Expiring Tax Deductions Prompt Talk Of Reform For State, Federal Tax System

Without congressional action to extend state and federal tax deductions, 11 million taxpayers will lose $17 billion.
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    (Photo/Robert S. Donovan via Flickr)

    (Photo/Robert S. Donovan via Flickr)

    As the year ends nine federal tax provisions will expire, causing some to pay more in state and local sales taxes. Most critics agree that state and federal taxes need an overhaul, but in which direction?

    In recent years, the issue of state and federal taxes has been hijacked by partisan politics. Tea party champion Grover Norquist and his Americans for Tax Reform group pushed its “Taxpayer Protection Pledge” on Republican lawmakers and candidates. The so-called pledge meant lawmakers would agree to oppose income tax increases for individuals or businesses.

    While President Barack Obama pushed to imposed tax hikes for individuals earning over $250,000.

    On a state level the picture hasn’t been any clearer. There are currently nine states — Alaska,New Hampshire, Florida, Nevada, South Dakota, Tennessee Texas, Washington and Wyoming — that do not have some form of income tax.

    Total tax revenue reached a record-high of $800 billion in state tax in fiscal year 2012. And at the end of this month, this is set to increase if a dozen temporary federal tax provisions end.

    Congress has until the end of December to extent present tax deductions. These include taxpayers who itemize their deductions on their federal returns, where they can deduct taxes paid to the state for real estate, personal property, or deduct from income or sales taxes — but not both. Without congressional action to extend state and federal tax deductibles, 11 million taxpayers will lose $17 billion.

    Critics are worried about the impact this new taxation will have on disposable income.  Economists have argued that a higher disposable income generally boosts economic activity  – where people feel they have the income to buy goods and property. Changes to deductions of state tax could affect the state economy, so if individuals are no longer spending this will have a huge impact on state revenue and how much it can collect from sales, income and corporate taxes.

    Other economists feel that eliminating these loopholes will make no different to the average median household. It is widely believed that the only people who profited from these deductions were individuals who had capital, property, business or were high-income entrepreneurs.

    But the real loser from the current taxation policies are the poor.

    Poor families in Washington state pay 16.9 percent of their total income in state and local taxes, more than any other state in the nation, according to the Institute on Taxation and Economic Policy’s ITEC report,  which advocates for progressive tax policies.

    Washington takes the top spot by a sizable lead. In Illinois, poor families’ pay 13.8 percent of their income to state and local taxes. In Florida, taxes comprise 13.3 percent of the income of the poor.

    Tax policy can spark positive economic activity, but that doesn’t mean the poor are excluded from greater economic growth.

    “When one in six Americans are living in poverty it’s important to ask what our public policies can do to make that better,” said ITEP Executive Director Matt Gardner in an interview with MintPress. “It’s important to remember that state tax codes can play a role in mitigating poverty as well.”

    New Census data showed that while poverty rates recorded no change in 43 states last year, they remained high. Even in the best-performing states, such as New Hampshire, Alaska and Maryland, a tenth of the population still lives in poverty.

    ITEP argues that states can implement and expand four simple, effective tax strategies to ease the tax burden on states’ poorest residents and recommends that states should look at the taxation policy and include: the earned income tax credit; property taxes with ‘circuit breakers’ to offset the burden of high property taxes; and targeted low-income credits and child-credits.

    “There has been a groundswell of poorly thought out proposals to hike taxes on poor people at the state level,” Gardner said. “The good news is that a lot of states have zeroed in on these good proposals.”

    While ITEP criticized states across the board for increasing the tax burden on the poor over time, the report cites three states that have fairer taxation. It names Vermont as one of the least regressive tax systems in the nation, and New York and the District of Columbia for having “close-to-flat” tax systems.

    Wisconsin is not choosing to go down this path of taxation. It is currently considering setting a no income tax policy. In theory, this would look like a good solution to solve the high taxation of poor families. Republican Gov. Scott Walker said earlier this week that his administration will consider ending the personal income tax as part of a major review of the state’s tax structure.

    In comments to WisPolitics, Walker told reporters that states without personal income taxes are in better economic shape and are better equipped to compete for jobs.

    “There are many states that do very well, better than most states in the country, that have no income taxes,” Walker said.

    The idea of paying no taxes seems appealing, but for some states it has proved difficult to collect revenue. Some states thrive with no income tax, often relying on gambling and sales taxes — such as Nevada. In New Hampshire, most state revenue comes from corporate taxes. In Alaska, revenue is generated by taxes on oil production. But in Florida and Washington, there are huge problems in getting revenue to support basic programs.

    Critics of Walker’s tax policy believe that eliminating the state income tax may be feasible, but without details, they predict a sizeable loss of tax revenue.

    Wisconsin relied on personal income taxes for almost 42 percent of its total tax revenue in 2012, according to the Census Bureau, collecting $6.8 billion. The state took in an additional $4.3 billion in general sales tax, and approximately $9 million in corporate tax. Matching this year’s revenues of $15 billion without personal income tax remains a major question.

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