheny County Chief Executive (and drink tax sponsor) Dan Onorato has put a competing initiative on the ballot asking voters to raise real estate taxes "in order to repeal the alcoholic drink tax." Should be a fun campaign.
I sat down one evening to figure income tax. I read the regulations and wrote down all the facts. Before too long my pencil was just a little nub. My head was aching badly so I went down to the pub.
I called for a pint of Guinness and it had a lovely head. As the barman set it on the bar he looked at me and said. I know it was six dollars the last time you were out But now it's six and sixty for a pint of Guinness stout.
I asked him what the deal was and why the price was high. Was the Publican so greedy he has to wring us dry? He said County Alleghany has decided to tax the drink To bail out public transit which was teetering on the brink.
I thought about the logic of taxing folks who drink. It seems to me the reasoning is a little out of sync. The only time I take the bus I'm tryin' to stay alive. Home is just too far to walk and I'm too drunk to drive.
There's a sin tax and a luxury tax and a tax on what we earn. And a tax on entertainment but what really makes me burn. Is taxing people in the pub who like a drink or two. I guess Dan Onorato is not like me and you.
He says it's not an issue that matters much to him. He'd rather bow to pressure than to go out on a limb. Other areas tax the drink and they're in the very same boat. We'll see how much it matters when we all go out and vote.
If you think that it's an unfair tax and don't know who to tell Remember the Whiskey Rebellion started here as well. So think about the tax you pay on every single beer And then you tell ol' Danny Boy that he's not welcome here.
Did Onorato honor auto rental tax to boot? I'm surprised that Enterprise hasn't brought a legal suit. If Port Authority wants to last and forever stay alive I guess they'll just encourage us to rent and drink and drive.
When it comes to the tax provisions of the recently enacted housing bill that Pres. Bush signed, there was virtual unanimity among policy organizations in Washington, on both the left and the right, that they were pretty bad. Then again, this is Washington where special interests try to spread half-truths on policies merely to suit themselves. Kim Rueben at the Tax Policy Center blog provides a nice answer to the question: Was the housing bill good tax policy? Her closing paragraph sums up pretty nicely the view of most public finance economists regarding the role of tax preferences in the housing market:
At least the current credit is an improvement over an earlier tax break proposed for people buying foreclosed property. Still, adding yet another credit to the hundreds of billions in tax breaks we already lavish on homeowners makes me wonder whether we should step back and rethink whether owning is truly the answer for everyone.
John McCain has a long voting record, and it is filled with many votes that he probably regrets. Speaking of which, there are his votes against the Bush tax cuts in 2001 and 2003, which he now favors extending (and more). There's his support for non-tax issues (such as the war, McCain-Feingold, and others.) But there have been those moments in John McCain's voting record that sound fiscal policy can speak proud of, such as these laws that ultimately were signed into law by Pres. Bush (whose fiscal policy record is nothing to praise):
Energy Bill of 2005: McCain joined six other Republicans and 20 Democrats (including Jeffords) to vote against this pathetic piece of legislation that loaded billions in subsidies to oil companies, ethanol producers, and thousands of other earmarks to various political constituencies. The only way you could have gotten any energy out of this bill would be to set it on fire. We blogged about how bad this bill was here, here, here, here, here, here, and here.
Medicare Part D: McCain opposed Pres. Bush's attempt to essentially buy votes from seniors in the 2004 election by implementing a massive new entitlement program for a generation that has already received generous treatment from government.
The Farm Bill of (Insert Year): McCain has consistently opposed the massive handouts that members of Congress give to farmers (many of which are very wealthy) each year to plant, to not plant, or to do whatever they feel like.
A new McCain ad highlights the fact that he voted against the Energy Bill of 2005, while Sen. Obama voted in favor of it. (He should do the same about the farm bill that Obama has supported every year.)
These are the parts of his record that McCain should be proud to speak of instead of attacking Sen. Obama in other advertisements filled with half-truths about the Illinois senator.
Mr. Obama's proposal to take some of this money from Big Oil and distribute it, like Robin Hood, to hard-pressed American families doesn't make economic sense. To be sure, Mr. Obama would not copy the tax enacted under President Jimmy Carter in 1980, which netted $40 billion before its repeal in 1988 while imposing huge administrative burdens -- and retarding domestic oil production. Mr. Carter's tax was levied per-barrel, so it directly increased the marginal cost of producing crude -- and made figuring out which barrels to tax ridiculously complicated. Mr. Obama wants a surtax on net oil company profits above a "reasonable" level. The tax would be set high enough to raise $65 billion over the next five years, and the revenue would fund a one-shot tax rebate that Mr. Obama would like to give to families and individuals this year.
Making Exxon surrender money that is now falling into its lap would not necessarily affect its longer-term plans or incentives. Indeed, some of Big Oil's "windfall" already will go to the government: The more profit the companies earn, the more corporate income tax they pay. But to add a five-year tax increase on top of that to pay for a one-year gift to voters would, indeed, increase the cost of doing business. That cost would be passed along in forgone investment in new production, lower dividends for pension funds and other shareholders, and higher prices at the pump -- thus socking it to the consumers whom the plan is supposed to help. If oil prices fall, there might be no windfall profits to tax. Then the Obama rebate would have to be paid for through spending cuts, taxes on something else or borrowing.
Read the rest here. See here for a post where we note that oil companies currently pay about 46 percent of their profits to Uncle Sam.
Confiscating every penny that oil companies earned in profit this year wouldn't be enough to pay out $1,000 per household. Senator Obama should stand clear of such gimmicks.
Property taxes often are the targets of anger and frustration, especially when the taxing government allows collections to jump year after year, instead of adjusting rates and assessments to maintain stability.
In Florida, Governor Charlie Crist has announced his support for Amendment 5 on the November ballot calling for swapping property tax reductions with other tax increases. The amendment calls for the Legislature to remove all property taxes levied by school districts by 2010. This would reduce the average property tax bill of a Florida resident by anywhere from 25 to 40 percent.
The amendment states that the lost revenue will be made up in one of three ways: a sales tax increase of 1 cent, spending cuts enacted by the state government, or a repeal of sales tax exemptions on items such as food and religious organizations. While critics argue that the sales tax increase and spending cuts will not completely make up the lost revenue, Crist argues that the lower property tax rates will spur investment and economic growth in the state.
Speculation suggests that this new 7 cent sales tax rate will be extended to cover previously exempted services. For example, funeral services are currently tax exempt in Florida, but if Amendment 5 is passes, a $5,000 funeral service will be hit with a new $350 tax.
As we have stated before, tax swaps are not sound tax policy for three specific reasons. First, local control of schools gets shifted to the state level, harming local autonomy. Second, increasing the sales tax is a more problematic source of revenue and makes the state less competitive in relation to rates found in neighboring states. Third, and most importantly, if the swap means a zero net change in revenue, it won't actually reduce Floridians' overall tax burden, as they think it will.
Teachers and teachers' unions oppose Amendment 5, arguing that the proposal sharply reduces a major source of funding. Some business interests have also expressed opposition, arguing that the higher sales tax rate might cause businesses to move out of the state.
Some proponents of the amendment suggest that it will spur home ownership and the housing industry, I wonder whether creating ambiguity about school funding sources and hiking the sales tax to 7 percent will encourage individuals to buy a house.
Read more about Florida's tax swap and other property tax proposals here, here, and here.
The seemingly constant budget struggle in California took an interesting turn last week when the Governor ordered the termination of 10,000 state employees, while lowering another 200,000 workers' wages to $6.55/hour. Since then, the State Controller refuses to comply with the Governor's orders. California's desperate financial situation has prompted desperate proposals, including higher taxes.
A Los Angeles Times article outlines Governor Schwarzenegger's recent proposal to increase the state sales tax 1 cent to help close the budget gap. California currently levies a state sales tax of 7.25%, the highest in the nation. In addition to the state tax, local governments also utilize sales taxes, resulting in rates around 8% across the state. This temporary tax hike would yield a projected $5 billion per year, far short of settling this year's $15 billion deficit.
Expanding the sales tax base provides a better alternative for revenue generation. California, like many states, exempts quite a few transactions from the sales and use tax. Services, groceries and entertainment top the list of California's exemptions. Removing some exemptions from the state tax code would increase the size of the tax base, leading to higher revenues without a rate increase or comparable revenues with lower tax rates. California can make up roughly $7.4 billion by removing exemptions on certain transactions. $2.7 billion of the potential revenue stems from transactions taxed in numerous other states (see chart below), with another $4.7 billion in lost grocery tax exemptions.
Groceries receive sales tax exemptions in many states. These exemptions, sold to the public as relief for the poor, generally provide relief to middle-class Americans. The millions of low-income families and individuals on food stamps are already exempt from taxes on groceries. The California Legislative Analyst's Office estimates state and local governments lose out on roughly $4.7 billion annually by exempting groceries. (Full report available here.) California's exemption also protects such necessities as candy, snack foods and soda.
California needs more than a temporary fix. Schwarzenegger is also calling for a constitutional amendment granting the Governor power to cut spending when the state falls into the red ink. Such a measure may push the lines of executive budget authority, but the state certainly needs some sort of reform. If California could learn to rein in spending and add stability to the state revenue portfolio, financial crisis may become less chronic.
Estimated annual revenue from exempt items taxed in many other states:
(Amounts in millions)
Auto repair and service
Dealers
$627
Repair shops
$410
Parking
$86
Carwashes
$39
Towing
$33
Entertainment/Recreation
Amusement, Gambling and Recreation
$650
Spectator Sports
$172
Performing Arts
$108
Film and movies
$86
Museums
$2
Repair and maintenance
Personal/household goods
$108
Precision equipment
$104
Mechanical Equipment
$69
Personal Services
Dry Cleaning/Laundry
$187
Total
$2,681
Source: California State Board of Equalization, Sacramento Bee
For more on tax policy in California, see our California State Tax Policy and Data page.
Yesterday, the Wall Street Journal's editorial page took another much-deserved thwack at Barack Obama's execrable "windfall profits tax" proposal. (Unfortunately, between this idea and John McCain's gas tax holiday plan, we know that stupid energy tax gimmicks are de rigueur for today's presidential candidates.) The WSJ correctly notes that oil companies' profit margins are not outsized, and that companies like Google look a lot more "unreasonably" profitable than Exxon.
High oil prices are a signal of strong demand and scarce supply, and they provide an incentive for increased production. Taxes discourage production because they drive a wedge between the price paid by the consumer and received by the supplier. Windfall profits taxes also drive up oil imports because they discriminate against domestic oil producers to the benefit of the Saudis and the Venezuelans—even Barack Obama lacks the power to impose production taxes on foreign oil producers.
It's almost cliché to invoke Jimmy Carter when discussing Barack Obama, but I'm going to do it anyway, because it's so appropriate here. Back in 1980, then-President Carter signed into law the Crude Oil Windfall Profits Tax Act, which imposed a 70% excise tax on the amount of an oil sale price exceeding $12.81 per barrel ($36.14 in 2007 dollars). The terms of the new windfall tax are undefined, but Obama says the government would take "a reasonable share" of oil company profits—whatever that means—by imposing a tax on oil sold over the arbitrary price of $80 per barrel.
As we discussed a few years ago, Carter's windfall profits tax fell far short of its projected revenues, partly because it discouraged domestic production and partly because worldwide economic events caused oil prices to fall sharply during the early 1980s. According to the Congressional Research Service, the Carter-era windfall profits tax:
Reduced domestic oil production by 3-6%; and
Increased foreign oil imports by 8-16%.
If foreign producers have the capacity to offset all the lost domestic production, then the windfall profits tax will simply shift domestic consumption from domestic to foreign oil with no effect on pump prices at all. On the other hand, if foreign producers can't turn up the taps to offset reduced U.S. production—Saudi Arabia in particular may not be able to meet its ambitious production targets—then not only will we be more dependent on foreign oil, but pump prices will rise to bring demand in line with newly-reduced supply.
So there's your windfall profits tax in a nutshell: reduced domestic production, increased dependence on foreign oil, and pump prices either unchanged (best case) or higher (worst case).
John Nordloh ("Government should look to Internet for tax solutions," Chicago Tribune, July 7) suggests raising revenues for the City of Chicago and the State of Illinois by taxing out-of-state businesses. He claims the new policy is only fair, as it will put all "transactions on the same 'tax' playing field." Unfortunately, Nordloh misses the point.
Taxation is not about leveling the playing field, but rather paying for public services. Public education, libraries, police protection, and courts are financed with tax dollars. These services are not used by out-of-state businesses.
Roads, on the other hand, are used to deliver goods across state lines. However, gas taxes are collected roughly in proportion to the amount of road use and provide for the maintenance of state roads.
Raising revenues by taxing entrepreneurs in other states is unfair; it allows Illinois residents to consume public services paid for by residents in other states. And since Buckeyes and Hoosiers are not represented in the Illinois General Assembly, it is a modern case of taxation without representation.
The IRS has shed some new light on the high-income Californians who are the targets of the state legislature's tax-raising approach to budget balancing (IRS spreadsheet or Tax Foundation tabular summary).
By breaking out state-by-state its popular analysis of income and tax data, the IRS shows us that the top one percent of California taxpayers (150,000 people)—the same people who would pay the new, higher state tax rates of 10 percent, 11 percent and 12 percent —are already paying more in total federal income taxes than the 66 million people nationwide who make up the lower-earning half of US taxpayers.
Thanks to all who came yesterday evening to the Tax Foundation's Chicago Reception at the annual conference of the American Legislative Exchange Council! We had a packed room of state lawmakers, members of think tanks, economists, and others to listen to remarks by Tax Foundation President Scott Hodge and Dr. Richard Vedder of Ohio University.
And congratulations to Rep. Phyllis M. Heineman of South Dakota (in last picture with Dr. Vedder) who won the drawing for an iPod loaded with Tax Foundation podcasts!
There isn't much honesty in this presidential campaign from two candidates who supposedly were of a new type of politics. Earlier this week, Sen. McCain distorted Obama's position on energy taxes in a recent advertisement (the one that featured Britney Spears and Paris Hilton). And today, Sen. Obama made misleading statements saying that McCain wants to cut taxes on oil companies by $4 billion. But what Obama didn't say is that McCain's corporate tax cut would apply to all corporations, whether they produce oil, wind energy, or cookies. (That's kind of like saying that Sen. Obama favors government paying for Warren Buffett's prescription drugs since he supports Medicare Part D. Of course, everybody gets it.)
What's also funny is that when the vote in the Senate came up for a specific piece of legislation that did give special tax favors to oil companies and other energy producers (green as well as "dirty"), Obama voted for it and McCain voted against it. It was the Energy Policy Act of 2005, which was a pathetic piece of legislation. McCain, along with many environmentally-friendly Democrats, as well as a few fiscal conservatives, voted against the measure. (It passed 74-26 and was signed by Pres. Bush who of course never had the guts to veto anything on principle.). Obama likely voted for it merely because his home state's corn producers stood to benefit from the ethanol mandates and subsidies that were included in the bill.
In his speech on Thursday, Obama also criticized McCain's gas tax holiday (rightly so), and then implied to voters that the oil company profits are merely at the expense of consumers, which is baloney and shows of economic ignorance of the fact that the purpose of prices is to allocate resources. Even if oil companies gave every dollar of profit to charity (and investment in the firm remained the same), the price would still have to be high given the huge worldwide demand for oil, or else there would be a shortage. Obama said, "But while Big Oil is making record profits, you are paying record prices at the pump and our economy is leaving working people behind."
Speaking of oil company profits, there is also the nonsense in a letter written by Democrats in Congress telling the oil companies that they should invest in alternative energies instead of buy back their stock. Essentially, they are telling the oil company executives that they should diversify the portfolio of their shareholders (corporate diversification) for them. But that leads to the obvious question: why not let investors diversify themselves if they think alternative energy is such a great investment? There are plenty of firms in that business. Suppose, on the other hand that there exist economies of scale (or scope) and thereby benefits in having the existing oil companies diversify themselves into green alternatives. Wouldn't you expect them to be doing just that right now in order to maximize the return to shareholders? After all, you imply that by buying back their stock, all they care about is their shareholders. If it's such a great investment, then their shareholders shouldn't mind. In fact, their stock should rise.
A humorous new Tax Foundation YouTube video titled "Dream Job" addresses the problem of the United States' high corporate tax rate.
While Americans pay close attention to individual tax rates, many tune out when the conversation turns to business taxes. This is a mistake. The tax climate for business should be important to all Americans, regardless of whether they actually own businesses themselves. Businesses pass their tax burdens on to their customers, employees, and shareholders. In fact, Tax Foundation research shows that in 2005 the average household paid $2,757 in business taxes.
Anybody who owns stock in a company stands to lose if higher tax rates reduce that company's earnings growth. Additionally, basic economics tells us that a corporation forced to pay high taxes must offset that cost by taking one of three courses of action. Charge higher prices, although competitive pressures can limit this option. Pay less in profit to investors, but investors' funds are nimbly re-invested elsewhere when profits dip. Finally, the company can pay lower salaries, give less generous employee benefits, or hire fewer people. In the increasingly dynamic economy, it could also mean that businesses relocate to places where the tax climate is more inviting.
With gas prices on the rise, some states have considered providing relief to their citizens by suspending their state gas taxes. However, many states are also faced with budget shortfalls which make it difficult to forgo any tax revenue. Not so in Alaska, where Gov. Sarah Palin has proposed suspending the state’s gas tax and sending a sizable “resource rebate” check to every resident. Bob Tkacz from Tax Analysts (subscription required) writes:
Recent record oil prices are flooding Alaska's treasury with huge royalty and tax profits, but the state's residents and businesses are struggling to pay for gasoline that has long cost more than $5 or $6 per gallon in the most remote communities. Depending on the average price of crude oil over the state fiscal year that began July 1, the Department of Revenue is projecting a revenue surplus, beyond the state's roughly $4 billion operating budget, in the range of $8 billion to $10 billion, or more.[...]
The [gas tax] suspension would cost the state treasury an estimated $39.9 million for a year. It is one of four measures under consideration to help Alaskans cope with energy costs. Palin has also proposed HB 4002, which would provide a special "resource rebate" payment of $1,200 to every Alaska resident as a broad assistance measure that directly shares the state's windfall profits.
But not all Alaskans are lining up to board the gravy train. Some point out that residents already benefit from the state’s oil resources through annual payments from the Alaska Permanent Fund. From the Anchorage Daily News:
Alaskans are already counting on Permanent Fund dividend checks this fall of almost $2,000 each. Every man, woman and child who's a bona fide resident will get the payment.
In any other state, residents would faint with joy if their politicians handed out that kind of money. An Alaska family of four is going to collect $8,000. That's not enough to help Alaskans cope with the spike in energy prices?
Consider Florida's new court fees, which went in effect July 1. Faced with a budget crisis, Florida has raised its filing fees to among the highest in the country: $300 for most civil cases, $397.50 for divorce and $270 for eviction actions. Florida does not, as do other states, waive civil filing fees for indigent litigants. Instead, court clerks negotiate payment plans with those unable to pay up front - and add a surcharge for paying over time.
Florida is also putting the squeeze on criminal defendants, most of whom are indigent. Those who cannot afford their own lawyer must pay $50 to apply for a constitutionally mandated public defender. If convicted, they face assessments for the costs of prosecution and defense regardless of their ability to pay. These charges are added to other assessments.[...]
Perhaps the worst feature of Florida's court fees is the fact that only 61% of the new fee collections will go toward funding courts, prosecutors and public defenders, according to a recent news report. The rest will go to the state's general revenue fund.
When determining whether something is a tax or a fee, the primary consideration is the purpose of the revenue. Fee revenue is used to recoup the cost of providing a service to a group of users (such as getting a divorce or an eviction notice, or driving a toll road, or using a sewer system). The purpose of fees is not to raise revenue, but to fund a service. If they raise general revenues, it has to be a small incidental amount, subordinate to the greater function of regulating or providing a service.
Taxes, by contrast, are all about raising revenue. If the revenue is spent on broadly available public benefits, and it is not an incidental amount, it's a tax. And that's the case no matter what politicians call it. See our Heatherly v. North Carolina brief for more information.
Here, according to Diller, 39% of the new assessments on justice-related activities are non-incidental amounts of revenue going to the state's general fund. These are taxes. Hefty taxes. Taxes on justice.
Back in April, the Louisiana Supreme Court called a $5 judicial charge imposed on speeders a tax, because the assessment had no logical connection to the administration of justice. Because courts cannot impose taxes in Louisiana, the charge was struck down. I wonder if Florida's Constitution allows for justice to be taxed.
Governor Paterson, in a televised speech, called for action to combat New York's growing deficit. From the New York Times article:
ALBANY - Gov. David A. Paterson, in a brief and rare live televised address, said Tuesday evening that New York is facing a fiscal crisis in the wake of Wall Street's meltdown, and he called on the Legislature to return next month to grapple with a budget deficit that will grow to $26.2 billion over the next three years...
"I'm asking for the state leaders in the public and private sector, in labor, those who serve in Washington, owners of business and others to join us in this great effort," Mr. Paterson said. "The era of buy now, pay later and later is over. The faster we address this crisis, the faster and stronger we will emerge from it."
...The damage on Wall Street is infecting all of our communities, and its effects on our New York State finances are devastating," Mr. Paterson said. At the same time, he said, the projected budget deficit for the fiscal year that begins April 1, 2009, has grown to $6.4 billion from $5 billion in just the last three months. The projected three-year shortfall has also grown sharply, to $26.2 billion from $21.5 billion.
Just to put the numbers in perspective, a $6.4 billion deficit for next fiscal year represents 8 percent of the $80 billion operating budget. The state provides detailed, easy-to-read budget information (here).
The Governor provided no details on how the Empire State will resolve this financial crisis, but is calling for an emergency legislative session in August.
Many states across the U.S. need to address similar budget shortfalls. In California, Governor Schwarzenegger threatened to cut state employees' wages to minimum wage until the state works out a budget compromise (here). Perhaps New York can work out a deal and avoid a California-type budget meltdown.
For more on tax policy in New York, see our New York State Tax Policy and Data page.
A new ad from Sen. John McCain is questioning whether Barack Obama is just a rock star, or whether he is ready to lead. But in the ad, McCain gets specific by accusing Obama of wanting to raise taxes on electricity. According to Newsday blogger John Riley, the source of this statement is based on a comment that Obama made to a newspaper in which he said "What We Ought To Tax Is Dirty Energy, Like Coal And, To A Lesser Extent, Natural Gas."
While it is true that such a tax policy would amount to new taxes on electricity, what McCain does not tell you is that he supports what is essentially the same policy. McCain was one of the leading supporters of the Lieberman-Warner bill in the Senate, which was designed to combat climate change by implementing a cap-and-trade system for carbon emissions (dirty energy) in the United States. And a cap-and-trade system that auctions off the permits (thereby charging companies for the right to emit pollution) is designed to achieve the same end as a tax on dirty energy (carbon), although the two can be administratively different. (If anything, a carbon tax is superior according to most economists, even though it has the word "tax" in it.) This is why my blog post here could not totally refute the claims made about Obama's energy tax policy in an otherwise bogus e-mail about Obama's tax policy.
So in summary, McCain is attacking Obama for wanting to raise taxes on electricity based on a quote in which Obama says we should tax "dirty energy," yet McCain has promised that his policy as president would do virtually the same thing. His position on this issue has actually upset many conservatives.
Given the indictment today of Sen. Ted Stevens (R-AK), we thought it would be nice to share this Boston Globe article from 2006 that described the workings of the Ted Stevens Foundation, now the North to the Future Foundation. It's priceless:
Meanwhile, the Ted Stevens Foundation, a charity named after the Republican senator from Alaska, was established to ''assist in educating and informing the public about the career of Senator Ted Stevens," according to the charity's tax filing. Under law, a charity is not allowed to benefit a political candidate.
The charity's chairman, Tim McKeever, a lobbyist who was treasurer of Stevens's 2004 campaign, said in a telephone interview that while the charity commemorates Stevens's career, he is not tied to its operation.
''It is nonpartisan and nonpolitical," McKeever said. ''I reject the premise that it is a political effort."
He said Stevens does not raise money for the foundation, although he acknowledged that Stevens has attended some fund-raisers. McKeever disputed the idea that there is a ''connectedness" between Stevens and the foundation.
So far, the foundation has saved most of its $2 million fund, with its biggest expense so far being the $40,000 acquisition of a desk that belonged to a former Alaska state senator and has since been donated to the Smithsonian. The group's tax records say the foundation is ''also gathering information for the only public recognition of Senator Stevens's 35 years in the US Senate to show recognition and commemoration of the career of Ted Stevens."
The Streamlined Sales Tax Project (SSTP) is a working group of revenue officials and experts, with the stated purpose of bringing simplicity and uniformity to sales taxes in the United States. There are nearly 8,000 sales taxing jurisdictions, each with their own bases and rates, and the enormous complexity involved in tracking borders and changes is a huge stumbling block to state efforts to impose tax on online sales. Member states (of which there are 22 so far) must adopt reforms to align their tax code with the SSTP.
While the SSTP has made some progress on uniformity (they have succeeded, for instance, in a single accepted definition of "candy"—something everyone defined differently before), it appears to be giving up the effort on simplicity. At their New Orleans meeting last week, for instance, I asked if any effort was being made to reduce the number of sales taxing jurisdictions, and/or to align them with 5-digit zip codes. "No and no," was the short but honest answer.
Rather than requiring that states simplify before reaching out beyond their borders to tax out-of-state companies, the SSTP seems content to let states continue the status quo. One panelist noted that far from requiring substantial reforms, "States still get to do 99.9% of what they want to do" under the SSTP agreement.
The SSTP already abandoned the notion of taxing like transactions alike when they adopted "destination sourcing" for online sales, but permitted states to adopt "origin sourcing" for intrastate sales. This in effect requires Internet companies to collect sales taxes based on where their customer is located, but allows brick-and-mortar stores to collect sales taxes based on where the store is located. This controversial move was adopted unanimously by the SSTP board last December, under immense pressure.
Coupled with the SSTP's non-worry about reducing the number of jurisdictions (they spoke optimistically of providing maps of sales tax jurisdictions, having rejected even aligning jurisdictions with 9-digit zip codes), full implementation of the SSTP could result in a serious and inequitable burden on e-commerce.
Another recent example is from New Jersey. The SSTP requires that all states have a uniform definition of clothing, and tax all of it (or none of it) at the same rate. New Jersey did so, but then imposed a "separate" fur tax on fur sales. Rather than recognizing this as an end-run around tax uniformity, the SSTP on July 17 upheld New Jersey's action (though an appeal is likely). The SSTP had previously let Minnesota get away with the same thing.
Meanwhile, the SSTP is attempting to persuade Congress to pass H.R. 3396 / S. 34, which permits SSTP member states to begin collecting sales taxes on online purchases, premised on the belief that the SSTP's simplification and uniformity mission has been accomplished. It has not. The SSTP should look again at serious simplification efforts before declaring themselves a success and seeking to expand state taxing power.
Minnesota and New Jersey have SSTP-sanctioned "fur taxes"
McCain: Please Stop with the Gas Tax Holiday Talk: It's common for politicians (on both sides) to take shots at economists like McCain did in this interview, arguing that they are heartless and don't understand the plight of hard-working Americans who don't get to sit behind a desk all day.[...] It's a baseless argument designed to distract from the core question, which in this case is "will the price at the pump fall significantly from a temporary reduction in the federal gas tax?" The answer is no. A gas tax holiday is truly a gimmick...maybe worse than Obama's worst gimmick which is exempting all senior citizens making under $50,000 from paying income tax.
Will the 1040 Be 3 Pages Next Year?: The housing bill that Congress is set to pass and the President is now willing to sign is set to add a number of lines to the standard 1040, including a deduction for property taxes paid that will likely be in the adjustments section yet only available to non-itemizers (above-the-line deduction) or beneath or part of the standard deduction. And then there is the new credit for homeowners that must be repaid in future years.[...] So you can count on probably around four new lines on next year's 1040, which could force it to finally be 3 pages, unless the IRS merges some of the credits and deductions together as it has done in the past. Or maybe the font next year will be smaller.
Sales Tax Holidays: Politically Expedient but Poor Tax Policy: Despite tax holidays being one of the least desirable forms of tax relief, many states are now doing them. Below is a list of holidays compiled by the friendly people at the Commerce Clearing House (CCH), with some slight updates by us.
Has Real Median Household Income Fallen Since 2000?: To give you an illustration of this problem of defining income, the table below show how the change in real incomes from 2000 to 2006 looks under 15 alternative definitions of income derived by the Census Bureau using CPS data.
American Airlines Case in New York Highlights Problems with Hotel Taxes: If you've stayed in a hotel room in the United States, you probably paid tax on it. Not just your share of the hotel's property tax and income taxes (embedded in the price), and not even the sales tax imposed on the transaction. Virtually every city (or other local government unit) imposes a separate (higher) tax on hotel stays.
Multiple-Choice Tax Proposal in Florida: The Florida Taxation and Budget Reform Committee placed an amendment on the upcoming ballot to eliminate the school portion of local property tax. According to one estimate, property owners would save $9.3 billion in 2011. But as the Jacksonville Business Journal reports, not everyone is happy about the measure.
Tax History Lesson: The McKinley Tariff: Before becoming president, William McKinley served in the House of Representatives, representing Ohio. He was a fan of tariffs, and a large part of his legacy is the tariff bill passed in 1890, introduced in a committee he chaired. It became known as the McKinley Tariff.
This morning on ABC's This Week with George Stephanopoulos, John McCain was interviewed by Stephanopoulos. And during a discussion on energy, McCain mentions his gas tax holiday proposal again as a way to relieve consumers, and then Stephanopoulos steps in.
STEPHANOPOULOS: Not a single economist in the country said it'd work.
MCCAIN: Yes. And there's no economist in the country that knows very well the low-income American who drives the furthest, in the oldest automobile, that sometimes can't even afford to go to work.
STEPHANOPOULOS: But they all say that that's...
MCCAIN: And they haven't met...
STEPHANOPOULOS: ... not who's (ph) going to get the benefit. The oil companies, the gas companies are going to absorb...
MCCAIN: You know, they..
STEPHANOPOULOS: ... any reduction.
MCCAIN: ... they say that. But one, it didn't happen before, and two, we wouldn't let it happen. We wouldn't let it -- Americans wouldn't let them absorb that.
STEPHANOPOULOS: How would you prevent that?
MCCAIN: We would make them shamed into it. We, of course, know how to -- American public opinion. And we would penalize them, if necessary. But they wouldn't. They would pass it on.
Penalize them if necessary? Does John McCain know what that entails? Does he understand that such a policy is de facto price controls? Of course he doesn't. That's because he doesn't know what he's talking about on this issue.
It's common for politicians (on both sides) to take shots at economists like McCain did in this interview, arguing that they are heartless and don't understand the plight of hard-working Americans who don't get to sit behind a desk all day. But that ridiculous argument is typically made when the individual fails to understand or want to accept what the economists are saying merely because it doesn't suit their agenda. It's a baseless argument designed to distract from the core question, which in this case is, Will the price at the pump fall significantly from a temporary reduction in the federal gas tax? The answer is no.
A gas tax holiday is truly a gimmick—maybe worse than Obama's worst gimmick, which is exempting all senior citizens making under $50,000 from paying income tax.
To be fair, there is nonsense with regard to the rhetoric on the energy tax policies of Obama as well. Obama has typically been clear that a windfall profits tax would be imposed merely to raise revenue to give a rebate to low-income Americans. One Obama primary ad and others on the Democratic side of the aisle, however, have made outlandish claims with respect to a windfall profits tax. One such claim is that a windfall profits tax would lower the price at the pump. Such a claim buys into this myth that profits are merely transfers from higher prices to consumers to higher profits for companies. Also, almost every advocate of a windfall profits tax (including Sen. Obama) fails to acknowledge that people pay taxes. Obama often uses rhetoric about "going after the big oil companies" when in fact, any economist would tell you that this really means "shareholders of oil companies." No politician ever wants to put a face on a tax increase.
Back to McCain's interview. The question before the gas tax holiday was brought up, there was this exchange:
STEPHANOPOULOS: A majority of Americans think you're going to come in. They look at your tax plans and say you're going to be just like President Bush on the economy.
What would you do right now -- spending aside -- that would be different from what President Bush is doing?
MCCAIN: Well, I would give every family in America double their exemption for -- on the child tax and children's tax, a dependent tax break, from $3,500 to $7,000.
I would declare that we will scrub every agency of government and eliminate those that are not necessary.
I will veto every single pork barrel bill that comes across my desk, and make them famous.
I will promise that we will not only keep tax cuts low, but we will have some additional incentives for American investment and growth of jobs.
I will embark on an immediate, an immediate effort to eliminate our dependence on foreign oil -- nuclear power, offshore drilling, wind, tide, solar -- and stop this drain of $700 billion a year from the American economy. This administration -- for 30 years, Congress and the administrations have not done anything on this energy crisis. Now, it's hurting low-income Americans the most.
There are many steps that can be taken absolutely, including the gas tax holiday. Everybody -- everybody... (Stephanopoulos interupts, see above)
So McCain brags about how he wants to reduce spending at the same time he tells us that he will double the personal exemption for dependents. Any public finance scholar would tell you that doubling the personal exemption is basically just like having a government agency write a check to every family in America based upon their income level and the number of children they have. There are already agencies that do just that (HHS, Food Stamps, etc.).
Combined with the gas tax holiday, the doubling of the personal exemption for dependents (phased in over next few years) is McCain's worst tax policy proposal. And that's funny, because these are the two that he cites the most in public.
(Note: This blog post has been updated to reflect a posting of the official transcript on ABC News' website. The earlier version included a transcript that was typed using TIVO.)
Once again, the United States Congress is making the tax code worse. Not that it should surprise any of the readers of this blog. Members of Congress, however stupid their policies may be, just want to appear as if they are doing something right now as it relates to housing. And if that means making the tax code more complicated and more distortionary and more discriminatory, then so be it.
The housing bill that Congress is set to pass and the President is now willing to sign is set to add a number of lines to the standard 1040, including a deduction for property taxes paid that will likely be in the adjustments section yet only available to non-itemizers (above-the-line deduction) or beneath or part of the standard deduction. And then there is the new credit for homeowners that must be repaid in future years. It's essentially an interest-free loan administered through the tax code, as if the federal government doesn't have any entities that subsidize and administer borrowing for housing already.
Also, there will likely be a couple of additional lines for the economic stimulus package that went out earlier this year due to the fact that some who didn't claim it yet will be able to "apply" for it on next year's return.
So you can count on probably around four new lines on next year's 1040, which could force it to finally be 3 pages, unless the IRS merges some of the credits and deductions together as it has done in the past. Or maybe the font next year will be smaller.
Either way, it's getting ridiculous. A member of Congress perceives a problem. And he/she immediately thinks: "Let's use the tax code to try to solve that problem."
I don't know why we have the number of cabinet departments we do. At the current pace, every government building in Washington may be a branch of the IRS in 50 years given that Congress appears willing to implement every new social policy through the tax code. As Bradford famously showed, a large fraction of the military's budget could be administered through tax preferences if it wanted to. While such a demonstration was largely tongue-in-cheek, as government as consistently shown, what seems ludicrous today will be policy tomorrow.
Earlier this year, the Tax Foundation was bombarded with questions about a bogus e-mail that had been floating around (also on message boards, blogs, etc.) comparing taxes under Bush to Clinton. The e-mail had many problems, which we documented here. Since then, we've also gotten questions about our corrected figures, claiming they were wrong. They are not, and it largely stems from a misunderstanding of how comparisons must take into account the fact that parameters in the tax code are adjusted for inflation each year, even with no direct policy change (i.e. that is the current law baseline).
But that Clinton/Bush tax bogus content is still out there, and it is now being included in an e-mail chain attacking Barack Obama about taxes. (View the content of the e-mail here.) The e-mail makes incorrect claims about Obama's tax proposals, as described in the table below.
E-mail claim
Fact
Obama would tax capital gains on ALL home sales at 28 percent
LIE. Obama's plan (like McCain's) does not change the tax treatment of capital gains on owner-occupied housing (I wish it did), which means most home sales would remain tax exempt. Obama does plan to raise the rates on long-term capital gains for stocks that are currently taxed at preferred rates (15 percent), but that has nothing to do with housing.
Obama would raise the tax rate on dividends to 39.6 percent
LIE. Merely repealing the Bush tax cuts (or allowing them to expire) would raise the dividend tax rate to 39.6 percent for those in the top income bracket (about 1 percent of tax returns, though a large share of dividends). However, Obama has indicated that he would apply the same tax rate on dividends as capital gains, which he has indicated would not exceed 28 percent.
Income tax bills for typical families would increase, even double for some
Outright LIE...not even close to the truth. As discussed earlier... Same as here. "Clinton-era" tax law assumed to be the same as Obama. But figures cited are wrong for many reasons.
Inheritance Tax under McCain = 0; Obama restored
LIE. Actually, McCain does not favor permanent repeal of the estate tax. And Obama does not want it fully restored. Obama would impose a 45 percent tax rate with $3.5 million exclusion, which is lower than pre-Bush tax cuts, yet significantly higher than 2010 scheduled law ($0).
Obama would impose new government taxes on homes that are over 2,400 square feet
LIE. This is the most outrageous claim. This appears to stem from Congressman John Dingell's proposal that would cap the mortgage interest deduction for large houses for environmental purposes. Obama has not favored such a proposal and even if he did, it would not be a new "tax" per se, just a limitation of what I would call an already bad tax provision (MID). Obama does favor a cap-and-trade system (like McCain), which is in implicit tax, but such an implicit tax would hit all homes indirectly based largely upon energy consumption.
Obama would impose new gasoline taxes
Ambiguous...Obama does favor a windfall profits tax on oil companies, which would likely raise the price of gasoline. However, he has not indicated support of raising the federal excise tax on gasoline (currently 18.4 cents).
Obama would impose new taxes on natural resource consumption (energy, natural gas, etc.)
Ambiguous...Obama does not favor any direct tax on these products (except for windfall profits tax on oil companies). However, again, a cap-and-trade system would act as an implicit tax on these oil companies, so this is not too outlandish of a claim (compared to the rest of them). It should be pointed out though that McCain supports practically the same policy.
New taxes on retirement accounts
Basically a lie. Obama has not said anything about a new tax on retirement accounts, unless one wants to argue that indirectly, he would affect the return on retirement accounts through his individual and corporate tax policies and dividend/capital gains policies. In fact, when it comes to direct taxes on retirement, Obama has proposed exempting seniors (those who most likely claim retirement income) who make under $50,000 from an income tax. (In my personal view, this is his worst proposal -- as if this generation of seniors hasn't gotten enough from government already. Furthermore, there is a fairness question about what to do with those who use Roth accounts and have paid taxes on pension income already.)
New taxes to pay for socialized medicine
Yes and No. Obama does have a universal health care plan that one could label socialist to some extent, although our current system has a large degree of implicit government payments through the exclusion of employer-provided health insurance. However, Obama has not said new taxes would pay specifically for that socialized medicine although he does favor some new taxes (higher income taxes on upper-incomes, higher payroll taxes on upper-income workers and a windfall profits tax). Such a claim is not possible to verify or refute due to the fact that all government money is basically fungible.
This correction of the bogus content is not an endorsement of Obama's tax plans. In fact, in my opinion, Obama's tax plan is terrible. Even if you wanted to make the tax code more progressive as Obama's main goal is, you could do it in a much better way than Obama has done (in a way that actually improves the tax code). Obama's tax plan is basically to raise taxes on the rich to spend money on the poor, yet call that spending "tax cuts." (The Republicans had a similar twisted view of "tax cuts" with the child tax credit in 1997 and 2001.) As for McCain's deficit-financed tax plan...we'll leave that for another day.
*Another Incorrect Assumption About Obama's Tax Plan*
The Center for Freedom and Prosperity released a video narrated by Cato's Dan Mitchell on July 23rd on Youtube discussing Obama's Social Security tax hike. In the video, Mitchell assumes that Obama would impose a full 12.4 percentage point rate increase on high-income workers. However, while Obama may have waffled on this issue a few months ago, details have emerged from the campaign indicating that he would only raise the payroll tax (combined employer/employee) by 4 percentage points, as we blogged on earlier this month. Again, this doesn't make it a good policy necessarily, but the facts need to be set straight.
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