South Hampton Roads Earned Income Tax Credit Coalition

Expanding Sales Tax Base, Eliminating Targeted Business Tax Breaks a Better Solution, According to Tax Foundation Report

Washington, DC, March 11, 2010 -- Illinois Gov. Pat Quinn yesterday called for a 33% increase in the state's individual income tax rate, but a new Tax Foundation report cautions against damaging one of the only good features of the state's tax system. Instead of raising the income tax rate from 3% to 4%, lawmakers should broaden the sales tax base and end targeted business incentives while lowering statutory rates.

"Illinois shouldn't rely on taxes alone to bring the state out of the red, but a change in tax policy could help its economy," said Tax Foundation State Analyst Justin Higginbottom, who wrote the report. "Increasing taxes would worsen the state's already harsh business tax climate and make the state less attractive to the businesses and individuals it should be courting."

Tax Foundation Fiscal Fact, No. 216, "Illinois Should Respond to Recession by Broadening Tax Bases and Spending Frugally, Not by Raising the Personal Income Tax Rate," is available online at http://www.taxfoundation.org/publications/show/25979.html.

Illinois ranks 30th out of 50 (where 1 is the best) in the Tax Foundation's 2010 State Business Tax Climate Index, which measures each state's "tax-friendliness" toward business. The state scores worse than three neighbors (Indiana is 12th, Missouri is 16th and Kentucky ranks 25th), while two neighboring states score in the bottom 10 (Wisconsin is 42nd and Iowa is 46th).

Illinois's state-local tax burden of 9.3 percent (the percentage of their income that Illinois residents pay in state and local taxes) ranks slightly below the national average of 9.7 percent. Illinois' neighbors have similar burdens, except Wisconsin, which has the 10th highest burden nationally at 10.2 percent.

The state's property taxes on homeowners are 6th highest in the country as a percentage of median home value - higher than all neighboring states except Wisconsin. Illinois's combined state and average local sales tax rate of 8.4% is higher than all of its neighboring states and 6th highest in the country (the total rate is higher in some localities, such as Chicago where state, county and city taxes total 10%).

Illinois's corporate income tax rate of 7.3% (the state corporate income tax of 4.8% plus the personal property replacement tax of 2.5%) is comparatively high nationwide, but three of the state's neighbors have even higher rates (Iowa's is 12%, Indiana's is 8.5% and Wisconsin's is 7.9%) while two have lower rates (Missouri's is 6.25% and Kentucky's is 6%).

The best feature of Illinois's tax system is its flat personal income tax rate of 3% (the lowest flat rate in the country). A flat rate with few deductions and credits stabilizes revenue flows from year to year, and minimizes distortionary decision-making by individuals and businesses.

The report notes that one way to improve the state's tax system is to expand the sales tax base to include all end-user goods and services. The state chose to forego over $1.4 billion in tax revenue in 2008 by exempting groceries, drugs and medical appliances from the state sales tax. Another suggestion is to end targeted business incentives such as film tax credits and tax breaks for the bio-fuel industry.

"With these changes, Illinois can create a stable revenue base for the future and concentrate on making the state attractive to businesses and residents."

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.

$1 Per-Pack Increase Would Make Georgia's Cigarette Tax Rate Higher Than Neighbors, Harm Low-Income

Washington, DC, March 10, 2010 -- The $1 cigarette tax hike being proposed by some Georgia lawmakers would push cigarette sales out of state or into the black market, according to a new Tax Foundation report.

Raising Georgia's cigarette tax from 37 cents to $1.37 would make Georgia's cigarette tax higher than all of its neighbors. Florida's cigarette tax is $1.34, Tennessee's is 62 cents, North Carolina's is 45 cents, Alabama's is 42.5 cents and South Carolina's is 7 cents.

"A $1 per-pack increase in the state cigarette tax will put Georgia at a comparative disadvantage for cigarette sales," said Tax Foundation State Analyst Justin Higginbottom, who authored Tax Foundation Fiscal Fact, No. 215 "Georgia Should Refrain from Relying on Smokers to Fill Budget Hole." The Fiscal Fact is available online at http://www.taxfoundation.org/publications/show/25964.

"This might lead to lower than expected tax revenue for the state and provide incentives for criminals to profit -- rather than the state -- off Georgia's high-priced cigarettes," Higginbottom said.

Border shopping has not been uncommon with tobacco products since the flurry of state tobacco tax increases during the recession, the report notes. After D.C. increased its cigarette tax from $2.00 to $2.50 to close a budget hole in FY 2010, it raised lower than expected revenue due likely to Maryland, Virginia, and D.C. smokers shopping outside the District.

While smokers are politically popular targets, cigarette taxes are regressive and disproportionately harm low-income smokers. A separate Tax Foundation report also found that Georgia's tobacco tax benefits high-income counties the most by transferring funds to them in the form of state services from lower-income areas where more people smoke. Residents of the Cobb-Douglas health district, whose incomes are 20 percent higher than elsewhere in the state, received $1.29 in state services for every $1 its residents paid in cigarette taxes, for a total transfer of $4.2 million.

"Advocates of increasing Georgia's cigarette tax so drastically should consider its consequences and basis as sound public policy," Higginbottom said. "A dollar increase in Georgia's cigarette tax would increase the incentive for border shopping and cigarette smuggling as well as benefit higher-income residents at the expense of low-income smokers."

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.

About 51.6 Million Filers Were "Nonpayers," Including Some Families Making Over $50,000

Washington, DC, March 10, 2010 -- A record number of the 142 million tax returns filed in 2008 resulted in no tax payment, according to a Tax Foundation analysis of IRS data. That means the tax filers got back every dollar that had been withheld from their paychecks, and often more. Roughly 51.6 million tax returns, or 36.3 percent, were filed by such "nonpayers," people whose exemptions, deductions and credits wiped out any federal income tax due.

A family of four earning more than $50,000 can have no income tax liability after taking the standard deduction and the child tax credit.

"Two records were set in 2008: the most nonpayers and the highest-earning nonpayers," said Tax Foundation President Scott Hodge, who authored Tax Foundation Fiscal Fact, No. 214, "Record Numbers of People Paying No Income Tax; Over 50 Million 'Nonpayers' Include Families Making over $50,000." The Fiscal Fact is available online at http://www.taxfoundation.org/publications/show/25962.html.

"Nonpaying status used to be a sure sign of poverty, but thanks to increased use of the tax code to deliver social benefits, incentivize behaviors and funnel money to targeted groups, middle-class families have now been pulled into the growing pool of nonpayers," Hodge said. "We're now in a situation where a record number of tax filers are completely disconnected from the cost of government."

The number of nonpayers has increased by 59 percent in less than a decade, growing from 32.6 million in 2000 to 51.6 million in 2008. In the same time period, the total number of tax filers grew by only 10 percent.

The last record for the number of nonpayers was set in 2006, when 33 percent of tax filers paid nothing. A record has been set every year since 2002 (30.1 percent), as tax cuts throughout the Bush years - especially the refundable child tax credit - pushed low- to middle-income people off the federal income tax rolls. The major tax change in 2008 was the Economic Stimulus Act of 2008, included tax rebates that boosted the number of nonpayers.

The number of nonpayers has increased by 59 percent in less than a decade, growing from 32.6 million in 2000 to 51.6 million in 2008. In the same time period, the total number of tax filers grew by only 10 percent.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.

Expansive Nexus Standards Burden Interstate Commerce, Harm Economic Growth

Washington, DC, March 8, 2010 -- As more states consider enacting so-called "Amazon tax" laws to force online retailers to collect sales taxes, a new Tax Foundation report cautions that such policies would not only fail to relieve short-term budget problems but also hurt long-term economic growth.

New York, Rhode Island, North Carolina and Colorado have Amazon taxes, and the Multistate Tax Commission last week indicated its plans to draft model legislation based on the laws in place in those states.

"Enactment of an Amazon tax is an aggressive and unconstitutional assertion of state power," said Joseph Henchman, the Tax Foundation's Tax Counsel and Director of State Projects, who authored the report. "These taxes are the latest in a series of efforts to eliminate the long-standing 'physical presence' standard and replace it with a nebulous, arbitrary 'economic presence' standard, where businesses can be taxed in every state where they have customers - meaning retailers large and small must track more than 8,000 sales tax rates and bases."

"This flies in the face of the argument that Amazon taxes 'level the playing field' between brick-and-mortar and Internet-bases businesses," Henchman said.

Tax Foundation Special Report, No. 176, "'Amazon Tax' Laws Signal Business Unfriendliness and Will Worsen Short-Term Budget Problems," is available online at http://www.taxfoundation.org/publications/show/25949.html.

Amazon taxes (also known as affiliate nexus taxes or affiliate taxes) require retailers that have contracts with "affiliates" -- independent persons within the state who post a link to an out-of-state business on their website and get a share of revenues from the out-of-state business -- to collect the state' sales and use tax. Even groups such as the National Conference of State Legislatures and the Streamlined Sales Tax Project oppose Amazon taxes.

Amazon taxes are unlikely to produce revenue in the near term, according to the report. New York continues to face a lengthy legal constitutional challenge, and Rhode Island has even seen a drop in income tax collections due to the law.

Unconstitutionally expansive nexus standards such as Amazon tax laws threaten interstate commerce and the national economy by discouraging business expansion.

"The real concern should be the extent of state powers," Henchman said. "Should states be able to reach beyond their geographic borders and impose their tax system on everything everywhere? Do we really need to make sure that taxes are the same in all states, and that people can't shop by tax rates as they shop by price, quality or convenience?"

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.

House Ways and Means Committee Hearing Focuses on Inflation-Adjusted Income Tax Brackets, Treatment of Retirement Income, Estate Taxes and Property Tax Assessments

Washington, DC, March 4, 2010 -- Tax Foundation Economist Kail Padgitt, Ph.D., will address four pieces of legislation being considered by Maryland's House Ways and Means Committee at a hearing scheduled for 1 p.m. today:

• HB 238, the Taxpayer Protection Act, would index state personal income tax brackets based on the annual change to the Consumer Price Index, creating stability within the tax code in terms of economic purchasing power and preventing "bracket creep."
• HB 300, the Fairness in Taxation for Retirees Act, would equalize the way the tax code treats retirement income from pensions and non-pension plans.
• HB 312, the Family Property Protection Act, would recouple Maryland's estate tax with increases in the federal estate tax exclusion, reducing compliance costs associated with the tax.
• HB 366, the Homeowners' Property Tax Assessment Cap Reduction, would cap annual state property tax assessment increases at 5 percent instead of 10 percent, which would give a tax cut to people whose property appreciates rapidly.

Padgitt's full testimonies are available online: HB 238, HB 300, HB 312, HB 366.

"Maryland taxpayers have for years been hit by a hidden tax increase each year as inflation pushes them into higher tax brackets," Padgitt said. "The Taxpayer Protection Act would make sure Marylanders don't pay higher income taxes unless their purchasing power actually increases."

"Equalizing treatment of retirement accounts, as HB 300 does, would eliminate the distortive effects of tax incentives favoring pensions over other types of retirement income, and it would reduce tax code complexity as well," he said. "Meanwhile, recoupling Maryland's estate tax with increases in federal estate tax exclusions under the Family Property Protection Act would provide Marylanders the benefit of reduced compliance costs. Finally, lowering the cap on state property tax assessments under HB 366 would shift property tax burdened from people whose property values soar to people whose property values increase more modestly or fall."

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.

Pennsylvania Governor Proposes Broadening Sales Tax Base and Lowering Rate, Reducing Corporate Income Tax Rate, Eliminating Cap on Net Operating Loss Carry-Forwards

Washington, DC, February 26, 2010 -- Pennsylvania Gov. Ed Rendell's $66.4 billion budget contains some sound tax policy reforms, but it also boosts spending and relies on one-time money, out-of-state businesses and the federal government, according to a new Tax Foundation report.

"Pennsylvania is one of the states that last year used one-time stimulus money to backfill their budgets, postponing meaningful steps to prioritize public expenditures," said Tax Foundation Director of State Projects Joseph Henchman, who authored the report. "As a result, the state now faces a built-in multi-billion dollar annual budget gap from those disappearing federal revenues. Governor Rendell proposes using tax increases to bridge that gap, but even those aren't enough to completely close it or address future budgets."

Tax Foundation Fiscal Fact, No. 213, "Pennsylvania Governor Proposes Spending Boost, Broader Sales Tax, Heavier Business Taxes," is available online at http://www.taxfoundation.org/publications/show/25905.html. The significant tax proposals in Rendell's budget include:

• Broadening the state sales tax and lowering the rate from 6% to 4%. The change would eliminate many unjustified exemptions (while retaining the largest unjustified exemptions: most groceries, clothing, legal and medical services) but would double-tax some retail items by taxing business-to-business transactions. The change would be a net revenue increase despite the rate reduction, raising $531 million in FY 2011 and nearly $900 million in FY 2012.
• Eliminating sales tax vendor compensation, which would raise $76 million in FY 2011.
• Reducing the corporate income tax rate from 9.99% to 8.99% and eliminating the cap on net operating loss carry-forwards, but imposing combined reporting and single-sales factor apportionment. The net result of this package of positive and negative reforms (which are expected to raise $66 million in FY 2011 and $167 million in 2012) would be an increase in business tax burdens, particularly for out-of-state businesses.
• Imposing a new severance tax on natural gas extraction, which would raise $161 million in FY 2011.
• Seeking federal aid by increasing unemployment benefits and exploiting the federal Medicaid matching fund system.

"Some of the governor's proposals -- such as broadening the sales tax while lowering the rate, uncapping losses that businesses can deduct and lowering the corporate income tax rate -- are moves in the right direction, but the budget also boosts spending significantly, relying on one-time money, out-of-state businesses, and the federal government to do so," Henchman said. "Without reprioritizing expenditures, slowing the rate of state spending, and meaningfully addressing the state's structural deficit, Governor Rendell may have difficulty selling his proposal to legislators and the people of Pennsylvania."

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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Tax Foundation Fiscal Fact, No. 213, "Pennsylvania Governor Proposes Spending Boost, Broader Sales Tax, Heavier Business Taxes," is available online at http://www.taxfoundation.org/publications/show/25905.html. To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.

Legislators Should Avoid Targeted Tax Increases, Instead Implement Reforms Based on Sound Tax Policy

Washington, DC, February 19, 2010 -- Georgia lawmakers are mulling tax increases and gimmicks to plug a projected budget gap of more than $2 billion, but a new Tax Foundation report cautions against such tactics and urges tax reform that will stabilize revenue.

Eliminating targeted tax incentives, lowering the state corporate income tax rate and moving to a flat personal income tax rate would improve Georgia's tax system, according to the report, Tax Foundation Fiscal Fact, No. 212¸ "Georgia Should Respond to Recession with Tax Reform, Not Tax Gimmicks."

"Cutting useless incentives, broadening bases, and lowering rates will make Georgia more competitive, less distortionary, and save the state money," said Tax Foundation Policy Analyst Justin Higginbottom, who authored the report. "Georgia should focus on emerging from this recession with a better tax system."

In the Tax Foundation's 2010 State Business Tax Climate Index, which measures the business-friendliness of states' tax systems, Georgia ranks close to the middle nationally but worse than four of its five neighboring states. Georgia residents pay the 16th-highest state-local tax burden in the country, 9.9% of all income earned in the state, and higher than all of its neighbors.

Repealing tax incentives, which cost the state $265 million from 2004 to2006, would create a more attractive climate for all business and help fill the budget gap. One example is the state's film tax credit program, which fail to live up to their promises of job creation and economic growth at a real cost to the state.

While Georgia's corporate income tax rate of 6% is about average nationally and regionally, when combined with the federal tax rate of 35%, it's higher than almost any country in the world. Georgia also is one of 22 states that also have a tax on the net worth of business, called a net worth or capital stock tax. Georgia is one of only 10 states that have a tax on business' inventory. Lowering the corporate income tax rate and repealing the state's inventory and net worth tax would improve the state's tax climate.

Georgia's average state and local sales tax of about 7% is 17th-highest nationally and on par with its neighbors, but expanding the sales tax base to include groceries and services would allow for the overall rate to be lowered without sacrificing revenue. Lawmakers should avoid targeted tax hikes on products such as tobacco and other "sin taxes." A recent Tax Foundation report found that cigarette taxes burden low-income taxpayers and benefit high-income residents.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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Tax Foundation Fiscal Fact, No. 212¸ "Georgia Should Respond to Recession with Tax Reform, Not Tax Gimmicks," is available online at http://www.taxfoundation.org/publications/show/25871.html. To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.

New Tax Foundation Report Compares Worldwide, Territorial Systems of Corporate Taxation, Emphasizes Need for Lower Federal Corporate Income Tax Rate

President Obama's recently released budget reemphasizes the administration's goal to curtail tax deferral for income earned abroad by American businesses, but a new Tax Foundation study argues that this would harm U.S. competitiveness in low-tax countries.

The study is Tax Foundation Special Report, No. 174, "The Importance of Tax Deferral and A Lower Corporate Tax Rate," and is written by Tax Foundation Senior Fellow Robert Carroll, Ph.D.

"Eliminating deferral under our current worldwide system of taxation would immediately subject all foreign earnings of American multinational companies to the high federal corporate tax rate and reduce competitiveness abroad," Carroll said. "On the other hand, a territorial tax system - one that would exempt foreign income from U.S. tax - would have distortionary effects on business decisions such as locating income and expenses. In both cases, a lower federal corporate tax rate would help offset the negative consequences."

Currently, the U.S. system for taxing foreign earnings blends aspects of both a worldwide and territorial system. U.S. multinational corporations are taxed on their worldwide income, but active earnings are not taxed until repatriated to the U.S., minus credits claimed for foreign taxes paid. Reforming the corporate tax system requires balancing neutrality between foreign and domestic production with international competitiveness, Caroll notes.

"We do not want our tax law to favor foreign production over domestic production, and at the same time we do not want to put U.S. companies with foreign operations at a disadvantage when they compete abroad with foreign companies," he writes.

According to the report, the United States is the only large economy that taxes corporate income worldwide with a tax rate exceeding 30 percent. During 2009, both Great Britain and Japan enacted territorial systems, giving their multinational companies a major tax advantage over U.S.-based firms that are saddled with a worldwide system. Over 80 percent of developed nations now have territorial systems.

Lowering the corporate tax rate to the average that prevails among our major trading partners, for a combined federal-state rate of roughly 25 percent (implying a federal corporate tax rate of 20 percent), would be a reasonable upper-bound.

Carroll notes that such a reduction in the corporate rate could not be financed entirely within the corporate tax base, meaning that there would need to be a rebalancing between the individual and business sides of the income tax. Given the increased capital mobility in a globalized economy, this could be a positive change.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

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Tax Foundation Special Report, No. 174¸ "The Importance of Tax Deferral and A Lower Corporate Tax Rate," is available online at http://www.taxfoundation.org/news/show/25842.html. To schedule an interview, please contact Natasha Altamirano, the Tax Foundation's Manager of Media Relations, at (202) 464-5102 or naltamirano@taxfoundation.org.