Category Archives: Taxation

Special Series: Dealing with Deficits: How States Can Respond

Source: Center on Budget and Policy Priorities, March 2008

The Center analyzes state budget issues including multi-state trends, the adequacy and equity of tax policies, structural budget issues, and budget transparency.

Series includes:

Policy Points: Four Helpful Hints for States Dealing With Deficits
Fiscal Stimulus at the State Level?
Income Tax Surcharges Can Help States Close Budget Gaps
It’s Time for Many States To Use Their Rainy Day Funds
▪ and more.

Recent CRS Reports

Source: Congressional Research Service
• February 26, 2008 – Child Welfare Issues in the 110th Congress
• February 20, 2008 – Trade Adjustment Assistance (TAA) for Workers: Current Issues and Legislation
• February 19, 2008 – The Alternative Minimum Tax For Individuals: Legislative Activity in the 110th Congress
• February 14, 2008 – Largest Mergers and Acquisitions by Corporations in 2007

The Deductibility of State and Local Taxes

Source: Congressional Budget Office, Pub. No. 2906, February 2008

Since the inception of the federal income tax in 1913, federal taxpayers have been allowed to deduct certain state and local taxes in calculating their taxable income. In its final report, in 2005, the President’s Advisory Panel on Federal Tax Reform recommended elimination of the state and local tax deduction, which provides a federal subsidy for some of the taxes levied by state and local governments. That subsidy is of substantial personal benefit to residents of the states and localities that receive it, but it is not shared equally among all federal taxpayers. In addition, the individual alternative minimum tax (AMT) increasingly eliminates the benefit of the state and local tax deduction for many middle-class taxpayers.

This Congressional Budget Office (CBO) paper, which was prepared at the request of the Ranking Member of the Senate Budget Committee, examines the arguments for and against the state and local tax deduction; how the benefits from the deduction are distributed among different groups of taxpayers and different governments; how the deduction and the AMT interact; and how modifying or eliminating the deduction would affect the federal budget, the finances of state and local governments, and federal taxpayers. In accordance with CBO’s mandate to provide objective, impartial analysis, the paper makes no recommendations.

Using Income Taxes To Address State Budget Shortfalls

Source: Elizabeth McNichol and Andrew Nicholas, Center on Budget and Policy Priorities, February 21, 2008

States are on the brink of their worst fiscal problems since the 2001 recession. At least half the states are anticipating budget shortfalls for next year (fiscal year 2009). For those states that have estimated the size of the gap, estimated deficits range from $34 billion to $38 billion in total. Among affected states, these deficits represent between 8 percent and 9 percent of total state expenditures.

New Federal Law Could Worsen State Budget Problems: States Can Protect Revenues by “Decoupling”

Source: Nicholas Johnson, Center on Budget and Policy Priorities, February 13, 2008

The federal “economic stimulus” package enacted today not only cuts federal taxes, but also threatens to reduce many states’ corporate and personal income tax revenue this year and next year.

The potential revenue loss comes at a particularly problematic time for states, because about half the states are already facing budget shortfalls for the current year, the upcoming year, or both; more states will be in trouble if the economic downturn worsens. Some states are already enacting cuts in K-12 education, higher education, health care and human services, among other areas in order to balance their budgets.

The Rangel Amt Proposal Versus Unpaid-For Repeal Of The Amt: Which Is Better Tax Reform?

Source: Aviva Aron-Dine, Center on Budget and Policy Priorities, February 13, 2008

Republican congressional leaders have sharply attacked House Ways and Means Chairman Rangel’s proposal to replace the Alternative Minimum Tax with a tax surcharge for very-high-income households as a massive tax increase that would seriously damage, even “doom,” the economy. In fact, however, the Rangel plan is not a tax increase. Moreover, it would create a tax system that is simpler, more progressive, and likely better for the economy than either current law or the idea favored by many of the plan’s critics: eliminating the AMT without paying for it.

See also:
Fact Sheet

How Much Does the Federal Government Spend to Promote Economic Mobility and for Whom?

Source: C. Eugene Steuerle, Gillian Reynolds, and Adam Carasso, Economic Mobility Project, February 4, 2008

Today, the Economic Mobility Project released a report on the federal government’s investment in economic mobility. The report, authored by C. Eugene Steuerle and Gillian Reynolds of The Urban Institute and Adam Carasso of the New America Foundation, finds that while the federal government makes a significant investment in economic mobility ($746 billion or 5.7 percent of GDP in 2006) the majority of that investment goes to middle and upper income households. Less than one-third (27 percent) of federal mobility spending goes to lower income households. While these households do benefit from many other federal programs, those programs generally are not aimed at promoting mobility and sometimes even discourage it. Between 2006 to 2012, under current law programs targeted to lower income households would decline as a percentage of GDP, while those targeted to the rich would increase over the same period.

Key Findings

Understanding States’ Fiscal Health During and After the 2001 Recession

Source: Elaine Maag, David Merriman, Urban Institute, January 30, 2008

Every state except Vermont operates under some sort of balanced budget requirement. That means that to serve the increased need of distressed populations during recessions, states must either increase revenue or reallocate resources dedicated to other programs. Similarly, when revenue declines, states must raise taxes or reallocate resources. This report examines the extent to which rainy day and general fund savings were a significant factor in helping states cope with fiscal stress during and after the 2001 recession, a possible explanation for the lower than expected legislated tax increases and social welfare cuts.

President’s Expected Push To Make Tax Cuts Permanent Is Irresponsible Fiscal And Economic Policy

Source: Aviva Aron-Dine, Center on Budget and Policy Priorities, January 28, 2008

In his State of the Union address this evening, President Bush is expected to renew his push to make his signature tax cuts permanent. In recent weeks, Administration officials have offered three major arguments for this policy — (1) the tax cuts yielded strong economic growth over the past few years, (2) extending them would help the economy overcome its current weakness, and (3) extending them would improve the economy’s performance over the long run. None of these claims bears up well under scrutiny.

IRS Issues Fall 2007 Statistics of Income Bulletin

Source: Internal Revenue Service

From press release:
The Internal Revenue Service today released the fall 2007 issue of the Statistics of Income Bulletin, featuring data from 134.4 million individual income tax returns filed for tax year 2005.

U.S. taxpayers reported $7.4 trillion of adjusted gross income less deficit in tax year 2005, up 9.3 percent from tax year 2004 when 132.2 million returns were filed.

Certain types of income posted strong gains between 2004 and 2005. Net capital gains climbed 41 percent and taxable interest rose 29.5 percent, while net partnership and S corporation income gained 27.3 percent.
Taxable income totaled $5.1 trillion in tax year 2005, up 10 percent from the prior year. Total income tax increased for a second straight year, rising 12.4 percent to $934.8 billion. Between tax years 2003 and 2004, total income tax rose 11.2 percent, the first increase in 4 years.

The alternative minimum tax (AMT) grew 33.7 percent between 2004 and 2005 to $17.4 billion. Four million taxpayers paid the AMT in 2005, compared to almost 3.1 million in tax year 2004.

Fall 2007 SOI Bulletin (PDF; 3.6 MB)