States Not Following the Money on Business Tax Breaks

April 12, 2012 at 4:53 pm

Two reports out today add to the evidence that states spend billions of dollars each year on business tax breaks without knowing if they are worth the cost — or do any good at all. As we’ve written, states should pay closer attention to these and other tax breaks, especially during difficult budgetary times like these.

  • Most states rarely or never evaluate whether their business tax breaks actually create jobs and expand the economy, according to a report from the Pew Center on the States.  A few states, notably Oregon and Washington, at least occasionally review all major business tax breaks and have begun to build regular assessments into the budget process.  Only a handful of states rigorously evaluate the economic impact of business tax breaks and draw clear conclusions about their effectiveness.
  • Sixteen states allow certain businesses to keep some or all of the state income taxes they withhold on behalf of their employees, so that workers’ taxes effectively subsidize their employer, according to a report from Good Jobs First.  These subsidies, typically designed to encourage businesses to create or retain jobs, leave the state with less revenue for schools and other public priorities and encourage a zero-sum competition among states that shifts jobs rather than creating them.  The report didn’t examine whether states have evaluated whether the tradeoff is worth it, but the Pew Center’s findings suggest that it’s unlikely.

As states continue to make tough choices about raising taxes and slashing services ranging from education to public safety, they ought to prioritize these tax breaks alongside other forms of state spending, not leave a large share of the budget off the table.

Ryan Budget Would Raise Some Taxes; Guess Who Gets Hit?

April 12, 2012 at 2:26 pm

You’ve undoubtedly heard lots about how House Budget Committee Chairman Paul Ryan’s budget plan would give millionaires an average $265,000 apiece in new tax cuts, on top of the $129,000 apiece they would get from Ryan’s call to extend President Bush’s tax cuts. Have you also heard, however, that he wants to raise taxes for some other Americans?  Want to guess who would bear the brunt of his tax hikes?

The Urban-Brookings Tax Policy Center has published new numbers that show the Ryan plan would raise taxes on low-income working families — those making up to $30,000 a year.  That’s because, while he would extend the Bush tax cuts, which are due to expire at the end of this year, he would not extend President Obama’s tax cuts for those with the lowest incomes, which will expire at the same time.  Our updated report gives the details.

Chairman Ryan’s proposed tax hikes on low-income Americans would come even as, on the spending side, his budget would slash programs that assist this same population.

Specifically, people with incomes below $10,000 would see their after-tax incomes fall by 2 percent, on average.  But people with incomes above $1 million would see their incomes rise by 12.5 percent (see graph).

Ryan Plan Would Cut Taxes Deeply at the Top, Raise Them at the Bottom

While making permanent the Bush tax cuts, which disproportionately benefit people at the top of the income scale, Chairman Ryan also would cut marginal tax rates even below the Bush levels.  In fact, his plan would drop the rate for very wealthy individuals to its lowest level since Herbert Hoover’s presidency.

Chairman Ryan says his plan would fully offset the cost of his proposed tax cuts by closing tax expenditures (tax credits, deductions, and other preferences) for high-income households.  But he hasn’t said what tax expenditures he would cut.

By raising taxes on low-income Americans and cutting programs that help them, while giving high-income people large tax cuts, the Ryan budget would significantly worsen inequality and reduce opportunity.

Here’s some of what would happen:

A single mother with two kids struggling to make ends meet by working full-time at the minimum wage would lose $1,500 (over 80 percent) of her child tax credit; she could lose some or all of her food stamps as well.  Meanwhile, Pell Grants, which help students from poor families attend college, would also face cuts, making it harder for striving low-income children to make it into the middle class.

Thinking About Tax Policy, Part 3: In the Search for More Revenue, Start at the Top

April 12, 2012 at 11:58 am

As this series has explained, our unsustainable budget deficits should remain in the forefront of tax policy discussions.  Given the need for more revenue, it is fortunate that taxes are low both historically and compared to other countries.

So the next question is: Where should we look first for more revenue?

Trends over recent decades in both income inequality and tax policy strongly suggest that we should start at the top of the income scale.  Here’s why:

  • ALTTAGTaxes at the top have fallen dramatically. The top 1 percent of taxpayers paid an average of about 23 percent of their income in federal income taxes in 2008, IRS data show.  That’s far below what they paid prior to President Bush’s tax cuts, and about a third less than they paid back in 1980 (see first graph).
  • There’s real money at the top. The top 1 percent of taxpayers had a combined income of $1.7 trillion in 2008, the most recent year available, also according to IRS data.  This is fully 20 percent of the nation’s total adjusted gross income — and much more than the bottom half of the population had (around 13 percent).  Returning the average tax rate on the top 1 percent of taxpayers to its 1996 level of 29 percent could raise about $100 billion a year, or $1 trillion over the next decade.

    By itself, of course, that wouldn’t solve the country’s long-term fiscal problems.  But $1 trillion over ten years is real money and would make a real dent in the deficit.


  • Higher-income people can and should share in the sacrifices needed to reduce long-term deficits. Low- and moderate-income households shouldn’t bear a disproportionate share of the burden through draconian cuts in Medicare, Medicaid, Social Security, and programs targeted on the poor and near-poor.

    That’s especially true given the sharp rise in income inequality over the last four decades (see second graph).

Reality Check on Who Pays Taxes

April 11, 2012 at 1:16 pm

Have you heard that close to half of U.S. households currently don’t owe federal income tax?  Does that mean, as some policymakers and pundits claim, that low- and moderate-income families don’t pay taxes, or don’t pay enough of them?  Not at all, as our updated analysis of this widely misunderstood issue explains.

Low-Income Households Pay Substantial Federal Taxes Other than Income Tax
Here are some of its key points:

  • The oft-cited figure that 51 percent of households didn’t pay federal income tax in 2009 is a temporary spike caused by the recession.  In 2007, before the economy turned down, 40 percent of households did not owe federal income tax.
  • These figures cover only the federal income tax and ignore the substantial amounts of other federal taxes — especially the payroll tax — that many of these households pay (see graphs at right).  Some 82 percent of working households pay more in payroll taxes than in federal income taxes.  In fact, low- and moderate-income people pay a much larger share of their incomes in federal payroll taxes than high-income people do.
  • Most of the people who pay neither federal income tax nor payroll taxes are low-income people who are elderly, unable to work due to a serious disability, or students, most of whom subsequently become taxpayers.
  • State and Local Taxes are Regressive

  • Low-income households also pay substantial state and local taxes.  Most state and local taxes are regressive, meaning that low-income families pay a larger share of their incomes in these taxes than wealthier households do (see graph below).
  • When all federal, state, and local taxes are taken into account, the bottom fifth of households pays about 16 percent of their incomes in taxes, on average.  The second-poorest fifth pays about 21 percent.

The fact that most people who don’t owe federal income tax in a given year do pay substantial amounts of other taxes — and also are net income taxpayers over time — belies the claim that households that do not owe income tax in a given year will form bad policy judgments because they “don’t have any skin in the game.”

Furthermore, although the federal tax system is progressive overall, state and local tax systems are regressive and undo a significant share of that progressivity.  There is nothing wrong with having one part of the overall tax system shield low- and moderate-income households, who pay substantial amounts of other taxes and generally pay federal income tax as well in other years.

Click here for the full report.

Thinking About Tax Policy, Part 2: Taxes Today Are Low

April 11, 2012 at 11:52 am

Yesterday’s post in this series explained why the nation’s unsustainable budget deficits must be in the forefront of any tax reform discussions.  That means we’ll need to raise enough additional revenue to contribute to a balanced deficit-reduction plan.

Fortunately, taxes are low right now, both historically and compared to other countries:

  • Across the board, federal taxes are far lower than they were before the early 1980s, Congressional Budget Office (CBO) data show.  For example, people in the middle 20 percent of the population paid 14.3 percent of their incomes in federal taxes in 2007 (the most recent year available), down from 18.6 percent in 1979.  For the top 1 percent of households, the average federal tax rate fell from 37 percent to 29.5 percent over this period.
  • As the chart shows, the United States is a low-tax country.  Total U.S. tax revenue (including both the federal government and the states) is below all of the other wealthy “G-7” countries as a share of the economy.  And it’s far below the average for members of the Organisation for Economic Co-operation and Development (OECD), which includes many less affluent countries (which tend to have lower taxes).

The U.S. Is a Low Tax Country

Moreover, higher taxes are not an inherent barrier to economic growth. CBO has found that tax increases used to reduce budget deficits can improve long-term economic growth and job creation.  Claims that reasonable revenue increases will sink the economy largely reflect politics and ideology, not solid analysis — as the experience of the 1990s shows.

In short, the United States needs to raise more revenue and has room to do it.