More States Propose Reverse-Robin-Hood Tax Policy

January 13, 2012 at 4:04 pm

Kansas Governor Sam Brownback and a legislatively appointed task force in Oklahoma have proposed raising taxes on working-poor families with children and impoverished seniors in order to help finance large tax cuts that mostly benefit the well-to-do.

The new proposals would eliminate each state’s Earned Income Tax Credit and grocery tax credit.  (Kansas and Oklahoma are among the few states that still tax grocery food; the grocery credits help blunt the impact of the tax on the poor.)  Low-income seniors, working parents, and others would end up paying more tax.  Other proposed changes would raise taxes on middle-income families, too.

Meanwhile, the plans would slash taxes for the highest-income households in those states.

For instance, the Oklahoma plan would cost a married couple with two children and a $25,000 income $647 a year in higher taxes and lost credits.  But it would give the top 1 percent of taxpayers, those with incomes over $357,400, an average benefit of $2,833.

As one Oklahoma task force member — a prominent Republican businessman — explained: “Basically, you’re taking money from the poor and giving it to the rich. . . .  I can’t support that.”  Unfortunately, most of his fellow task force members, including several leading lawmakers and top political appointees of Governor Mary Fallin, have endorsed the proposal.

The Kansas proposal would have a similar impact, taking hundreds of dollars from seniors and the working poor and giving thousands of dollars to the wealthy.

Remarkably, such proposals are not unique in recent years.  As we noted last year, Michigan, New Jersey, and Wisconsin have acted in the last two years to raise taxes on the poor to finance tax cuts for businesses and the wealthy.

Housing Block Grant Proposal Would Likely Pave the Way for Deep Cuts

January 13, 2012 at 2:27 pm

Representative Gary Miller (R-CA) has proposed a sweeping expansion of Moving to Work (MTW), a pilot block grant program that exempts 35 of the nation’s 3,900 public housing agencies from nearly all federal housing regulations so they can experiment with new ways to deliver housing assistance.  But experience with other block grants suggests that this would lay the groundwork for even deeper cuts in federal housing funding than Congress is likely to impose in the coming years, as our new paper explains.

Why is expanding MTW a bad idea for housing agencies?

Many agencies would likely be attracted to joining MTW if given the option.  Because of the bleak federal budget outlook and funding cuts made in recent years, they may reason that further cuts are inevitable.  Block grant funding would give agencies more flexibility to decide how to use their shrinking resources — to spend a larger share on program administration, for example, an area that experienced deep cuts in 2011 and 2012.

MTW expansion offers agencies a very risky tradeoff, however.  In exchange for more flexibility, agencies agree to receive funding for housing vouchers and sometimes public housing in the form of block grants, which are much easier targets for funding cuts than other kinds of programs.

As the graph shows, funding for the major housing block grants — the Public Housing Capital Fund, Community Development Block Grant (CDBG), HOME Investment Partnerships program, and Native American Housing Block Grant (NAHBG) — has declined sharply over the past decade, compared to funding for other housing programs.

Why are block grants at increased risk of cuts?

Since housing agencies can use block grant funds in a large variety of ways, it is difficult for policymakers to assess how many low-income families these agencies could help with a given amount of funding — or how many families would lose assistance under a proposed funding cut.  When there is no easy way to measure or predict a program’s impact, it is hard to defend program funding when the competition for resources is great.  And that competition will only intensify over the coming decade as lawmakers struggle to adhere to the spending limits in the Budget Control Act.

As a result, agencies risk losing billions of dollars in funding under a sweeping expansion of MTW.

What would large funding cuts mean for low-income families?

MTW would give agencies more choices about how to carry out these cuts — but all of them would be bad choices, with harmful consequences for low-income families.

Agencies could save some money by streamlining administrative costs, but these already are relatively small.  Instead, they would have to absorb funding cuts primarily by raising rents on families (the great majority of which are poor and include seniors, people with disabilities, or children), shifting their programs away from the neediest households (who cost the most to help), or assisting far fewer families.

For more reasons why expanding MTW isn’t a good idea, see this earlier CBPP report.

Romney’s Wrong: Federal Low-Income Program Dollars Go Overwhelmingly to Beneficiaries

January 12, 2012 at 10:22 am

Presidential candidate Mitt Romney has endorsed a proposal to eliminate major federal assistance programs for low-income Americans and turn them over to the states, often with deep funding cuts.  But the rationale he offered for doing so in this past Sunday’s “Meet the Press” debate — that the federal bureaucracy eats up most of the money Congress provides for these programs, and little actually reaches people in need — is simply false, as our new paper explains.

At least nine-tenths of federal spending for each of these programs (and in most cases, a higher percentage) reaches low-income Americans (see graph).

Romney said that “all these federal programs that are bundled to help people and make sure we have a safety net need to be brought together and sent back to the states,” and he specifically called for subjecting Medicaid, food stamps, and housing vouchers to this treatment.  He added:

What unfortunately happens is with all the multiplicity of federal programs, you have massive overhead, with government bureaucrats in Washington administering all these programs, very little of the money that’s actually needed by those that really need help, those that can’t care for themselves, actually reaches them.

This statement is far off-base.  Budget data for the major low-income assistance programs — Medicaid, food stamps (now known as the Supplemental Nutrition Assistance Program, or SNAP), the Supplemental Security Income program for the elderly and disabled poor, housing vouchers, the school lunch and breakfast programs, and the Earned Income Tax Credit — show that 91 to 99 percent of total federal spending on these programs reaches beneficiaries in the form of benefits or services, as does 90 to 99 percent of combined federal and state spending for these programs.  These figures are for fiscal year 2010, the latest year for which full data are available.

Here are the specifics:

  • Medicaid: 96.2 percent of federal spending, and 95.4 percent of combined federal and state spending, went for care for beneficiaries.
  • SNAP (formerly known as food stamps): 94.6 percent of federal spending, and about 90 percent of combined federal and state spending, went for food that beneficiaries purchased.
  • Housing vouchers: 90.9 percent of federal spending went for rental assistance for low-income tenants.
  • Supplemental Security Income (SSI): 92.8 percent of federal spending went for benefit payments to beneficiaries.
  • School lunch and breakfast programs: 97.4 percent of federal spending went to schools to subsidize their costs in operating the school meals programs.
  • Earned Income Tax Credit: Over 99 percent of EITC dollars went directly to households receiving the EITC.

Turning the programs over to the states, as Romney has proposed, likely would not reduce their administrative costs materially, if at all.  State and local governments would still incur administrative costs, and states would have to assume some administrative costs that the federal government now bears.  In addition, splitting certain administrative tasks among the 50 states would likely be less efficient and more costly than having the federal government continue to carry them out.

Congress Should Start Minding the Tax Gap

January 11, 2012 at 5:16 pm

The IRS’s new estimate of the “tax gap,” its first in six years, shows that taxpayers failed to pay $450 billion in federal taxes on time in 2006, $385 billion of which they never paid.  That’s real money (more than Medicare cost that year, as the graph shows), particularly for a country facing wrenching choices on how much to raise taxes on honest taxpayers and to cut Medicare, health and science research, education, and other vital priorities in order to rein in long-term deficits.

What is most frustrating about the new figures is that they restate a simple message that isn’t new but that the current Congress has chosen to ignore.  In the areas of the tax code with substantial information reporting and withholding requirements — most notably workers’ wages, which employers report to the IRS and on which they withhold income and payroll taxes — compliance is extremely high.  But where there is no third-party information reporting or withholding, tax collections are abysmal.  Sole proprietors, a major class of small businesses, report less than half of their income to the IRS.

In fact, under-reported business income is the single largest source of the tax gap, amounting to fully $122 billion in 2006 alone.

Eliminating the tax gap would be impossible.  Nor can any single measure substantially reduce it.  But Congress can — and should — take a number of steps that would boost collection of taxes that are already owed by many billions of dollars.

Not too long ago, there were signs that policymakers of both parties recognized this.  The Bush Administration pushed successfully for new withholding requirements on government contractors on the heels of troubling Government Accountability Office investigations showing widespread tax abuse.  Then, in the 2010 health reform law, the Obama Administration teamed up with congressional Democrats to tighten reporting requirements on certain business transactions.  These were two modest but real steps forward.

The current Congress, however, repealed both measures.  To make matters worse, in last year’s deficit-reduction legislation (the Budget Control Act), House Republicans blocked Senate Majority Leader Reid’s effort to ensure sufficient funding for IRS tax compliance activities, even though the Congressional Budget Office concluded that it would have generated net budget savings of $30 billion over a decade.

The new IRS figures are a stark reminder to policymakers that some taxpayers are not paying substantial sums of legally owed taxes and that we know how to address this problem: by expanding information reporting and withholding.

Criminal Justice Reforms Can Save States Money — But Do States Know How Much?

January 11, 2012 at 4:20 pm

Corrections spending is absorbing a growing share of states’ budgets (see map), leaving less for education, health care, and other priorities.  Some states have adopted criminal justice reforms that reduce costs while protecting public safety — offering effective addiction treatment to more people convicted of drug-related crimes instead of incarcerating them, for example, or imposing sanctions other than prison time for people who miss meetings with their parole officer.

Corrections Spending Has Grown as a Share of States Budgets More states might implement these reforms if lawmakers had a rigorous assessment of the likely impact on the state budget, such as expected cost savings.  Unfortunately, many states do a poor job of producing this vital assessment (called a “fiscal note”), as a new report from CBPP and the ACLU explains.

We examined more than 600 significant bills on adult sentencing and corrections policy that 49 states have enacted in the past three years and found that:

  • States did not write fiscal notes for about 40 percent of them. Without an official certification that a bill would save money, lawmakers may have less incentive to vote for it.
  • Most states failed to examine the bill’s fiscal impacts beyond a year or two. Some effective reforms, including certain drug and mental health treatment programs, require modest startup costs but reduce future prison spending significantly.  Lawmakers need to be aware of these long-term benefits.
  • About 15 percent of fiscal notes did not estimate a budgetary impact or indicated only that the impact was positive or negative. While some of these notes contained some useful information, they failed to accomplish the primary goal of a fiscal note:  to provide the best possible estimate of the bill’s impact on the state budget.
  • Few states’ fiscal notes explain their methodology. Without an understanding of the method used to determine a bill’s cost or savings, lawmakers and the public can’t evaluate the accuracy of fiscal notes, reducing their credibility and usefulness.
  • Some states do little to ensure the credibility of their fiscal notes. In some states, executive branch agencies produce fiscal notes with no review by nonpartisan analysts. Lawmakers must believe that fiscal notes are credible before they can rely on them when deciding how to vote.

A few states, including Texas and Washington, produce fiscal notes that meet high standards.  Our analysis describes the best practices in this area.  To achieve them, many states may need to invest more resources in their fiscal note process, for example by hiring more professional research staff and upgrading the data available to them.  But investing in good fiscal notes is far less costly than enacting or maintaining criminal justice policies that require more prison spending.