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While Illinois raises taxes, Georgia reforms them
While Illinois was busy raising taxes, Georgia was busy finding ways to make the tax code simpler, fairer, more stable, and more competitive for the 21st century. On January 7, the Special Council on Tax Reform and Fairness for All Georgians released its final report of recommendations for reforming Georgia's antiquated, agriculture-based tax system. Sometime in the next few weeks, the legislature will act on the Council's recommendations. From NTU's perspective, there are some good recommendations but also some proposals that need attention.
As NTU stated in a letter to Georgia lawmakers, the positive recommendations include a proposal to reduce the personal and corporate income tax rates. The report calls for the elimination of the current six tax brackets and a substantial reduction in the personal income tax (from the current highest marginal rate of 6 percent) over time. The Council envisions a rate that does not exceed 4 percent in 2014, at which point the income tax changes should (by the Council’s estimates) be revenue neutral. Additionally, the report calls for the corporate income tax rate to maintain parity with the personal income tax. As we said in our letter, "Flattening, simplifying, and reducing the income tax rates will help spur investment, lead to more job growth, and provide more revenue stability."
But while NTU supports the income tax reductions, there are several aspects of the Council’s report that we have concerns with. For example, we are concerned that the plan’s recommendation of an income tax rate higher than the revenue-neutral level of 4 percent for several years after the plan’s adoption would lead to substantially higher tax collections, an outcome that we cannot support because it is not fair for taxpayers. Furthermore, as we stated in the letter, the Council's call for "a flat communications service excise tax fails to take into account the unique aspects of how each service is delivered. Communications taxes differ because the communications technologies themselves differ in how they interact with public resources. Satellite television, for example, does not utilize public rights of way, so imposing a 7 percent tax on over one million satellite television subscribers in Georgia to pay for something they don’t use makes no sense. Additionally, the proposal to increase the cigarette tax is misguided because it can disproportionately harm the poor and small retailers without raising the projected revenue. Such has been the case in numerous places, among them New Jersey and the District of Columbia."
Reforming the tax code to alleviate the burdens on taxpayers is a worthwhile pursuit. The best possible reform is one that remedies the distortive and burdensome aspects of a tax code, but remains revenue neutral. There are some questions about this tax code that the legislature can and should address in the weeks ahead. Georgians are counting on their lawmakers to build a better tax code for a stronger, more prosperous economy.0 Comments | Post a Comment | Sign up for NTU Action Alerts
State Budgets Getting Worse Before Better
First the good news: state revenues are rising. After three years, state revenues that dried up due to the Great Recession have increased steadily and helped to fill state treasuries. The flow of revenue has been so solid that some states, such as Maryland, have reported surpluses at the end of the last fiscal year.
But here’s the bad news: despite the growth in revenue, states should expect to confront another round of massive budget deficits, some of which will be even worse than what the states have encountered thus far. States already face budget shortfalls in excess of $82 billion, according to the National Conference of State Legislatures. But that figure will likely be higher as state budget officials review their fiscal figures over the next several months.
Revenue collections, according to Stateline, have fallen so much in this recession that it will take years for the collections to return to precession levels. But another problem is that the cost of government is increasing, especially in healthcare, education, and public safety budgets. Given the nature of the political process, governors and state lawmakers will try to balance budgets and forestall cuts by resorting to tax increases, one-time fixes, borrowing, and accounting gimmicks. To name just one example, California’s Governor Jerry Brown is already talking about putting on the ballot a measure that would extend several unpopular tax hikes.
But it is also possible that the dire circumstances states find themselves in will finally force state officials, regardless of their party affiliations, to have the difficult conversation among themselves and with constituents about what services government can and should provide. For examples, Arizona’s Republican governor and New York’s Democrat governor are examining ways to reduce the size of their Medicaid programs by limiting eligibility, an idea once thought to be impossible.
The road back to the pre-recession days will be long and hard. Predictions for economic recovery are grim, especially as the Federal Reserve projects that unemployment will be at 8% through the end of 2012. Further, the rate of growth will have to be consistently higher than historic levels. By one estimate, Oregon’s revenues will not return to pre-recession levels even after a decade of growth.
What all this means for states is that Great Recession will have a greater impact than originally thought and state officials must factor this into their policies. No longer can states spend without restraint or under the assumption that revenues will quickly return to fix fiscal problems. The states must adjust to a new normal by having an honest conversation with taxpayers about the tough decisions ahead.0 Comments | Post a Comment | Sign up for NTU Action Alerts
Illinois' tax hike fallout
Shortly after Illinois Governor Pat Quinn, Speaker Michael Madigan, and Senate President John Cullerton rammed through a $7 billion income tax hike, the largest in state history, Scott Walker, Wisconsin’s new governor, had three words for Illinois businesses: Escape to Wisconsin. The phrase comes from an old Wisconsin tourism campaign. But the phrase is very appropriate for right now.
Illinois’ multi-billion dollar tax hike, which includes a 46% increase in the state’s corporate income tax, will fall heavily on Illinois businesses. In fact, according to the Tax Foundation and the Illinois Policy Institute, the corporate income tax rate, when combined with the federal corporate income tax and property replacement tax, gives Illinois the dubious honor of having the highest corporate income tax in the industrialized world. No wonder then that employees of Illinois-based heavy manufacturer Caterpillar sent 1,200 e-mails in opposition to the tax hike to just one state lawmaker.
Now that Illinois’ lawmakers have decided to increase the cost of doing business there, officials in other states like neighboring Wisconsin are trying to lure business away by emphasizing lower taxes relative to Illinois. Walker has proposed a complete elimination of the corporate income tax for two years for firms that move to Wisconsin. He is also pushing a series of proposals to reduce state spending and limiting tax increases.
Of course, Wisconsin’s Walker will not be the only state governor looking to take advantage of Illinois’ recent actions. Indiana’s governor Mitch Daniels, who has made a name for himself by pairing back spending, reforming health care, and signing budgets without tax increases, has talked about tax reform and has extended an invitation for Illinois businesses to relocate to the Hoosier state. Michigan’s Rick Snyder is already working on a proposal to reform his state’s dreaded business tax surcharge, which many observers say has stifled job growth in the state. Even Chris Christie in far away New Jersey has been promoted his state as a haven for businesses who want to flee the tax and spend culture in Illinois.
Of course, as businesses flee Illinois it will only mean less revenue for the state as the taxpayers Quinn, Madigan, and Cullerton are counting on to finance their overspending take their money elsewhere.
One of the great things about our federal system is that is allows states to experiment and compete, which yields the best ideas and policies. When a state does something right, it is copied widely. But when a state does something wrong, states avoid it or poach from its mistakes. Given the reaction so far, Illinois has clearly done something wrong with increasing taxes and other states will take full advantage of it.
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Happy Payroll Tax Holiday!
Many of you may have noticed a slight bump in your paychecks this month. No, it’s not an accident! The payroll tax cut, signed into law under last year’s tax cut compromise, just went into effect for more than 159 million American families. As you may recall, December’s tax package included a 2% cut in the employee portion of the payroll tax.
According to The Hill, “Under the payroll tax holiday, the average worker will see an annual paycheck increase of about $700, and the average family will see an increase of more than $1,000.” Furthermore, “Economists estimate the U.S. is likely to see economic growth of 3 percent to 4 percent in 2011.”
While we had grave concerns surrounding many of the provisions in the “compromise,” we were very pleased to see the payroll tax cut included. It’s a pro-growth measure that is much needed as our nation continues to face high unemployment and a dismal economic climate.
Enjoy! For the next 12 months anyway.
And in case you missed it, go here for a closer look at additional provisions within the tax deal.1 Comments | Post a Comment | Sign up for NTU Action Alerts
Compromise is Costly
As many of you know, we at NTU are ardent supporters of full repeal of the onerous death tax. The levy destroys hard-earned savings and pushes small and family-owned businesses into bankruptcy. Economists have acknowledged that the tax's adverse effects on the economy exceed generated revenues, and studies show that permanent repeal would create 1.5 million jobs and slash the unemployment rate by a full percentage point over the next two years. One of our biggest concerns with the tax cut compromise that passed Congress in late 2010 was the resurrection of the death tax from 0 to a 35% rate and $5 million exemption. Mind you, this "deal" expires in 2012, at which time the tax will return to pre-2001 levels (55% rate and $1 million exemption).
There is talk that some will fight for a permanent arrangement of current rates (again, 35% rate and $5 million exemption) to avoid a more devastating blow to American taxpayers, but we don’t believe that’s the answer. The only way to truly protect taxpayers and spur economic growth is through full, permanent repeal.
A new study by our friends at the American Family Business Foundation highlights the number of small businesses, farms and households susceptible under the new law and how the impact of the death tax is growing faster than inflation, subjecting far more individuals to the levy than originally intended.
Here are a few key findings from the report:
I encourage all of you to check out the new study for a more detailed explanation. The American Family Business Foundation has provided another great resource for the death tax debate, and we look forward to continuing to work with them as we push for full, permanent repeal in the 112th Congress.0 Comments | Post a Comment | Sign up for NTU Action Alerts
Illinois jumps off a cliff
Well, they did it despite our urging to the contrary. Just hours before a new General Assembly took office, Illinois legislators, at the urging of Governor Pat Quinn, narrowly approved a massive 67% increase in the personal income tax and a 46% increase in the state's corporate income tax. The tax hikes will take $6.8 billion from Illinois taxpayers to help fill up state coffers and finance $12 billion in borrowing to close an expected $15 billion budget gap.
Proponents claim that the tax hikes are necessary and temporary to address the state's budget crisis.
But notably absent from the plan was any real reduction in any state government spending. Without a reduction in spending from state programs or pension obligations, there is nothing to reduce the pressures on the budget that lead to the tax hikes. Worse, the tax hikes are so large and broad that they could seriously harm the economic recovery in Illinois by driving companies and jobs out of the state. The Illinois Policy Institute estimates that the tax hikes will cost at least 100,000 jobs. Perhaps that is why the Chicago Tribune's editorial assessing the tax hikes is entitled, "Goodbye, jobs."
While I disagree with the result, it is the result and I have to live with it. I just hope Illinoisans understand what has happened and realize the consequences of these tax hikes by the time of the next election. As I stated in NTU's press release on the subject, "Illinoisans already have to bear the 14th-highest state and local tax burden per capita in the nation. It makes no sense to pile more onto such a heavy load, especially in a down economy. Unless Governor Quinn and the State Legislature agree to reverse their destructive tax policies and significantly reduce state spending, residents are in for even tougher times ahead."
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Bag Taxes Should be Thrown Out
For most politicians a new tax or regulation is the go-to solution for a purported problem. In the case of saving the environment a popular choice is the “bag tax.” In 2010 alone, 15 states had proposals pending to impose a tax per plastic bag consumed at check out lines statewide. This year lawmakers in Virginia and Maryland will try again. Similar to the 5 cent tax already in place in neighboring Washington, DC, politicians in these states want to discourage bag consumption in order to reduce the plastic waste that ends up in rivers and landfills. In reality, the bag tax is just another money grab. Its attempt to control individual behavior merely pushes up costs on businesses and shoppers, all with little environmental benefit.
In the coming weeks Democratic lawmakers in both states will propose their statewide tax proposals on plastic grocery bags. In Maryland, the tax would be 5 cents per bag and 20 cents in Virginia to finance Chesapeake Bay clean up efforts. State Delegate Al Carr of Montgomery and Delegate Joseph Morrissey of Henrico are the primary sponsors of the plans in their respective states. Each have been perennial supporters of the tax. Last year, Morrissey even tried to have plastic bags banned altogether.
While jacking up the price or even banning bags outright seems logical to reduce plastic bag waste, the opposite seems to happen. When government taxes or limits access to one product consumers substitute it for others that serve the same purpose. For example, people reuse disposable paper and plastic bags for a number of common household purposes: as garbage bags, for storage, as food containers, for pet waste or as packing material.
When government artificially inflates their costs consumers will likely substitute for other paper and plastic products, like garbage bags, to use for these secondary purposes. Stimulating bulk purchases of plastic bags can cause equal environmental damage. Ireland is a prime example of this. Shortly after instituting a nationwide bag tax, the nation's largest food retailer reported a 77% increase in the sale of trash can liners. Other retailers reported similar increases. In the United States, Seattle, Washington instituted a 20 cent tax in January 2009, while San Francisco, California banned bags altogether. Both measures had little effect on the cities’ litter reduction goals.
Moreover, these debates get caught up in the political process, benefiting those special interests with government connections. Del. Al Carr, the sponsor of the Maryland bill, said he has plans to tweak it this year to exempt farmers' markets and roadside stands in response to concerns from the Maryland Farm Bureau.
NTU will keep you posted as these proposals move forward in both Legislatures.1 Comments | Post a Comment | Sign up for NTU Action Alerts
2011 Tax Changes
Tax policy can be complicated, even for the wonkiest of them out there. And with Congress’ last-minute political charade before the holidays, do you really know what you face in 2011? And, if you do, do you know how long it will last? Remember that provisions in the tax cut compromise are temporary, with a few extensions expiring as early as the end of this year.
But let’s deal in the present, shall we? The Wall Street Journal published an excellent piece today entitled “Tax Changes for 2011: A Checklist” that better enables taxpayers to adequately plan their finances for the next 365…er 358 days.
Here are some of the changes:
Income Taxes: They will carry over from 2010 and expire in 2012, but brackets are a tad higher due to adjustments in inflation. Expires: end of 2012
Investment Taxes: Zero for taxpayers in the 15% bracket and below. 15% rate for those in the 25% bracket and above. Expires: end of 2012
Death Taxes: Resurrected to 35 percent rate and $5 million exemption. Expires: end of 2012
Payroll Taxes: Temporary 2% cut in employees’ share of Social Security taxes, saving a maximum of $2,136 per worker. For most, this will come as an automatic adjustment to withholding. For those who are self-employed, the IRS has said they hope to release a quarterly withholding worksheet soon. Expires: end of 2011
Alternative Minimum Tax (AMT): The patch sets single filer exemption at $47,450 and $74,450 for married couples. Expires: end of 2011
Roth IRA Conversion: Income limit has been removed, but 2011 converters no longer have the option of deferring conversion income into later years.
Medical Expenses: Workers with Flexible Spending Accounts (FSAs) can no longer use pretax funds to purchase over-the-counter medicines without a prescription. You may continue to use funds for nonprescription items like crutches and contact-lens solution, but only if permitted by your health plan. IRS Publication 502 provides more specifics.
Energy Tax Credits for Homeowners: “25(c)” credit for energy-efficient improvements has been extended, but the WSJ admits that it will be useful to few people. The lifetime $500 credit will not qualify those who received the $1,500 credit last year. Expires: end of 2011
Thanks to writer Laura Sanders for a comprehensive look at what taxpayers can expect for 2011. Unfortunately, many of these provisions are set to ultimately return to 2001 levels, setting up another, near inevitable legislative battle in 2012. Enjoy the good stuff while you can.4 Comments | Post a Comment | Sign up for NTU Action Alerts
Illinois Needs to Kick the Cigarette Tax Habit
As the country slipped into the Great Recession in 2008, state tax revenues have sharply declined. For many lawmakers raising taxes on smokers seemed the obvious choice. Not only would a higher rate generate a supposed revenue boon, higher cigarette prices would encourage people to kick the habit. But as with any policy, a cigarette tax hike produces many unintended consequences.
From 2007 through 2009, 22 states hiked their cigarette taxes. Tobacco state South Carolina and five other states followed suit in 2010. Now Illinois is poised to jump on the bandwagon with a tax package that includes hiking cigarette taxes by a buck. The package is expected to be voted on in the House today and already has strong support from Senate President John Cullerton, D-Chicago. Supporters hope outgoing “lame duck” lawmakers will back an increase because they won’t have to face voters in 2012.
The hike represents a 102% price increase per pack. Cook County smokers alone would see the price go well over $10, prompting many to go to adjoining states and counties with lower rates. Neighboring Missouri, with its far lower 17 cent rate, is sure to attract them.
Evidence of this occurring in other states abounds. For example, when New York increased its cigarette tax by $1.60 in June 2010 it brought the average price per pack to $9.20 state-wide, and a whopping $11 per pack in the city. Looked for cheaper way to light up Pennsylvania was their hot spot, where a generic pack of 20 costs nearly the same as the new $4.35 New York rate. Data from the Pennsylvania Department of Revenue show that from September 2009 to September 2010 the state saw its cigarette tax revenue increase by nearly 60 percent, while New York tax collections remained stagnant or falling. Missouri is likely to experience a similar revenue windfall.
A recent report released by the Michigan-based Mackinac Center for Public Policy attempts to quantify the amount of cigarette smuggled into states. Comparing legal per capita sales of cigarettes to survey data on the percentage of smokers in each state they determined that states with higher taxes have more inbound smuggling. No surprise New York ranks among the top five smuggling destination states at 47.4 percent of the state’s total consumption.
Counterfeiting and violence result as individuals profit in a newly created underground tobacco market. Willing to break the law, individuals engage in hijacking, theft, and destruction of property to ship and sell contraband cigarettes in high tax states. The report projects that a $1.00 tax hike will increase total smuggling in Illinois to 26.3 percent of total cigarette consumption, up from just 5.9 percent in 2009.
Many supporters of these taxes confuse declines in cigarette sales following a tax hike with people kicking the habit. They assume a 20 percent drop in sales means 20 percent of people no longer smoke. Data shows this is not the case. High cigarette taxes increase smuggling, create dangerous black markets, and deplete state coffers of revenue.0 Comments | Post a Comment | Sign up for NTU Action Alerts