Flip It to Fix It Report

8/6/2019 Flip It to Fix It Report

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FIX ITTO

AN IMMEDIATE, FAIRSOLUTION TO STATE

BUDGET SHORTFALLS

FLIP IT

KAREN KRAUTSHANNON MORIARTY

DAVE SHREVE


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FLIP IT TO FIX IT: AN IMMEDIATE, FAIR SOLUTION TO STATE BUDGET SHORTFALLS

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TABLE OFCONTENTS

Executive Summary...........................................................

Table of Contents / Credits................................................Key Findings......................................................................Introduction.......................................................................Signi cance.......................................................................Inverting State Tax Structures...........................................Policy Recommendations.................................................Conclusion.......................................................................Endnotes.........................................................................

Appendix A: Method and Inverse Calculations.................

Appendix B: State Income Tax Limitations....................... About the Tax Fairness Organizing Collaborative.............

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CREDITSWritten by:Karen Kraut , Director, Tax Fairness Organizing Collaborative (TFOC), United for a Fair EconomyShannon Moriarty , Communications Director, TFOC, United for a Fair Economy

Dave Shreve , Economist and member of Virginia Organizings Tax Reform Committee

Research Assistance: Dave Shreve and Raghu VaidyanathanEditing Assistance: Lee FarrisCharts and Graphs: Raghu VaidyanathanLayout and Design: Shannon Moriarty

Special thanks to the Institute on Taxation and Economic Policy.


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3www.faireconomy.org

Tis resulting progressive tax structure has major bene

to states. It raises signi cant revenue.If every state inverted

its tax structure, states would raise a combined $49billion, wiping out de cits with cash to spare toinvest in economy-enhancing activities.

It is unmatched in its economic e ciency, whichencourages steady and strong economic activity an widespread prosperity over time.

It provides commonsense equity, with wealthy

families contributing a greater share of their incomin taxes than low- and middle-income families.

o achieve the inverted structure, states must establish,or signi cantly improve upon, the graduated personalincome taxthe backbone of any progressive taxstructure. Concurrently, states and localities mustsigni cantly reduce their reliance on regressive sales,excise, and property taxes, which fall heavily on low- amiddle-income families.

Te bene ts to inversion are clear and many; there is norational economic argument against a progressive taxstructure for every state. Te biggest hurdle in achievingsuch a model is a lack of political will. State level eleco cials simply cannot ignore the fundamental rootsof their de cit problems, even if signi cant legislativeor constitutional roadblocks make sensible reform apolitically di cult undertaking.

EXECUTIVESUMMARY

Severe budget de cits now facing the states represent

signi cant hardship and political challenges, butimmediate solutions are feasible and readily available.Te national recession has produced historic revenueshortfalls marked by the greatest decline in state taxreceipts on record, while concurrently increasing thedemand for public services.

When the economy is hurting, state governments shouldbe adding jobs and investments, a proven response thatkeeps money owing in the economy. Instead, virtually every state has opted to slash vital public investmentsand layo public servants. Such moves increaseunemployment, harm the nations infrastructure andeducational systems, and dampen our nascent economicrecovery. Tis is not good policy in the short or longterm, andcontrary to popular beliefit is entirely unnecessary.

At the core of the budget crises facing states areregressive state tax structures (comprised of the majorstate and local taxes) that are unfair, unsound, andunsustainable by design. Fortunately, there is a sensiblesolution: inverting the states current tax structure.

Te inversion exercise takes a states current distributionof state and local taxes by income quintile (lowest 20percent, second 20 percent, middle 20 percent, fourth20 percent, top 20 percent) and ips it at the 50thpercentile mark, thereby making a regressive structureprogressive.




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Every state has a regressivetax structure that would bene tsigni cantly from a directinversion into a progressivestructure.

An inverted tax structure for everystate would raise a combined$490 billion in new revenue,immediately eliminating statebudget de cits.

A cuts-only approach to statebudget de cits is shortsightedimposing immediate harmon families, while dampeningeconomic recovery and

compromising the futurecompetitiveness of the Americanworkforce.

KEY FINDINGS A progressive tax structure

provides commonsense equity,economic ef ciency, andadequate revenue to invest incommunities and spur economicgrowth.

To achieve an inverted,progressive structure, statesmust establish or improve uponthe graduated personal incometax while reducing reliance at thestate and local level on regressivesales, property, and excise taxes.


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INTRODUCTIONS

evere budget de cits now facing the states

represent signi cant hardship and politicalchallenges, but immediate solutions are feasibleand readily available. Te recession has produced historicrevenue shortfalls marked by the greatest decline in statetax receipts on record,1 while concurrently increasingthe demand for public services. When the economy ishurting, state governments should be adding jobs andinvestment to o set the private sectors contraction andreluctance to invest. Instead, virtually every state hasopted to slash vital public investments and layo publicservants. Such moves increaseunemployment, harm the nationsinfrastructure and educationalsystems, and dampen the nascenteconomic recovery. Tis is not goodpolicy in the short or long term,andcontrary to popular beliefit is entirely unnecessary.

One key factor contributing tothe states scal shortfalls is theoverwhelmingly upside-downcharacter of state tax systems. Nearly every states taxstructure (comprised of the major state and local taxes)can be classi ed as regressive, with low- and middle-income families paying a greater share of their incomein taxes than the wealthy. Such a regressive systemcontributes greatly to the inequality that lies at the

heart of the nations underperforming economy, and

short-changes the development of public structuresand human capital on which the future of our nationseconomy depends.

What if there was a solution to state de cits that wouldraise signi cant revenue, encourage investment, andcreate jobswithout cutting vital public services? And what if the revenue required by such a solution could bgenerated solely by making tax systems as fair as most Americans think they ought to be?

Tere is a commonsense solution, toward which every state can aim their reform e orts, that achieves thesegoals while raising enough revenue to o set most of thbudget cuts being proposed and already implemented:the inversion of each states tax structure.It is

What if there was a solution tostate de cits that would raise

signi cant revenue, encourageinvestment, and create jobs

without cutting vital public

services?




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accomplished by taking each states current distributionof state and local taxes and ipping it, with a pivot pointat dead center (the 50th percentile). In this inverted stateand local tax model, the wealthiest 20 percent pay thestate and local tax share of income currently imposed

on the least wealthy 20 percent, and vice-versa, with thefourth quintile2 also trading places with the second.

In most states the resulting distribution embodies thekind of tax structure many people mistakenly assumethat we already havewhere the e ective tax rate risesgradually with income. And since the inversions would

collectively generate an estimated $490 billion in new annual revenue, it would provide an immediate solutioto the de cits facing nearly every state, while alsopreserving and creating jobs and stimulating economicrecovery. It also achieves greater economic soundness

and a more sustainable scal policy in both the mediumand long-term because a progressive tax structure isunmatched in its economic e ciency, which encouragesteady and strong economic activity and widespreadprosperity.


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At least 25 states have proposed deep cuts i

health care.6

Many of the proposed cuts would undermine thequality of healthcare for children, elderly, andlow-income families, leading to increased use of emergency rooms and nursing homes, which is botine cient and signi cantly more costly.

At least 20 states have proposed major cutshigher education.7

A growing body of research consistently concludesthat public higher education institutions arebene cial to the students who attend and help powstate economies. State colleges and universitiescontribute signi cantly to in-state purchasing of goods and services, contributions to state GDP,and job creation. A study in Virginia, for example,found that every dollar spent by the state on highereducation produced more than $13 in job-creatingeconomic activity.8 In the long-term, the vitality of our public higher-education institutions playsa crucial role in providing a skilled and educated workforce to advance American competitiveness.

Deep cuts to public structures and services weakencommunitiesand thus a ect everyone. Te negativeimpacts, however, are especially felt by middle- and loincome families who rely on early childhood education

Fiscal year 2012 is shaping up to be one of the

states most challenging budget years on record.Gimmicks have been exhausted, ngers have beenplaced in multiple dikes, and helpful federal recovery e orts have begun to taper o . At the beginning of this year, the Center for Budget and Policy Prioritiesreported that 44 states and the District of Columbia were projecting budget shortfalls totaling $112 billion.3 While economic freefall has been halted, the nascentrecovery remains fragile. Tus, it is alarming to see statespoised to sti e further recovery by pursuing additionalbudget cuts. Such cuts are economically unsound scalpolicy because they impose signi cant short- and long-term damage to general prosperity and to the health and well-being of all residents.

At least 21 states have proposed deep cuts in pre-kindergarten and/or K-12 spending.4

Te importance of preschool programs is well-documented; children who participate in preschoolprograms have higher earnings, are more likely to graduate from high school and hold a job, andcommit fewer crimes. Furthermore, a landmark long-term study on the e ects of early interventionsfor disadvantaged children documented a return tosociety of more than $16 for every tax dollar investedin early care and education programs.5

SIGNIFICANCE




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programs, healthcare, and public K-12 and highereducation. But beyond the irreversible harm felt by many residents, it should be made crystal clear: deep cutsto state services help no one, reducing overall economicactivity and the already anemic pace of economic

recovery.9

With so much at stakeincluding the well-being of themost vulnerable populations, the future competitivenessof the American workforce, and the nations ability to rebound from the recessionit is disturbing thatstate budgets are unsustainable by design, relyingdisproportionately on low- and middle-income residentsfor revenue. According to the Institute on axationand Economic Policys 2009 report,Who Pays? , when

the major state and local taxes (income, sales, excise,property) are combined, nearly every state tax structurecan be regarded as regressive. Tis means the taxstructure takes a greater share of income from middle-and low-income families than from the wealthy.

Te graph below averages the major state and local taxefor all states to show the current average distribution inthe U.S..

As illustrated above, on the state and local level, low-

and middle-income people are contributing a greatershare of their income in taxes than the nations wealthieindividuals. Tis upside-down structure is inherently unfair and is in direct opposition to Adam Smiths rstcanon of sound taxation: Te subjects of every stateought to contribute towards the support of governmentas nearly as possible, in proportion to their respectiveabilities; that is, in proportion to the revenue which therespectively enjoy under the protection of the state.10

More signi cantly, this regressive structure is a majorreason that states are grappling with such signi cantbudget shortfalls. States are grossly over-dependenton the incomes of those residents who spend almostevery dime they make and who are sapped the mostsigni cantly by recession. As such, states should

ITEP, Who Pays? A Distribution Analysis of the Tax Systems in All 50 States, 3rd Edition, November 2009, p. 124.


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expect nothing less than the major revenue shocks andpersistent de cits they have witnessed in the recent

period of recession. In the past 30 years, income growthhas overwhelmingly bene ted households in the topincome quintile. In 2008, the top 10 percent of familiestook home over 48 percent of all income. Te top onepercent of Americansthe nations wealthiesthavedone even better, receiving over 20 percent of all incomein 2008 and controlling 225 times the net wealth of the median household.11 Further, those at the top areoverwhelmingly white. According to United for a FairEconomy, Whites are 3 times as likely as Blacks and

4.6 times as likely as Latinos to have annual incomes inexcess of $250,000.12

When virtually all income growth accrues to those atthe very top, trying to raise adequate revenue through aregressive tax structure is like to trying to squeeze waterfrom a stone. Although state and local taxes raised acollective $1.3 trillion dollars in 2009, combined state

budget shortfalls were $191 billion in FY 2010, $130billion in FY 11, and $112 billion in FY 12.13 Te latter

two years state de cits were less severe thanks to theinfusion of federal stimulus dollars, and the nationaleconomy bene tted clearly as a result. But because thie ective tool was both underutilized and inaccurately assessed, it is unlikely to be repeated in the near term. Although all states will continue to depend vitally on thfederal governments more progressive and economicasound scal policy structure, they must also establishtheir own sounder and more productive revenuestructures.

ITEP, Who Pays? A Distribution Analysis of the Tax Systems in All 50 States, 3rd Edition, November 2009, p. 124. UFE, Comparing the Growth of U.S. Family Incomes, 1947-1979 to 1979-2008




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INVERTING STATETAX STRUCTURESF

or our economy and society to thrive, we must

support the vital public structures and servicesthat keep communities strong and which engenderrobust private investment. It is counterproductiveand ahistorical to pretend that revenue shortfalls areinevitable and that public disinvestment can somehow coincide with private re-investment. Such misbeliefs alsoignore the large sum of new revenue that can be raisedin an economically sound, commonsense manner, by inverting each14 states upside-down tax structure.

Te inversion exercise takes a states current distributionof state and local taxes by income quintile (lowest 20percent, second 20 percent, middle 20 percent, fourth20 percent, top 20 percent) and ips it at the 50thpercentile mark, thereby making a regressive systemprogressive. Tis dramatic exercise is intended to reveal:(a) the economically unsound and unfair regressivenature of existing state and local tax structures, and (b)the extent to which simple, commonsense equity canproduce signi cant bene ts, which are illustrated below.

Te progressive tax structures created by invertingstate and local tax systems would achieve the trifecta of

scal policy solutions, accomplishing three of the mostimportant goals.

1. Immediately solves current state budget

shortfalls.If every state inverted its tax structure, states andlocalities would raise $490 billion additional dollarsin the aggregateinstantly solving the FY 12 budgetde cits with cash to spare for investing in economy-enhancing activities.

2. Fairest solution.Te inverted tax system would be more progressive.In most states the wealthy would pay more than the

middle or poor. In other words, most families with littdiscretionary income would see their overall tax liabilireduced after an inversion. Conversely, tax liabilities would rise for families with the largest discretionary income. Tis is consistent with Americans perceptionof fairness, according to a recent study. Te study concluded thatacross income and party lines Americans dramatically underestimate current levels ofinequality and prefer a more equal distribution of wealthan the status quo.15 Further, national poll resultsconsistently show that the majority of Americans woullike to see the wealthy paying more in taxes than whatthey are currently contributing.16

In a few states, it is the middle, not the poor, whocurrently pay the highest share of income in taxes.


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Tere the inverted structure would be a step in theright direction, but better still would be a gradually progressive system.

3. Smart economic policy.

A progressive tax structure is unmatched in itseconomic e ciency, which encourages steady andstrong economic activity and widespread prosperity.In a well-designed progressive tax structure, incomeof the greatest usefulness (e.g., to buy basic needs) istaxed at the lowest rate, while income of decliningutility (income less likely to be spent in the economy)is taxed at progressively higher rates. Tis is importantbecause low tax rates on income most likely to bespent maximizes consumer demand and the private

investment geared to this demand, spurring greatereconomic activity. Progressively higher taxes on incomemost likely to remain idle ensures it is moved rapidly back into the economy in the form of economy-stimulating public investments and jobsineducation, health care, transportation, public safety,and beyond.

This dramatic exerciseis intended to reveal: the

economically unsoundand unfair regressive

nature of existing stateand local tax structures,and the extent to which

simple, commonsense

equity can producesigni cant bene ts.




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POLICY RECOMMENDATIONS

There is no single, perfect state and local taxstructure and the inverted model, therefore, isintended to serve principally as a North Star,

towards which tax reform e orts should aim (withoutany concern for hitting it precisely). In that vein,there can be no unalterable or one-size ts-all policy prescription. Tere is, however, a clear and well-de nedgeneral path to the improved tax structure that theinverted model helps to illustrate and reveal.

State and local tax revenue is raised through acombination of tax vehicles, which vary in incidence

and weight from state to state. Te primary approachthrough which a state can invert (or begin to invert)its tax structure is, nonetheless, simple and universally e ective. In every case, substantially increasing the weight of a well-designed graduated income tax whileconcurrently reducing the weight of sales, excise, andproperty taxes within the overall tax structure willimprove every state tax structure, increase equity,revenue stability, and economic soundness, and movethese structures closer to the example of the inverted tax

model.

Te chart on Page 13 illustrates that, among the majortax vehicles, the sales tax is the most regressive taxbecause it disproportionately impacts low-incomepeople. Tis is because low-income people, unlike the wealthy, are forced to spend a majority of their income

purchasing basic needs that are subject to the sales tax.On the contrary, a graduated personal income tax, by de nition, imposes a greater liability on taxpayers astheir income goes up.

As this graph makes evident, relying heavily on a welldesigned graduated income tax is key to achieving theinverted structure. en state constitutions currently prohibit or restrict the establishment of an income taxor a graduated income tax. While unquestionably asigni cant political hurdle, constitutional barriers are ninsurmountable as states modify their constitutions wit

some frequency.

Currently, nine states do not use a broad based incometax and, not surprisingly, those states lead the nation inthe regressivity of their tax structures.

Forty-one states and the District of Columbia use abroad-based personal income tax. Nearly all of thesestate income taxes, however, are either at, essentially

at, or are replete with broad deductions that make

seemingly progressive structures far less progressive inpractice. In all cases, the sound, moderately graduatedincome tax is rendered far less e ective than it ought tobe, less capable of raising su cient revenue, spurringinvestment, and sustaining widespread prosperity than would be without these often unquestioned state incomtax attributes. Among the most common of these stateincome tax limitations:


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32 states and the District of Columbia allow forbroad itemized deductions similar to federalitemized deductions. According to the Center onBudget and Policy Priorities, itemized deductionsare regressive they provide greater governmentsubsidies, per dollar of taxpayer expenditure, forhigher-income taxpayers than for people with moremodest incomes. Also, high-income taxpayers, onaverage, claim more itemized deductions, measuredas a share of their incomes, than lower-incometaxpayers do.

Seven states have a at, not graduated, incometax. Flat rate taxes are e ectively regressive in thatthey have a greater negative e ect on people withlower incomes than those with higher incomes.

14 states have rates so nominally graduated (wherethe top tax rate kicks in at a very low amount of taxable income) that they are virtually at, orin one case (AL), with deductions factored ine ectively regressive.

Six states allow the deduction of all orpart of federal income tax liability, whichdisproportionately bene ts high-income people,because they have a higher federal income taxliability to deduct.

27 states have special capital gains exclusionsof which are notable; 6 states limit the taxabof some dividends. According to the Instituteon axation and Economic Policy, [s]ince mostdividend and capital gains income goes to a smallgroup of the very wealthiest Americans, these taxbreaks mainly bene t the wealthy while o ering on

UFE, Comparing the Growth of U.S. Family Incomes, 1947-1979 to 1979-2008 ITEP, Who Pays? A Distribution Analysis of the Tax Systems in All 50 States, 3rd Edition, November 2009, p. 4.




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since Blacks have 12 cents and Latinos have 10 cents ounrealized capital gains for each dollar that Whites hav Of the 41 states (and D.C.) that tax capital gains, 34 taxit as regular income. While this is an improvement ove

the federal governments preferential treatment of capitgains, states can and should consider taxing capital gaiat a graduated rate beyond their income tax rate. Forexample, Massachusetts taxes short term capital gains 12 percent, as compared to the income tax rate of 5.3percent.

Seventeen states and the District of Columbia have anestate tax. Of these states and D.C., 15 have exemptionlevels on estates with values between $1 million and $

million. Tree states levy the tax on estates with valuesbetween $338,333 and $859,350. A graduated stateestate tax falls exclusively on the wealthiest familiesand would contribute toward achieving an inverted taxstructure.

a pittance to middle- and low-income families (seechart below, Average Capital Gains and Dividend asa Share of Income in 2008, by size of Adjusted GrossIncome).

States should consider two additional tax policies, which can, in smaller ways, contribute to achieving theinverted structure: a graduated state estate tax and agraduated tax on capital gains and dividends. Both taxesdisproportionately fall on the wealthiest taxpayers, asexplained below.

Te graph below shows the distribution of capital gainsand dividend income.

Overwhelmingly, this kind of investment income owsto those with household income over $200,000. Tisincome is even more prevalent in households withincome over $1 million. Tus, a tax on capital gains anddividends would fall primarily on these high-incomehouseholds. It would also fall primarily on whites,

CBPP, Average Capital Gains and Dividend as a Share of Income in 2003, by size of Adjusted Gross Income,updated with 2008 data.


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Te bene ts to inversion are clear and many; there is no

rational economic argument against a progressive taxstructure for every state. Te biggest hurdle in achievingsuch a model is a lack of political will. State level eleco cials can no longer ignore the fundamental rootsof their de cit problems, even if signi cant legislativeor constitutional roadblocks make sensible reform apolitically di cult undertaking.

By design, the tax structure of every state in the

nation falls short on the core tax principlesof economic soundness, equity, and revenueadequacy. Te resulting failure to generate su cientrevenue to sustain vital public infrastructure andservices should come as no surprise. Yet a lack of publicawareness and understanding of the deeply awed,upside-down state and local tax structures allows electedo cials to continue to seek out and implement harmfuland unproductive budget cuts as the solution.

Tis report provides a solution to the real problem:revenue. Te vast majority of states would bene ttremendously by inverting their existing tax structures. All combined, states would generate an additional$490 billion in revenueimmediately eliminatingtheir de cits with cash to spare for investing in jobcreation and other stimulants to the economy. Te

ipped structure would be progressive, which is not only more economically sound, but also consistent with themajority of Americans perception of fair.

o begin to achieve the inverted structure, states mustestablish, or signi cantly improve upon, the graduatedpersonal income taxthe backbone of any progressivetax system. Concurrently, states and localities mustsigni cantly reduce their reliance on regressive sales,excise and property taxes, which fall heavily on low- andmiddle-income families.

CONCLUSION

This reportprovides asolution to the

real problem:

revenue.




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1 http://www.cbpp.org/cms/?fa=view&id=711

2 A quintile is 20% of a range of data; in this case, 20% of a states non-elderly taxpayers.

3 The Center on Budget and Policy Priorities (CBPP), States continue to feel Recessions Impact, March 2011. http://www.cbpp.org/cms/index.cfm?fa=view&id=711

4 CBPP, Governors are Proposing Further Deep Cuts in Services, Likely Harming Their Economies, March 2011. http://www.cbpp.org/cms/index.cfm?fa=view&id=3389

5 HighScope Perry Preschool Study, 2004. http://www.highscope.org/Content.asp?ContentId=282

6 CBPP, Governors are Proposing Further Deep Cuts in Services, Likely Harming Their Economies, March 2011. http://www.cbpp.org/cms/index.cfm?fa=view&id=3389

7 Ibid

8 UVA Today, Cooper Center Study Shows Major Economic Impact of Higher Education, October 2009. http://www.virginia.edu/uvatoday/newsRelease.php?id=9909

9 CBPP, An Update on State Budget Cuts: At Least 46 States Have Imposed Cuts That Hurt Vulnerable Residents and theEconomy, Feb. 2011. http://www.cbpp.org/cms/index.cfm?fa=view&id=1214

10 Adam Smith, The Wealth of Nations, Book V (1776)

11 United for a Fair Economy (UFE), State of the Dream 2011: Austerity for Whom? http://www.faireconomy.org/issues/racial_wealth_divide/state_of_the_dream_reports/ state_of_the_dream_2011_executive_summary

12 Ibid

13 CBPP, States continue to feel Recessions Impact, March 2011. http://www.cbpp.org/cms/index.cfm?fa=view&id=711

14 The effectiveness of this exercise can also be illustrated by inverting the nations state and local tax structures collec-tively. If every state aspired to and attained the inverted national averagea commonsense target all states would movesigni cantly away from their current regressive or essentially at structures.

15 Norton, Michael I., and Dan Ariely. Building a Better AmericaOne Wealth Quintile at a Time. Perspectives onPsychological Science 6 (2011): 9-12.

16 CNN Money, Americans agree: The rich should pay higher taxes April 2011. http://money.cnn.com/2011/04/22/news/economy/budget_taxes_poll/index.htm; NBC News/Wall Street Journal Survey, February 2011. http://msnbcmedia.msn.com/i/MSNBC/Sections/NEWS/A_Politics/___Politics_Today_Stories_Teases/2-24-28-11.pdf

17 Sabato, Goodbye to Goodtime Charlie: The American Governor Transformed, 1950-1975 (Lexington, MA, LexingtonBooks, 1978). Pages 64-65. Council on State Governments Book of the States annual volume (1982), pp. 117, 126

18 Seven states have no income tax at all and 2 states (NH, TN) tax only income from interest and dividends. See Appen-dix: State Income Tax Limitations.

19 See Appendix: State Income Tax Limitations.

ENDNOTES


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20 Federation of Tax Administrators State Tax Forms page:

http://www.taxadmin.org/fta/link/forms.html. For additional details, see ITEP, Writing Off Tax Giveaways, 2010, p. 5.http://www.itepnet.org/state_reports/itemize0810.php

21 CBPP, Limiting Itemized Deductions for Upper-Income Taxpayers Would Have Little Effect on Small Business,

Charities, Housing, March 2009.22 The Institute on Taxation and Economic Policy (ITEP), A Capital Idea: Repealing State Tax Breaks for Capital GainsWould Ease Budget Woes and Improve Tax Fairness, January 2011. http://www.itepnet.org/pdf/capitalidea0111.pdf

23 ITEP, The ITEP Guide to Fair State and Local Taxes, 2011, p. 41, www.itepnet.org

24 UFE, State of the Dream 2011: Austerity for Whom? http://www.faireconomy.org/issues/racial_wealth_divide/state_of_the_dream_reports/ state_of_the_dream_2011_executive_summary

25 About.com, State Estate Tax and Exemption Chart, May 2011. http://wills.about.com/od/stateestatetaxes/a/stateesta-tetaxchart.htm




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APPENDIX A: A NOTE ON METHOD AND INVERSE CALCULATIONS

The government nancial data on which the inver-sion calculations are based are drawn from two

general sources: tax incidence percentages andmean income by quintile according to income are,in the case of the rst four quintiles, taken directlyfrom the Institute of Taxation and Economic Pol-icy Who Pays, 3rd edition (November 2009). Theaggregate state and local tax collections are takenfrom the United States Census Bureau, State andLocal Government Finance, 2008 State and LocalGovernment, State and Local Summary Tables byLevel of Government, Tables 1a and 1b. [http://www.census.gov/govs/estimate/] In both cases,

these publications represent the most recent state-by-state tax incidence and tax collections data.The ITEP incidence analysis is based on 2007 dataand includes the impact of permanent tax changesenacted through October 2009. The U.S. Censustables are based on data from 2008. More recentcensus data of this type is available in aggregatedform (not broken out state-by-state) for 2010.

For the top quintile (not speci ed in Who Pays?),

we estimated the tax incidence and mean incomeby taking the published tax incidence and meanincome estimates for the 76th through the 95thpercentiles (titled Next 15% in Who Pays?), the96th through 99th percentiles (titled Next 4% inWho Pays?), and the top 1% (also titled Top 1%in Who Pays?) and generating an estimate with thefollowing formulas:

(Mean Income for Next 15% x .75) + (MeanIncome for Next 4% x .20) + (Mean Income for

Top 1% x .05) = Mean Income for Top Quintile

(Mean Income for Next 15% x Total TaxesAfter Offset, expressed in decimal form, x .75) +(Mean Income for Next 4% x Total Taxes AfterOffset, expressed in decimal form, x .20) + (MeanIncome for Top 1% x Total Taxes After Offset,expressed in decimal form, x .05) = Mean Dollar

Amount of Taxes Paid for Top Quintile

Mean Dollar Amount of Taxes Paid for Top Quin-tile Mean Income for Top Quintile = Mean TaxRate for Top Quintile

The Multiplier published here represents theratio of the theoretical revenue produced under theassumptions of an inverted tax structure (pivotedat the 50th percentile) over the current revenue(for 2008, from the Census tables cited above).A multiplier of 1.434, for example, indicates thatthe estimated revenue generated under the newinverted structure would be approximately 43.4%greater than that amount currently collected (basedon 2008 data). It is notable that when individualstate and local tax structures are ipped, no statehas a multiplier less than 1.009 (Vermont). Wheninverted on the basis of the national average taxincidence for states and localities, where the pre-vailing tax incidence, of course, is often of lesseror greater disparity than that of the individualstates, no state has a multiplier less than 1.077

(New York). These multipliers indicate two things:the estimated percentage of new revenue attributedto the theoretical inverted structure; and the rela-tive distance (in the national average inversion)between the states existing structure and a muchmore economically sound and equitable one basedon a ipping of the aggregate current upside-downstructure.

Rounding and sampling Error: Because the MeanTax Rate for the Top Quintile is drawn from

rounded numbers published in Who Pays?, it issubject to small rounding error. The property taxdata in the census tables come from a sample of allproperty tax collectors, and as such are subject tosampling error. For more information on samplingand nonsampling error and on de nitions, see.


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The tax collections included in the State and LocalSummary Tables by Level of Government, Tables1a and 1b, include two categories not representedin the ITEP incidence analysis: Motor vehicle Li-cense Fees and other fees and government revenue

de ned as Other. For 2008, these categoriesrepresent 8.24% of all state and local taxes col-lected. Were they to be included in the incidenceanalysis, the effect would be small, and, sincethese revenues are generally more regressive thanthat of the average tax collected by most states, itwould produce a slightly more upside-down taxincidence and, in the inverted model, slightly morerevenue.

Tax changes implemented since these data werecollected (after October 2009 for tax incidence,and after January 2009 for revenue collections)are not re ected in this analysis. In the few stateswith notable tax law changes since that time, thisshould be recognized and included in any assess-ment of the inverted model and its implications fortax incidence or tax revenue.

******

It is critical to note, nally, that the theoretical taxincidence re ected in the inverted structures representtwo things:

1. The signi cant potential for new revenue connect-ed to a fair and economically sound distribution of state and local tax liability;

2. A suitable target for long-range tax reform efforts

The theoretical inverted tax model does not indicateat all how much certain tax vehicles would have to be

increased or decreased, augmented or eliminated, inorder to conform to the inverted tax structure.

Only a few general principles are clear in this regard:

1. Since most state income taxes are either at, es-

sentially at, or lled with limitations (deductions,exemptions, and credits) that generally tilt liabili-ties away from those with the highest incomes,efforts to broaden and graduate state income taxesare an indispensible part of any movement toward

these fairer, more productive, and more economi-cally sound inverted structures;2. Reliance on sales and excise taxes must be re-

duced, even in forms by which the sales tax itself is rendered less regressive (extended to someluxury services, for example);

3. Reliance on local property and sales taxes wouldhave to be reduced as well, even if this has to hap-pen indirectly (increased state revenue=increasedaid to local K-12 education and public safety=lessreliance on local property tax revenue).

Whether state tax reform efforts reach the theoreticalinverted structures in tentative and small steps, in aseries of more aggressive steps introduced over the pe-riod of several years, or in one swift reform effort alldepend, of course, upon the readiness of state legisla-tures, statehouse leadership, and both the strength andclarity of the reform vision. The inverted structure isintended principally to reveal the strength, simplicity,and, surprising favorability, of the right-side-up tax

incidence re ected in the inverted model. One way oranother, opponents would have to oppose a structurethat large majorities deem fair, that brings the mostrevenue with the lowest rates for the most taxpayers,and which generates far more economic activity andwidespread prosperity than any of the existing stateand local tax structures.




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APPENDIX B: STATE INCOME TAX LIMITATIONS

Limits onDividend

Flat I nco meTax es (7)

Outdat ed orLimited

All (3) Major (8) Specialized(19)CO AL AL MO AR CO MI [4] CO AKMN AZ IA MT HI CT MT IL FLNC AR LA OR MT GA KS IN NVND CA NM ID MA MA NHSC DE ND IA ND MI SDVT GA SC KY OK PA TN

HI VT LA NJ UT TXID WI ME NH WAIA MI TN WYKS MNKY MOLA NEME NJMD NCMS OHMO OKMT ORNE UT

NJ [2] VANMNYOKOR

UT [3]VAWI

OKSCVA

KSMEMSMOMTNM

ALAR

CT [5]GAID

Itemized D educt ions (32)Ded ucti on f or Fed er al

Taxes (6)Capital Ga ins E xclus ions

(27 ) No Income Tax (9) [1]

Starting point

Fed. TaxableIncome (6)

State DenedItemized

Deductions(26) Part (3)

[1] In NH and TN, Income Taxes are imposed only on dividends and interest.

[2] Unlike the rest of the states in this column which offer deductions for most categories allowed under federallaw, New Jerseys itemized deductions are limited to two categories: property tax and medical expenses.

[3] Taxpayers in Utah receive a tax credit equal to 6% of the combined personal exemption and standard oritemized deduction taken on federal returns (75% of exemption; 100% of deduction), phased out by 1.3% of theamount over $25,070 (joint returns).

[4] Dividend tax break available only to taxpayers over 65.

[5] As of 2009, the Connecticut income tax is an essentially at tax, topped with a new millionaires taxbracket (6.5% marginal rate over $500K in taxable income).


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ABOUT THE TAXFAIRNESS ORGANIZING

COLLABORATIVEThe Tax Fairness Organizing Collaborative(TFOC) is a network of 28 member organiza-tions in 24 states that use grassroots power topromote progressive tax reform.

The TFOC is rooted in two core beliefs. First, that afair tax system is one that is progressive, transparent

and that generates enough revenue to fund qualitypublic services and provide opportunities that enableall people to thrive. And second, comprehensive par-ticipation of people at the grassroots level is integral toachieving long-term political change.

History The TFOC is the only nation-wide network of state-level tax fairness groups that use community organiz-ing as the primary vehicle for political in uence. Itwas established in 2004 to ll an important gap in theprogressive movement by supporting state-level taxfairness advocacy efforts and facilitating connectiv-ity across state lines. The TFOC provides a nationalinfrastructure for tax fairness organizers to collaborate,share best practices, problem-solve, and learn the lat-est in messaging and communications.

Our WorkThe Tax Fairness Organizing Collaborative supportsthe work of its state member groups by:

Bringing together grassroots state organizinggroups to exchange experiences and share bestpractices;

Sharing strategies across state lines and forms af-nity groups to tackle common problems;

Providing the latest information on messaging,framing, and polling;

Developing and shares culturally appropriate toolsto draw diverse constituencies into tax debates;

Bringing the cadres of newly minted state tax ac-tivists into the effort to reform federal tax policies;and

Building a collaborative structure through whichmembers can better secure long-term funding tobuild and sustain tax organizing capacity.

To learn more, please visit www.faireconomy.org.

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