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February 12, 2007
The EITC Is Not the Way to Go
by David Brunori

Full Text Published by Tax Analysts®

Document originally published in State Tax Notes
on February 12, 2007.



Several state legislatures are considering, or being lobbied to consider, adopting earned income tax credits. Nineteen states currently offer some version of an EITC, which in states where it is refundable provides cash payments to low-income families that file income tax returns. Proposals surfaced this week in Connecticut, Georgia, and North Carolina. In North Carolina, two proposals are before the General Assembly. The proposals would provide credits of between 5 percent and 10 percent of the federal EITC. The credits won't come cheap. The 5 percent credit would cost the state an estimated $67 million next year.

The proposals have the support of advocates for low-income families. From what I understand, most Democratic and many Republican lawmakers support the idea of adopting an EITC.

I'm not convinced that trying to duplicate the 30-year-old federal EITC program at the state level is a good idea. Don't get me wrong: I think the EITC was a stroke of political genius. Conservatives have long liked it because it requires recipients to work. Liberals have always liked it because it was a vehicle for providing help to those who truly needed help. Politically it was a win-win situation. Today, liberals are much more interested in pursuing EITC programs than are conservatives. If you are interested, you should read the New Jersey Policy Perspective's impassioned and well-written argument for expanded EITC programs in the group's January 2007 newsletter.

But at the end of the day, EITC programs are welfare. They have one purpose: to redistribute wealth. I am all for redistributing wealth. It doesn't bother me one iota to tax the hell out of the rich and give the proceeds to the poor. But EITC programs are not the way to do that. Despite their obvious political appeal, EITC programs place the burden of running the welfare program on the state revenue department. Welfare is not the revenue departments' expertise and shouldn't be their mission. Their job is to collect taxes. I don't want the revenue agents -- not those in my state, anyway -- to be figuring out who's eligible for government money. I want them making sure the tax laws are being followed.

The welfare needs of the state -- and certainly of its neediest citizens -- would be better served by trained professionals. Those trained professionals don't work for state revenue departments.


A Dramatic Proposal in Oregon


Once again the sales tax is on the table in Oregon. A bipartisan group of legislators has introduced HB 2530, which would add a 5 percent sales tax and cut income taxes by one-third. The bill would also provide additional tax credits for the poor and cut taxes on capital gains.

Oregon is one of only five states without a sales tax. Most public finance experts believe that to ensure stability and efficiency, state and local governments should rely on some combination of income, sales, and property taxes. Oregon has long resisted adopting a sales tax, a decision that has led to heavy reliance on personal income taxes and on increased use of nontax revenue such as lotteries.

Although the adoption of a sales tax would strengthen Oregon's public finance system, don't bet on it happening this year. A similar proposal died in committee in 2005. And Oregon voters overwhelmingly rejected sales taxes in 1973, 1986, and 1993. The 1993 vote was a lopsided 74 percent against the sales tax. The bottom line is that Oregonians don't like consumption taxes.


Another Green Governor


Montana Gov. Brian Schweitzer (D) is proposing an environmental program that would provide property tax breaks for clean energy development and transmission. New coal-to-fuel plants that remove harmful pollutants would receive property tax breaks of as much as 50 percent. New plants that don't remove harmful pollutants would be penalized by having their property tax rates doubled. Renewable energy facilities -- wind, solar, and biodiesel -- would also receive the tax break. New pipelines for ethanol would get the biggest break -- a 75 percent reduction in property taxes.

Schweitzer is looking to aid Montana's energy industry and take advantage of the nationwide movement toward clean fuel. He joins many other governors in attempting to use the tax code to develop clean and green energy. There are two problems with Schweitzer's plan. First, tax incentives are rarely, if ever, the way to foster economic development. Global markets will dictate whether companies will undertake the investment called for by the governor.

Second, because of its global nature, energy policy is best left to the federal government. Every governor knows that. But the federal government has been unwilling or unable to make any significant policy contributions in that area. So it's hard to blame the governors for trying.


It's Patriotic to Give Tax Breaks to Oil
Companies


Oil companies are lobbying the North Dakota Legislative Assembly for a big tax cut. The oil companies want to drill in North Dakota so they can wean our nation from its dependence on foreign oil. The problem is that drilling in North Dakota is expensive because the oil is under shale. But maybe it would be more economical if the enterprise was subsidized by the North Dakota government. That way the oil companies could recoup their costs and make more profit. We all know that the one thing oil companies need is higher profit margins. After all, Exxon Mobil made a mere $39.5 billion last year.

The oil companies are asking the legislature to reduce the oil production tax from 11.5 percent to 9 percent. They would also like to lower the rate to 5 percent for the first two years of any new production. Those reductions would cost the state only $12.7 million over the next two years -- and, as I said, the oil companies need the money.


Speaking of Needing the Money


The Orlando Magic of the NBA is asking Florida to give each of the state's nine professional sports teams $60 million in tax breaks for arena and stadium improvements.

The Magic is owned by Richard DeVos (the guy who founded Amway). DeVos is reported to be the 73rd-richest person in the world, with a net worth of $3.5 billion. Why any government would give that guy a dime is beyond my comprehension. But Florida Gov. Charlie Crist (R) thinks it's a great idea.


You Can Make Chicken Salad
Out of Chicken . . .


The Arkansas House Committee on Agriculture, Forestry and Economic Development unanimously passed HB 1318, which would allow a $15-per-ton income tax credit for the purchase and transportation of excess chicken litter. Chicken litter, for the uninformed, is chicken poop. Yes, unfortunately, chickens poop. I say unfortunately because some parts of the country have lots of chickens and as a result have lots of chicken poop. The good thing about chicken poop is that it can be used as fertilizer. The bad thing about chicken poop is that it runs off into rivers. The Arkansas legislators are trying to alleviate the costs of transporting the waste.

Keep Your Property Bucolic and Get a Tax
Deduction Too

Kentucky Gov. Ernie Fletcher (R) is proposing a law that would allow landowners to claim an income tax credit if they agree not to develop their land. That is becoming a popular conservation method across the country. In many states, people with a lot of undeveloped land can receive tax benefits by agreeing to keep it that way. In some states, the landowner can donate an easement to a nonprofit and receive a charitable deduction. Those deductions can be large if the land is in or near a metropolitan area.

Fletcher would grant a tax credit to a person or corporation that promises the state that no development will take place. Property owners could receive up to $250,000 a year in credits and up to $2.5 million over the life of the program. The catch is that the property owner would have to allow the public access to the land for recreation. So the rich guy with the big spread would be able to receive tax breaks as long as he is willing to allow hunters and fishers on the property. I guess the rich guy just has to hope the critters don't come too close to the house.


MOO in Vermont


The Vermont House Agriculture Committee voted to impose a 0.25 percent property transfer tax on nonresidential property. The proceeds from the tax would go to help the embattled Vermont dairy farmers. Those dairy farmers aren't making as much money as they would like, and the legislative committee is trying to help them out.

I understand the lawmakers' love for the dairy farmer. (Actually, I don't, but I can use my imagination.) Apparently the lawmakers have less love for the nonresidential property owners, real estate agents, construction companies, and others hurt by the property transfer tax.


Can't Collect the Amusement Tax


The Maryland comptroller is apparently having a heck of a time collecting the state's amusement tax from bars and taverns. If a business has coin-operated machines, it is required to pay the amusement tax of 10 percent of the gross receipts of the machines. I doubt there's a bar or tavern in Maryland that doesn't have a jukebox, pool table, pinball machine, or video poker machine. But according to a story last week in Baltimore's The Sun, the bar owners just aren't paying the tax. New comptroller Peter Franchot, who succeeded the always interesting William Donald Schaefer, sent out a "you better start paying your taxes" letter to Maryland bars.

Another Tax Problem for Wal-Mart

I am not a card-carrying Wal-Mart hater. That is because I don't really care about Wal-Mart, and I think people who do care should avoid shopping there. But Wal-Mart won't make many more friends after the must-read article in the February 1 Wall Street Journal. The Journal reported that Wal-Mart created a complicated (indeed, ingenious) tax minimization scheme in which subsidiaries acted as landlords. So Wal-Mart paid rent to Wal-Mart, and the lessee got to deduct the rent as a business expense. The lessor was a real estate investment trust owned by Wal-Mart that got to avoid state tax because it paid out profits as a dividend, and Wal-Mart received the dividends tax-free.

That little Ponzi scheme allowed Wal-Mart to avoid millions in state corporate taxes in 25 states. North Carolina, thank goodness, is challenging the strategy as designed to distort income. That may be the understatement of the year. The funniest thing is that the same Wal-Mart official appears as both the tenant and landlord on the lease.

The sharp minds at Ernst & Young, who would happily decimate a state's tax system if the price were right, sold the "strategy" to Wal-Mart. The Journal reports that E&Y admitted that there was no business purpose to the shell game other than tax avoidance. In fact, according to the Journal, E&Y told investors in the strategy that if they were ever accused of being tax cheats, they should invest some money in the community.


Property Taxes Aren't to Blame for
Segregation, Court Rules


There are some who believe the property tax could be blamed for just about anything that is wrong with America. But the tax isn't the cause of segregation, at least not in Alabama. Plaintiffs there argued that because the property tax didn't raise enough money for public schools, the state had to make up the difference and thus couldn't spend enough on higher education. That in turn caused state colleges to raise tuition, lowering black enrollment. Ridiculous? That's how the Eleventh Circuit saw it. The federal appellate court affirmed a lower court ruling that the property tax doesn't cause segregation. Thank God, because as one of the last people in the nation who think the property tax is a good idea, I don't want to be considered a racist. (For a related story, see p. 369.) State Court Opinions

The Sprint Debacle in Texas

Sprint will be subject to the new Texas 1 percent gross receipts tax. So a year and a half before the first tax payment was due, Sprint started charging its customers a 1 percent "Texas margin fee reimbursement," purportedly to cover the costs of the new tax. That has many Texas politicians in an uproar. Everyone is demanding that Sprint issue refunds to its customers. I'm not sure what the politicians expected companies to do when a gross receipts tax was adopted. Every sane business will pass the costs on to its customers. Sprint happened to do it in a heavy-handed way. But rest assured that every business would do it if it could. That is the nature of the tax. Any politician who thought differently made a big mistake voting for it. (For a related story, see p. 385.) News Stories

Worth Reading

The folks in Texas should have done their homework before adopting the gross receipts tax. Anyone thinking about it now should read the new report John Mikesell, a giant in the field, wrote for the Tax Foundation and the Council On State Taxation. The report tells you all of the reasons why you should not impose a gross receipts tax. There are many.

Dumb, Dumber, Dumbest

I was looking at some of the tax proposals before the Georgia General Assembly. My gosh, what are those people thinking? Here are the highlights: HR 3, a constitutional amendment to cap property tax reassessments (never a good idea); HB 10, creates an earned income tax credit (well-intentioned but misguided); HB 66, abolishes the income tax and doubles the sales tax rate (monumentally ridiculous); and HB 86, exempts military retirement from income tax (well-meaning but dumb).

To be fair, there are two rational proposals before the legislature. HB 124 exempts business inventory from property tax (actually, a very good idea), and HB 67 repeals the corporate net worth tax (liberals won't like it, but the tax doesn't work very well).


Remember When . . .


Remember when the introduction of the Internet Tax Freedom Act was a big deal? Back in 1998 it caused such a fuss. Proponents were saying it was necessary to "save" the Internet from the tax cartel that was the states. Opponents denounced the measure and predicted the state governments would be insolvent within days of its passage. It was great fun. Did anyone notice this week when U.S. Rep. Anna G. Eshoo, D-Calif., introduced a measure that would make the temporary ban permanent? Hardly a whimper came from opponents or supporters. I miss the old days.


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The Politics of State Taxation is a column by
State Tax Notes contributing editor David Brunori, who welcomes comments at dbrunori@tax.org.


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