The Center's work on 'Taxes' Issues


Growing Incarceration Contributed Little to Drop in Crime, Study Finds

February 26, 2015 at 1:33 pm

Increased incarceration has contributed next to nothing to the sharp drop in crime over the past 25 years, a recent Brennan Center for Justice report finds. This research, along with other recent analysis challenging the belief that incarcerating a bigger share of offenders and for longer periods would significantly reduce crime, suggests that states would be better off spending less on locking people up and more on education, mental health, and substance abuse treatment.

As our report on criminal justice reform explains, most states’ prison populations are at historic highs; in 36 states, the prison population has more than tripled as a share of state population since 1978 (see graph).  This growth has been costly.  If states were still spending on corrections what they spent in the mid-1980s, adjusted for inflation, they would have about $28 billion more each year to spend on more productive investments or a mix of investments and tax reductions.

The Brennan Center report found that while rising incarceration rates helped reduce property and violent crime rates in the 1990s, the effect was much smaller than some other studies have suggested, accounting for 0-10 percent of the total decline over the decade.  Since 2000, rising incarceration rates account for less than 1 percent of the decline in crime rates.

“This report’s analysis reveals that incarceration has been decreasing as a crime fighting tactic since at least 1980,” the authors conclude. “Since approximately 1990, the effectiveness of increased incarceration on bringing down crime has been essentially zero.”  Factors such as an aging population, higher earnings, lower alcohol consumption, and smarter police tactics may have done as much or more to reduce crime, according to the study.

We’ve outlined four basic ways that states can reduce their prison populations to free up funds for schools and other investments in human capital: decriminalize and reclassify certain low-level felonies, shorten prison terms and parole/probation periods, restrict the use of prison for parole violations, and divert people with mental health and substance abuse issues out of the system altogether.

Making State and Local Tax Breaks for Businesses More Transparent

February 9, 2015 at 12:09 pm

State and local tax breaks to encourage certain activities, like saving for college or locating a business in a specific neighborhood, have become very costly and deserve as much scrutiny as government spending.  But, for the public, identifying these so-called “tax expenditures” can be difficult, and finding out their cost is often impossible.

The Governmental Accounting Standards Board (GASB), which sets the rules that states and localities generally follow in preparing their annual financial reports, is developing a proposal that would go far toward solving this problem.  It would require these financial reports to specify the revenue losses from state and local tax incentives to encourage specific companies to boost jobs or investment.  These arguably are the most obscure types of tax breaks.

Most states have passed legislation requiring the kind of tax-break disclosure that GASB proposes for at least one of their tax-incentive programs.  But obtaining information about the total state costs of company-specific tax incentives often requires digging through multiple sources or making special requests for unpublished information.  The obstacles are even greater at the local level; cities and counties rarely publish the cost of property tax breaks (“abatements”) they negotiate with companies.

If GASB approves its proposal, the vast majority of states and localities will have to implement it or have trouble selling their bonds, since investors want annual financial reports to conform fully to GASB rules.  (Many states’ laws require conformity.)  This will eliminate the need for public disclosure advocates to wage difficult state-by-state battles for disclosure legislation.  It also will ensure that this vital information is widely available and reported uniformly.

We commend GASB for proposing the new rule; we’re especially pleased with the mandatory reporting of forgone revenue, which even states with supposedly comprehensive tax expenditure reports often omit.  Also valuable is the proposal’s requirement that localities disclose the revenue losses that independent school districts often suffer when the cities and counties in which they’re located grant abatements over which they have no control.

Unfortunately, the draft rule doesn’t require financial reports to include the number of years that existing tax breaks will continue, let alone the revenue losses still ahead.  Nor does it require them to name the specific companies that have received tax breaks.  That’s a major flaw, given that more and more states are putting all their eggs in one basket by granting multi-billion-dollar tax incentive packages to just one or two companies.

We hope GASB modifies the proposal to correct these and other shortcomings before issuing a final rule.  Nevertheless, the proposal represents a huge step forward in tax break transparency.  If implemented, it will be a powerful tool to help budget watchdog groups and average taxpayers alike hold public officials accountable for the use of tax dollars.

Kansas Isn’t the Only Tax-Cutting State With Budget Woes

January 16, 2015 at 3:08 pm

As we noted this morning, Kansas is the poster child for the harmful consequences of large state tax cuts, which can open up huge budget holes and undermine the foundations of a strong state economy, like a high-quality education system. But Kansas isn’t the only state experiencing pain of its own making.  Big tax cuts are playing a major role in several other states’ budget woes.  For example:

  • North Carolina followed Kansas’ lead and enacted large cuts to personal and corporate income taxes in 2013.  The cuts, which started taking effect last January, are already contributing to budget shortfalls; North Carolina faces a $200 million shortfall so far in the current budget year.   Some estimates put the 2016 cost of the tax cuts at $1.2 billion (about 8 percent of the budget).
  • Pennsylvania is $2 billion (nearly 7 percent) short of the revenue it needs this year to maintain services at current levels. This is an ongoing problem — revenues haven’t kept pace with needs in recent years — and tax cuts are a major reason. For example, the state has repeatedly cut a corporate tax called the capital stock and franchise tax. This tax, which raised more than $1 billion a year before the recession, will bring in an estimated $118 million in 2016 before disappearing altogether.
  • Wisconsin projects that revenues over the coming biennium will fall $2.2 billion (6.5 percent) short of agencies’ budget requests. This comes on the heels of several sets of tax cuts over the past four years that will cost over $1 billion this fiscal year, the state’s Legislative Fiscal Bureau estimates, and likely more than $2 billion in the next biennium.

Despite the steady improvement of the national economy, these states are trying to figure out how to plug budget holes.  Other states shouldn’t follow their example.

5 Pieces of Context for the New Kansas Budget

January 16, 2015 at 10:45 am

With Kansas Governor Sam Brownback releasing his budget this morning, it’s a good time for a refresher about what’s happened since Kansas enacted one of the largest state income tax cuts in history two years ago.

  1. Kansas’ finances are a mess. The tax cuts have proven even more expensive than originally imagined, leaving the state with far less revenue than it will need to pay for schools and other state services.  To get through the past two years, the governor has nearly drained Kansas’ operating reserves, leaving the state highly vulnerable to the next recession.
  2. Kansas’ schools and other services have been weakened and face even more cuts. General state aid for schools per student is 15 percent below pre-recession levels.  And with the state’s financial picture so bleak, more cuts are likely on the way, though a court ruling that the state’s school funding is so low it violates the state constitution may help.
  3. Taxes are down for the wealthy but up for the poor. Kansas’ tax cuts didn’t benefit everyone.  Most of the benefits went to high-income households.  Kansas even raised taxes for low-income families to offset part of the revenue loss; otherwise, the cuts to schools and other services would likely have been even bigger.
  4. The tax cuts haven’t boosted Kansas’ economy.  Since the tax cuts took effect two years ago, Kansas has seen private sector jobs grow by 2.6 percent, notably slower than the 4.4 percent growth nationally.
  5. There’s little evidence that the tax cuts will improve its economy in the future.  The latest official state revenue forecast, from last November, projects personal income will continue to grow more slowly in Kansas than in the nation as a whole this year, next year, and the year after that.  (See chart.)

State and Local Tax Systems Hit Lower-Income Families the Hardest

January 15, 2015 at 9:59 am

In nearly every state, low- and middle-income families pay a bigger share of their income in state and local taxes than wealthy families, a new report from the Institute on Taxation and Economic Policy (ITEP) finds.  As the New York Times’ Patricia Cohen wrote, “When it comes to the taxes closest to home, the less you earn, the harder you’re hit.”

Only California taxes the top 1 percent of households at a higher effective rate (8.7 percent) than middle-income taxpayers (8.2 percent), ITEP found.  In the ten states with the most regressive tax systems, the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy neighbors.

Washington State’s tax system is the most regressive, according to ITEP.  The bottom 20 percent of taxpayers pay 16.8 percent of their income in taxes, while the top 1 percent pay just 2.4 percent.  After Washington, the most regressive state and local tax systems are in Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Ari­zona, Kansas, and Indiana.

A number of states, including Kansas, North Carolina, and Ohio, have made the situation worse in recent years by cutting income taxes, the only major state revenue source typically based on ability to pay.  Income tax cuts thus tend to push more of the cost of paying for schools and other public services to the middle class and poor — exactly the opposite of what is needed.