President Obama recently gave a lengthy speech on inequality, poverty, and what to do about it. He claimed inequality is increasing, which is debatable, and then offered a few populist ways to reduce it, such as raising...
The Tax Policy Blog
One issue discussed in the interview is the recent controversy over whether the IRS should employ private debt collectors to reign-in back taxes from taxpayers, which Olson opposes. Here's a clip from the transcript:
Hodge: The IRS has started looking at contracting out or using private debt collectors to collect those unpaid tax bills. The New York Times has been very critical of this effort. They think it'll actually be more expensive, and obviously one of the biggest issues is the concern about privacy or the sensitivity of all of this data. Can you help us sort through all this, is the New York Times off base on this, and what's the perspective of your office?
Olson: I personally am opposed to using private debt collectors to actually collect the tax. I think that the IRS has the authority to do this, and although I think that the program as designed right now is legal, it's constitutionally permissible because the private debt collectors aren't really doing anything that requires discretion and judgment, which is reserved to government employees.
That's the very problem with why this won't work. It's because it's premised on the concept that there are basic, simple tax cases, and I'm here to tell you, after having practiced outside the IRS for 27 years, and now being National Taxpayer Advocate for five years, that there is no such thing as a simple tax case. That even when you think that you've got somebody who has signed their tax return that shows a balance due, that they've agreed to the amount, when you actually go out to touch them, often they say, "Well, I can't afford to pay this right now, I'm uncollectible." That requires discretion. It requires a decision whether you're going to put a lien on that taxpayer's account while you hold off collecting. Or somebody will say, "Well, I don't mind paying the tax, but I don't think I should have to pay the penalty, I was in the hospital," you know. And all of those things, the private debt collectors can't, constitutionally, decide, and so the cases go back to the IRS.
So here we have this situation where we're paying 25% to the private debt collectors, then we're going to reserve 25% of whatever we collect to pay for the IRS unit that is going to have to work these cases, so the public fiscal only gets 50%, and my question is, what if we had just sent a letter to that taxpayer? I mean, these are cases that have just been lying fallow, you know? And so what if we had just shaken the tree ourselves with a letter? Which goes to my other point about, there might be a role for private debt collectors, in the fact of, they might be very helpful to us in doing skip tracing, trying to find the taxpayers, you know? Or trying to find assets. Not necessarily engaging in the conversation with the taxpayer, but assisting the IRS in doing some of its core responsibilities.
Hodge: Just to play devil's advocate for a minute, there are a lot of cases in the government where using private debt collectors has been pretty effective, such as the student loan programs, farm loan programs, the Small Business Association Administration loan programs, etc., where the government has proven to be pretty ineffective at maintaining the effectiveness of those collections, and moving to private collectors has proven to be very effective, and actually improved the servicing, in some cases, of those loans. Wouldn't that apply in this case?
Olson: I think there are two issues. One is that from the Secretary and the Commissioner on down, everyone acknowledges that the IRS collects the tax cheaper, better, and more effectively than the private debt collectors. The Commissioner has sworn before Congress, on sworn testimony, that that is his position. It's just that we're not getting additional funds from Congress to hire the employees to do that work. The second point is, the Constitution doesn't reserve the authority to issue a student loan to the government, but the Constitution does say that the power to lay and collect tax resides in the government. There's really a constitutional issue there. And my final point is, the government will not fall down if the student loans are not made, but the government will fail, and the social contract with the taxpayers will fail, if we do not protect taxpayer rights, and protect taxpayer privacy, and raise the funds that we need to.
You know, we can argue that whether we need a smaller government, or a larger government and lower taxes, and things like that, but there is this understanding and I view it as a social contract between the tax administrator and the taxpayers, that we are going to absolutely protect their rights, and absolutely protect their privacy, and really honor the fact that they are coming in and paying the lifeblood of government with their hard earned dollars; and I think that makes it very, very different from the other kind of areas where we have used private debt collectors quite effectively. And again, I view that there is a role for private debt collectors, it's just not the role that this test has, or this program has envisioned.
Listen to the full interview or read the transcript here. If you haven't subscribed to our podcast using iTunes already, click here to do so today.
Former Vice President Al Gore, who has long been concerned with environmental issues, has suggested that the U.S. should impose a tax on carbon emissions in place of the current payroll tax, which is about 15 percent (combined employee/employer) and is used to finance Social Security and Medicare. From MSNBC:
Former Vice President Al Gore has a novel approach for dealing with global warming: tax carbon dioxide emissions instead of employees’ pay.
“Penalizing pollution instead of penalizing employment will work to reduce that pollution,” Gore said Monday in a speech at New York University School of Law.
The carbon tax would replace all payroll taxes, including those for Social Security and unemployment compensation, Gore said. He said the overall level of taxation, would remain the same.
While taxation of carbon emissions may or may not be proper public policy, Gore’s suggestion that we would be penalizing pollution as opposed to penalizing work ignores the question of who would bear the burden of a pollution tax. Most likely, much of a carbon tax would be borne by workers of companies that emit carbon, meaning you would still be “penalizing” some work.
To the extent that a carbon tax is borne by the firm, it would encourage lower carbon emissions. However, to the extent that the tax would fall on workers, the distributional effects of this may not be desirable for progressives like Gore. Much of the polluting is done by companies whose workers are blue-collar, while white collar positions often involve companies with little, if any, carbon emissions.
Also, unless other countries agreed to impose the tax as well, this would put U.S. based firms at a competitive disadvantage compared to other locations. Thereby, you may get less pollution in the U.S., but the pollution would merely move to a separate country without U.S. employees. Tyler Cowen at Marginal Revolution, however, thinks that U.S. leadership could possibly solve this international public goods problem.
Yesterday in a televised debate on NBC’s Meet the Press, Virginia Senatorial Candidate Jim Webb said that if elected to the Senate, he would propose a 5 percent income tax break for veterans. The excerpt of the MTP transcript:
MR. WEBB: What I’ve done—one of the things I’ve done is I’ve proposed a 5 percent tax break for all people who serve honorably in the military. And one of the reasons that I have done that...
MR. RUSSERT: How much would that cost?
MR. WEBB: If, if you go to the, the typical income of a veteran, it’s about $30-something-thousand, so it’s not a high-cost program. And it’s targeted to people who’ve served. And one of the things that that would do, by the way, in my view, is to bring more people from across class lines into the military. One of the, one of the great problems we have right now in, in, in discussing this war is that very few people who have brought us this war have served and very, very few of the children of these people who have brought us this war have served. And if you have to wake up every morning wondering about a loved one, you will look at, at words like this much differently.
Here is a Washington Post article on the topic from earlier this year:
Virginia U.S. Senate candidate James H. Webb Jr. continued the military emphasis of his Democratic campaign, proposing an income tax break for veterans and picking up the endorsements of retired generals and a congressman who disapprove of the Iraq war.
Webb proposed a 5 percent income tax break for veterans who have served honorably, although he couldn't say exactly how the plan would work or how much it would cost. But he said it would be an important symbol of how the country values those who volunteer for military service.
"In earlier days, military service in this country was viewed by many to be an obligation. . . . Or to put it another way, military service was viewed as a tax that many in the country were called upon to pay for the good of national security," said Webb, a former Marine whose son is scheduled to be deployed to Iraq this summer. A tax break would be a reward for such service, he said, and perhaps entice others to join the military.
While it may be proper public policy to give more to veterans, there are better ways to accomplish that goal rather than via the tax code, which is so complex that it may be impossible to use it to help those we intend to help. First, many veterans are retired and have a very low income tax liability already as a result of much of their income being in the form of Social Security benefits, most of which is nontaxable. Therefore, low-income veterans especially would see hardly any relief at all. Second, if the purpose of this proposal is to reward veterans for the value of the service that they have provided to society, why is the value of one veteran’s service a function of his/her current income? Shouldn’t every veteran just be given a one-time check from the government? And finally, the desire to entice others to join the military could be satisfied by merely raising military pay directly rather than a backdoor, complicated attempt through the tax code to convince people to join.
The federal income tax has traditionally allowed a deduction for state-level income taxes paid. Recently lawmakers also reinstated a deduction for state sales taxes paid as well. The provision had previously been eliminated as part of the 1986 tax reform, and was revived by Congress in 2004.
However, the federal sales tax deduction is only a temporary provision, and may expire soon if Congress doesn't renew it by October 15th—a deadline set by the Internal Revenue Service for items to be included on next year's tax forms. From Sunday's Los Angeles Times:
Just about every lawmaker in Congress favors extending a batch of popular tax benefits approved during President Bush's first years in office and authorized through 2005.
But in a case study of the tortuous process that can surround even the most highly regarded proposal on Capitol Hill, extension of the tax benefits appears to face an uphill road as Congress nears adjournment.
The benefits, claimed by more than 10 million taxpayers last year, give those who live in states without income taxes a deduction for their state sales taxes. They allow a deduction for some college tuition. Teachers may deduct the costs of buying supplies for their classrooms. And a research and development tax credit — hugely popular in the business community — is also part of the package.
But so far, these and 43 other tax benefits have become ensnared in a partisan battle over a minimum-wage increase, which Democrats and some moderate Republicans want, and a sharp reduction in the estate tax, dear to the hearts of conservative Republicans...
Some lawmakers, including at least one powerful Republican, are pushing for Congress to break the deadlock.
"Taxpayers could miss out on valuable benefits through no fault of theirs," Sen. Charles E. Grassley (R-Iowa), chairman of the tax-writing Finance Committee, said last week. "I urge the House and Senate leadership, both Republican and Democrat, to take this problem seriously."
Grassley warned that time is of the essence, saying that Internal Revenue Service officials have told him Congress must approve the benefits extensions by Oct. 15 if the changes are to be included in 2006 tax forms. That means Congress, which plans to adjourn at the end of this month to campaign for the November elections, has only two weeks to act. (Read the full piece here).
In the past, we've argued against the various credits, deductions and exemptions in the federal income tax code—including the deduction for state and local sales taxes—because they ultimately force up tax rates by shrinking the federal income tax base.
Here's our section on the federal deductibility of state sales taxes, from our analysis of the final report of the President's tax reform panel in November 2005:
Eliminate the deduction for state and local taxes Both plans would eliminate the current tax deduction for state and local taxes which removes more than $320 billion from the federal tax base. The estimated value of these deductions in 2006 are $49.4 billion. This proposal will expand the tax base and reduce the tax code’s complexity. The common critique of these deductions is that they partially subsidize state and local spending; therefore states and localities do not fully realize their true costs. Without the deduction, this distortion is removed. Lastly, some argue that the deduction eliminates double taxation of income; however, allowing the deduction gives a greater benefit to those who live in high tax states and localities. It is more economically neutral to eliminate the deduction than to allow some groups to benefit more than others. (Read the full piece here.)
As we've written before, booming property tax collections in recent years have given birth to property tax reform movements in many states, particularly in the state of Florida. Two news stories over the weekend highlight the vigorous property tax debate currently underway in the Sunshine State, which appears to be gaining political momentum.
Property tax pressures demand new look at state's tax structure Not so very long ago, Florida was considered something of a haven for people -- especially retirees -- fleeing high property taxes elsewhere in the nation.
Welcome to the future.
Anyone who hasn't figured out that property taxes loom as the next big fight across Florida -- not just the Pensacola Bay Area -- hasn't been paying attention.
But it is demanding attention.
Here and across Florida residents find themselves whipsawed by soaring property values and skyrocketing insurance premiums. Worse, surging construction costs caused by hurricane rebuilding from the tip of Florida to Louisiana mean homeowners can pay a lot more for less house than they could get just few years ago. Add on tougher building codes, and sticker shock is rampant.
People used to move to this area because of the low property taxes; today, people are talking about leaving because they are getting so high.
Tax-cut demand gets tractionFor Mary Fidler and thousands of other frustrated taxpayers, the public hearings across Volusia County this week are far more than procedural steps to finalize government budgets.
The hearings are the last chance to persuade officials to cut taxes that have infuriated some and crushed others.
"I've done a lot of crying since the property taxes came out. What can I say?" said Fidler, a grandmother of six whose family has lived on farmland outside Port Orange for decades.
Her tax bill could nearly double to about $10,000.
Fidler is one of many frustrated by soaring property tax bills, the result of skyrocketing property values and rising government spending.
But fed-up taxpayers are rising up in record numbers, coordinating protests countywide to demand that elected officials slash their budgets and push back tax rates.
They came by the busload to a County Council budget hearing earlier this month. They'll be out in full force this week, they said, because if tax bills double, triple and more, it will cripple the region.
It's no surprise that support for property tax reform builds whenever home values are on the rise. Surveys consistently find that property taxes are among the most disliked of all types of taxes.
For example, here are the results from our own annual survey question about which state and local tax is "least fair":
Q675. Of the following state and local taxes, which do you think is the worst tax -- that is, the least fair?
Source: Tax Foundation
Local property tax
State income tax
State corporate income tax
For more on state and local property taxes, see our "Property Tax" section. Also, keep an eye out for our forthcoming Special Report on growing property taxes around the nation.
Whenever oil prices spike, lawmakers inevitably resurrect the idea of taxing "windfall" profits of oil companies. But what happens when oil prices fall?
Not much. As noted by today's editorial page of the Investor's Business Daily, many lawmakers continue to call for excess profits taxes on oil companies despite sharply falling oil prices in recent weeks. From the piece:
[E]nergy prices are dropping faster than the jaws of Democratic critics of Big Oil. Crude contracts have fallen below $64 a barrel, and gasoline has skidded nearly 16% in a week and a half.
"The only place they have to go is down," says Fred Rozell, gasoline analyst at the Oil Price Information Service. "We'll be closer to $2 than $3 come Thanksgiving."
Not so thankful will be the likes of Chuck Schumer. New York's senior senator recently opined that the "fact that Big Oil is pulling in record-breaking profits while most Americans are breaking the bank to fill up their gas tanks is both despicable and mind-boggling."
Schumer, along with colleague and presidential wannabe Hillary Clinton and others, is calling for a return of the tax on "windfall profits." But he ignores the fact that, according to a new report from the Tax Foundation, the biggest profiteers from oil aren't the companies that produce it and deliver it to our gas tanks, but the federal and state governments that tax it.
From 1977 to 2004, total federal and state taxes on gasoline sales came to $1.34 trillion, thanks to average taxes at the pump of about 40 cents a gallon. Oil company profits over the same period totaled less than half that — or $640 billion. And that doesn't include the billions in taxes the oil companies paid on their profits.
The idea of "windfall" profits taxes has been around for centuries, and we've published a lot on them over the years. For a list of recent analyses, see our collection of resources here. For everything we've done on the subject, search our entire website by clicking here. For a little tax history, see our 1940 collection of resources on windfall profits taxes here.
One of the most disturbing recent trends in state public finance is the increased reliance on cigarette taxes to fund public programs. The trend has developed because it is easy for politics to trump policy--and there are few classes of citizens with less political power than smokers. Politicians have been simultaneously unwilling to forego spending or raise broad-based taxes (i.e. taxes on sales or income) to pay for it, so they force smokers in many states to pick up the bill.
Rarely do we see an admission that the movement to increase cigarette taxes is politically motivated. In an article (subscription required) in today's State Tax Today, however, a proponent of Arizona's Proposition 203 (which would increase that state's cigarette tax to fund, among other things, early childhood education programs) admits that politics drove their decision to use the cigarette tax as a funding vehicle:
"We polled on everything...(t)his was the thing that would be the most succesful in Arizona."
Indeed, it's no surprise that the public in Arizona would favor a cigarette tax increase above all else. On at least two prior occasions (Prop 200 in 1994 and Prop 303 in 2002), Arizona voters approved increases in the state's cigarette tax.
This time, however, voters would not only be approving an increase in the state cigarette tax (from the current rate of $1.18 per pack to a new rate of $1.98 per pack) as well as increases in other tobacco products, but they would also approve the creation of a special "board" that would determine how the funds generated (~$150 million per year) would be spent. This board would be appointed by the governor and approved by the legislature.
Thus, not only will the money generated be spent by a board that is not directly accountable to the voters, but (more importantly) Prop 203 will bet the fiscal future of Arizona's early childhood initiatives on a product that is steadily declining in use by Arizona's citizens.
If Prop 203 passes, Arizona will once again shoulder the burden of expanding government on a narrow and relatively poor base of its citizens in the short-term, while putting pressure on an increase in broad-based taxes in the long-term. There are very few public finance economists who will say that such a trend is consistent with the economic principles of sound tax policy. Please click here to read a recent Tax Foundation report questioning the continued vitality of selective excise taxes like those levied on cigarettes.
The U.S. House Committee of the Budget held hearings yesterday on the controversial topic of whether tax and spending bills should be "dynamically scored"—that is, whether estimates of their budget impacts should take into account how law affects larger economic variables like GDP growth rates.
Douglas Holtz-Eakin of the Council on Foreign Relations was one of those presenting testimony. Here's an interesting clip from his presentation. In it, he explains how current Congressional Budget Office and Joint Committee on Taxation estimates of the costs of tax and spending bills are not really "static" as is often claimed by commentators. Instead, they take many behavioral factors into account. Dynamic scoring would simply extend that to larger macroeconomic factors as well. And while dynamic scoring may be difficult to implement in practice, it's probably worth the effort, as it would force policymakers to take into account the effects of policy on the overall U.S. economy:
Dynamic Scoring is Good Science Budget “scores” are estimates of the change in the federal unified budget that would result from the passage of specific statutory language. All proposals are measured relative to a single, fixed baseline outlook for the budget which is, in turn, built upon a projection for the United States economy. A key feature of current scoring is that in evaluating legislation, the aggregate amount of economic activity – total production and income – is assumed to be unchanged from its baseline values.
It is this feature that has led some observers to refer to current scoring procedures as “static.” Unfortunately, this label has caused certain critics to mistakenly conclude that current procedures do not recognize the incentive effects of legislation – that firms, workers, investors, and households continue their economic lives as if nothing had changed. Nothing could be further from the truth. For example, in scoring the impact of the Medicare Modernization Act (MMA), congressional analysts necessarily had to incorporate the decision of firms to offer insurance contracts for the cost of outpatient pharmaceuticals and bid for customers, the willingness of seniors to purchase such insurance, changes in the amount of drugs prescribed and purchased, take-up of low-income subsidies, and a myriad other decisions by households, firms, and governments. However, in keeping with current practice, the overall level of gross domestic product and national income was assumed to be unchanged.
Dynamic scoring would expand the range of economic impacts to include the pace of economic growth – that is, estimating the change in the aggregate level of economic output and income. This has some desirable features. In estimating the impact of the legislation, analysts would (a) consider the direct impacts on program costs and tax receipts; (b) evaluate the effects on incentives to work, save, invest and conduct economic affairs; (c) estimate the resulting change in the overall level of economic activity; (d) compute the impact of this higher or lower level of economic activity on program costs and tax receipts; and (e) calculate the net impact of the legislation on the unified budget. The key difference is step (d), which is in turn built upon (c).
A virtue of dynamic scoring is that it extends analysis of budget policy to include economic policy dimensions. Specifically, dynamic scoring requires that analysts incorporate into their evaluation of legislation all the economic feedbacks at the individual, household, firm, and national level. For this reason, it has the potential to distinguish between those policies which are equal in their budget cost, but very different in their economic incentives. Indeed, one of the most attractive aspects of dynamic scoring is its promise of allowing policymakers to distinguish between economically efficient tax and spending policies that promote growth, and those that work to reduce the living standards of future generations.
Read the full testimony here. In our recent podcast interview with Holtz-Eakin, he made a similar point about the scientific foundations of dynamic analysis. See also our previous post on the costs and benefits of dynamic scoring.
Ohio Senator George Voinovich is calling for a temporary tax hike to fund the wars in Afghanistan and Iraq, making the argument that the costs of the war should not be passed on to future generations. From today’s Columbus Dispatch:
Just 56 days before crucial congressional elections, Republican Sen. George V. Voinovich yesterday repeated his call for a temporary tax increase, a position that places him at odds with Senate and House Republicans fighting for re-election.
At a Senate hearing where Homeland Security Secretary Michael Chertoff testified, Voinovich said Congress should approve "a temporary increase in our taxes" to pay for the ongoing wars in Afghanistan and Iraq and to defend the nation against terrorist attacks.
Christopher Paulitz, a Voinovich spokesman, said the senator has not introduced a bill to raise taxes and "doesn’t have anything specific in mind. What he’s trying to do is get people’s attention that we can’t keep promising everything under the sun and leave it to our grandchildren to pay for it."
Voinovich’s call for a tax increase comes as Sen. Mike DeWine, R-Ohio, is criticizing Democratic challenger Sherrod Brown, of Avon, for opposing the federal tax cuts of 2001 and 2003 and voting for numerous tax increases.
While taxes may typically need to be raised to fund a war, holding everything else constant, the full costs of the war should never be borne in such a short time period, assuming the war will be temporary. There are two main reasons to justify borrowing to pay for a war: (1) the short-term costs could be so large, we would be better off for government to smooth the costs over time, and (2) theoretically the benefits of a war would be borne mostly by future generations – why is it unfair to tax them for that benefit?
The first reason assumes that people will not merely save today to pay for future tax hikes, which in economic circles, means we are assuming no Ricardian equivalence. If Ricardian equivlance did hold and taxpayers merely forecasted future tax hikes and thereby saved today to pay for those future tax hikes, then the full cost of the war spending would be borne today, which would make Voinovich’s concern unwarranted. However, as we have seen empirically, individuals do not have perfect foresight and tend to not care fully about the finances of their offspring, meaning the government is responsible for most of the determination of the allocation of the costs of war over time.
As for the question of how to fairly distribute the benefits and costs of war among current and future generations, Voinovich’s quote that we are "leave[ing] it to our grandchildren to pay for it" is making the normative argument that the full costs of war should be borne by today’s generation. That assumes either that there will be no benefit to future generations from the current war (which would depend upon your own view of the likelihood of success of our current conflicts), or he believes that those who pay for the costs of policies should not necessarily be those who benefit from them.
In the midst of the election season - when many are thinking about winning elections, one state lawmaker in Kansas is thinking tax reform. From State Tax Today:
“A legislative committee is planning to take a major look at Kansas's overall state and local tax structure and make recommendations about potential changes for the incoming Legislature.
Rep. Kenny Wilk (R), chair of the Special Committee on Assessment and Taxation, said the panel would be spending much of its time on a broad-based study of the current state and local tax structure, focusing on shifts in reliance on sales, property, and income taxes since 1990.”
While Kansas’ current tax system does not rank among the nation’s worst, there are significant opportunities for lawmakers to make the system more competitive. For instance, Kansas ranks 34th in the Tax Foundation's 2006 State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales and gross receipts taxes; unemployment insurance taxes; and taxes on wealth, including residential and commercial property. More damaging than Kansas’ mediocre ranking is the fact that Kansas’ tax system lags behind all neighboring states (with the narrow exception of Nebraska).
Even though the economy is expanding and tax receipts are up, most of the discussion regarding recent surpluses in Kansas is directed towards additional spending instead of tax reductions. Even worse is the discussion of creating an individual income tax surtax to raise additional funds for higher education.
Other states in the region are taking a different path by reducing taxes with surplus funds and enhancing their tax climate in the process. For instance, lawmakers in Oklahoma recently passed major tax reductions that included phasing down the top individual income tax bracket from 6.25 percent to 5.25 percent. The Oklahoma legislation provides $600 million in annual tax relief and also eliminates the estate tax in 2010.
Nebraska has also taken action to reduce taxes. This spring, lawmakers approved legislation to reduce taxes by roughly $100 million annually. Furthermore, during his highly competitive primary race against Nebraska football legend, Tom Osborne, Governor Dave Heineman signaled he would seek further tax reductions if elected to a full term. Now that Governor Heineman won the primary and is a strong favorite in November, it is very probable that there will be further tax reductions from Kansas’ neighbor to the north.
It is evident from the actions of neighboring states that they are serious about making their tax systems more competitive for the 21st Century. While oftentimes necessary, playing defense by stopping tax increases is not the answer for Kansas. Lawmakers in Kansas must take a proactive approach if they wish to make Kansas’s tax system more competitive. Hopefully Rep. Wilk’s panel will provide what it takes to get the process started.
The Nevada Supreme Court recently overruled one of the most notorious public finance court decisions in recent years. In its 2003 decision in Governor v. State Legislature, the state’s highest court ruled that the legislature’s constitutional duty to fund education trumped the constitution’s requirement that any tax increase pass by a 2/3 vote in each legislature.
The court was asked to decide the case when the legislature adjourned without funding education because there were not enough votes to raise taxes to do so. A tax increase was necessary because a simple majority of the legislature had appropriated virtually all forecasted revenue for purposes other than education.
The Nevada Supreme Court’s original decision ordered the legislature to proceed under majority rule, even though Governor Guinn had not asked the court for such a remedy. The only party that suggested such a remedy was the Nevada State Education Association, which did so through the filing of an amicus brief.
The fallout from the case was swift, and the criticism of the opinion was widespread, though of course it also had its defenders. An attorney for the court also later resigned, apparently in protest against the court’s decision.
In a decision where they ordered that a state spending limit could not appear on the ballot this fall, the court unanimously reversed its ruling in Governor v. Legislature. This is a good development for public finance law. The Governor v. Legislature decision drove an unnecessary wedge between procedural and substantive constitutional provisions and could have served as a model for similar misbehavior in other states.
The Tax Foundation state tax team has been traveling in recent months—to Kansas, Michigan, Washington, and Ohio—to deliver talks about state tax policy. In addition, we've also released several state-level reports—on tax systems in Ohio, Connecticut and soon Kansas—in order to further our mission of educating lawmakers and the public about improved state tax policy around the country.
The following are a few bullet points from a presentation I delivered yesterday (Sepember 12, 2006) to a group of political and business leaders in the State of New Jersey:
- There is little doubt that New Jersey has one of the worst business tax climates in the country. In fact, in the 2006 version of the Tax Foundation’s State Business Tax Climate New Jersey ranked 49th, ahead of only New York.
- The State Business Tax Climate Index (SBTCI) measures how a state collects its tax burden because how a state raises revenue is as important as how much it raises.
- The more complex a state’s tax system is the more it changes economic behavior and in the long run this will deter economic growth.
- The recently passed budget bill in New Jersey, passed in early July to close a budget gap, had three provisions that will serve to further weaken an already badly damaged business tax climate.
- The 1% sales tax increase from 6% to 7%, the 4% corporate income surtax and the cigarette tax increase will all further erode the business tax climate in New Jersey. The sales tax increase is made doubly harmful when considering that New Jersey shares a border with Delaware, a state with no state sales tax. As several studies have shown, people will cross the border to make purchases in the low tax state, further hurting New Jersey businesses.
- New Jersey has the worst Corporate Tax system in the 2006 SBTCI, which is significantly damaging the state’s ability to compete in the global market place with countries like Ireland and Estonia that are enacting broad based- low rate corporate income taxes.
- Although New Jersey, and all states, needs to be aware of companies moving abroad, they need to be more concerned with companies moving from one state to another as the Department of Labor reports most job relocations are from one to state to another rather than to foreign countries.
- There are persistent claims that taxes do not matter to businesses and that government expenditures on services matter more.
- While we do not claim that taxes are the sole determinant of business location, it is self-evident that they are a major factor.
- Besides, increasing spending on things such as education and infrastructure may take years to pay dividends as it takes years to educate children and build roads, but a legislature can go to its statehouse today, improve the tax system and immediately help businesses in its state and attract new companies.
- Furthermore, if expenditures on highways were truly the silver bullet for economic development, West Virginia would lead the world in growth. And as the recent explosion of spending on education has shown, increased government spending on programs does not guarantee improved results.
- One needs to look no further than a few basic statistics to reinforce the fact that taxes matter to businesses.
- Nevada ranks 5th in the 2006 SBTCI and from 2000 through 2005 income and output growth in the state were 1st and 2nd fastest in the country respectively.
- New Jersey ranks 49th in the 2006 SBTCI and from 2000 to 2005 income and output grew the 45th and 38th fastest respectively.
- Certainly New Jersey has a more developed economy and higher levels of these two measures than Nevada, and New Jersey is starting with higher levels of both income and output making it harder for them to grow as rapidly. However, New Jersey is definitely growing slower than the rest of the country and although business tax climate might not totally explain why this is, it is undoubtedly a major factor.
- Furthermore, even though New Jersey will always benefit from its proximity to New York City and educated work force among other assets, it could certainly do better at spurring growth and helping its businesses.
- In recent years New Jersey has taken the backwards approach to economic development of offering targeted tax incentives to politically favored companies. The Goldman Sachs Tower in Jersey City is a prime example. Tax incentives are not an economic development tool. They are a tacit admission that the state’s tax system is so onerous that new businesses will not locate there without a special incentive.
- New Jersey’s surprisingly low state and local tax burden, as calculated by the Tax Foundation, is a powerful signal that the state’s tax system is riddled with credits, deductions and exemptions. With corporate and individual tax rates at 9 percent (without the surtax) and 8.97 percent respectively, New Jersey should be on the top of the tax burden ranks. It is not because its tax systems are riddled with holes.
- Tax incentives do not spur economic development in the long run. They only serve to temporarily create new jobs while at the same time narrowing the tax base and foisting the tax burden on businesses already located in the state. The narrower base keeps the rates high and places the burden on those businesses not receiving special treatment.
- This is essentially an economic slap in the face to businesses already located in New Jersey. Of course it is inevitable that every other business within the industry will line up at the statehouse for their break, only serving to narrow the base more.
- The government should never be in the position of picking winners and losers in the market because this alters economic decisions and in the long run negatively impacts economic growth. When it offers targeted tax incentives this is exactly what its doing.
- Now that the additional damage is done, what must New Jersey do fix its business tax climate? The answer is simple: make your business tax climate competitive with other states and competing foreign countries by broadening your bases and lowering your rates. Stop handing out politically determined tax gifts to the lucky few and improve taxes economy wide to spur growth in your state.
For more on our state-level tax policy work, check out our "State Taxes & Spending" section.
We've released the sixth episode of our "Tax Policy Podcast" this morning, featuring an interview with the always-provocative Stephen Moore of the Wall Street Journal's editorial board.
Here's a clip from the transcript, on the impact of corporate income taxes on the wages of U.S. workers:
Scott A. Hodge: I understand that in preparing for one of your recent columns you've been looking into study by Kevin Hassett, who's an economist at the American Enterprise Institute, on how the wages of workers are affected by corporate tax rates across countries. I think most lay people tend to think that companies, and especially wealthy companies pay corporate income taxes. But there's a growing understanding that real people also pay those corporate taxes. What did you find from Hassett's study and what lessons can we take from that?
Stephen Moore: Well, I think Kevin Hassett's study at the American Enterprise Institute is really quite groundbreaking because what it’s essentially arguing is that the real burden of the corporate income tax is not born by corporations or even the "rich fat cat investors," but rather the workers who work for those companies. And what Kevin's study shows is that wages rise much more slowly, and even fall, in countries that have high corporate taxes versus countries that have low corporate taxes. And this has been an age old question, as you know Scott, in the public finance literature about who really bears the burden of the corporate income tax. And what Kevin's study shows is that workers are the ones who are paying a lot of the freight. And what that means to me is, if we want to see fundamental reform of our tax system, a big first start toward that would be to abolish the corporate income tax. One way of convincing the political system that that's the right thing to do is to persuade organized labor and workers that they're the ones who are really being harmed by our high corporate income tax.
NPR's "Morning Edition" today reports on one way state lawmakers are reacting to large and growing budget surpluses in recent years: returning them to taxpayers with tax reductions.
The story focuses specifically on the State of Arizona, which has emerged as a leader in the trend toward surplus-based tax reductions. According to state Senator Dean Martin, Arizona recently enacted the largest tax reduction—in nominal terms, that is—in state history, returning more than $1 billion to taxpayers over three years. From the piece:
[S]tate lawmakers began the year with a happy problem: what to do with a $1.1 billion surplus.
It took six months to work out the details but they eventually agreed to give it back.
They reduced income taxes by five percent a year over the next two years and cut property taxes over the next three.
All in all, the cuts amount to more than a billion dollars...
The story goes on to explain how Arizona is just one of more 20 states that used their budget surpluses this year to reduce income taxes. It also notes how a handful of other states have used budget surpluses to reduce property taxes instead.
While Governor Ed Rendell of Pennsylvania opposes raising the state’s excise tax on gasoline to improve roadways, he has suggested the possibility of increasing taxes on oil companies to generate funds for road needs. From State Tax Today:
“Pennsylvania Gov. Ed Rendell (D) says he opposes an increase in the state gasoline tax to help raise the $866 million to $2 billion his own blue-ribbon commission estimates is needed to maintain roads and bridges and bail out mass transit agencies in Philadelphia and Pittsburgh.
Rendell, in the middle of a campaign for reelection, would not say how he would come up with the cash called for by the Pennsylvania Transportation and Funding Reform Commission. He said the state has always found a way to "stretch highway dollars" and would continue to do so, though he acknowledged that it is unrealistic to believe the transportation needs can be met without additional funding sources.
The only possibility Rendell suggested was an increase in the state franchise tax for oil companies.
The commission's interim report, released August 23, found that the state needs $866 million a year in new funding just to maintain the status quo in roads and transit, and up to $2.2 billion a year in new funding to improve the state's transportation system.”
Today, the American Petroleum Institute estimates motorists in Pennsylvania pay an average gasoline tax of 50.7 cents for every gallon of gasoline and 63.6 cents per gallon of diesel fuel – both tax rates rank in the top 10 nationally. Included in these rates is the state’s franchise tax on oil companies which increased to 19.2 cents per gallon of gasoline and 26.1 cents per gallon on diesel as of January 2006.
Governor Rendell is wise to consider stretching current highway dollars before raising Pennsylvania’s gasoline taxes. However, an issue that is neglected in the debate is the amount of Pennsylvania’s federal gasoline tax dollars that are “earmarked” for projects that are many times low-priority, often politically motivated and sometimes marginally related to roads.
For instance, according to Taxpayers for Common Sense, the 2005 highway bill spent $706,691,502 of Pennsylvania’s federal transportation funds on 423 earmarked projects. (see full list here). That amounts to $2,812 of federally earmarked gasoline tax dollars per lane mile of highways in Pennsylvania.
Included in the laundry list of earmarked transportation “pork” is $1.6 million for construction of the Montour Trail, Great Allegheny Passage, $600,000 to complete gaps in the Pittsburgh Riverfront Trail Network and over $4 million for projects at the Philadelphia Zoo – including pedestrian walkways and landscape improvements to surface parking lots.
It’s no wonder many of Pennsylvania’s roads are in dire need of repair when gasoline tax dollars –that are designed to build and maintain roadways – are being used to fund zoos and bike paths.