Taxing Issues: Fighting a Ban on Income Tax

TAXING ISSUES: A SIX PART LOOK AT ISSUES THAT HINDER TENNESSEE’S ABILITY TO BE A JUST A PROGRESSIVE STATE.

Part III: Fighting a Ban on Income Tax 

It’s the truth: In Tennessee the poor pay more of their income in state taxes than the rich. In the midst of difficult conversations about the haves and have-nots, however, you may find yourself yearning for a simple solution to the grave injustices of our state tax system. The good news is that there is one, an income tax. The bad news is that the “haves” in our state are working – hard – to ensure that the solution is off the table forever.

Third-party economists and researchers have agreed for years that the solution to our revenue problem is a progressive, broad-based state income tax. It’s the only way to guarantee that everyone pays taxes according to their means. Otherwise, we’re stuck with the system we have now; sales and business taxes have no where to go but up, leaving the poor and middle class to shoulder most of the burden while the rich cut their state services, such as health services, police and fire protection, and education.  

Glen Casada (R-Thompson Station) has introduced a constitutional amendment in the state legislature that would forever ban this type of protection for the poor and middle class. Even worse, he himself seems to be dangerously ignorant of the repercussions. Tennessee could see a $3 billion potential loss in revenue, and in January 2012, when challenged on the house floor regarding the bill’s regressive nature, he stated that an income tax was regressive, thus displaying a disturbing lack of basic knowledge or a blatant disregard of tax structure and history.

A progressive tax is defined as a tax that increases in rate as the payer's income increases. An income tax, for example, is a progressive tax.

A regressive tax, on the other hand, is one whose rate increases as the payer's income decreases. Sales tax , for example, is a regressive tax.

 Senator Borah said in 1909, “the income tax is the fairest and most equitable of the taxes. It is the one tax which approaches us in the hour of prosperity and departs in the hour of adversity. Certainly, it will be conceded by all that the great expense of government is in the protection of property and wealth. There is no possible argument founded in law or in morals why these protected interests should not bear their proportionate burden of government.” But, don’t just listen to Senator Borah, listen to Adam Smith, the father capitalism, who said in hos book, the Wealth of Nations  "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.” Smith also says "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

For years, TFT has been supporting this as a solution to Tennessee’s revenue problem and dependency on federal funding. Now, however, despite overwhelming evidence in support of an income tax, Casada and many others in the legislature are threatening to take away this option for Tennessee’s future just to score cheap political points

The bill must receive a 2/3 majority in the house and senate in 2013, then, if it passes, will go on the 2014 general ballot for a vote.

TFT could fight this terrible idea before it goes to the ballot. We, the people of the poor, middle, and upper classes aren’t the only ones who have an interest in keeping our sales taxes low and removing our food taxes entirely: in a state without an income tax option, taxes on small businesses are bound to swell as the need for revenue increases. The strong faith communities of Tennessee have also voiced opposition to this unethical, unjust ban for reasons tied to their belief that opportunities for improvement should not be stacked against the poor. Even legislators who take their roles as civil servants seriously, such as Mike Kernell and Douglas Henry, are opposed to this horrendous bill.

The time to act is now. What do you think? Tell us in the comments below if you think this is an issue for TFT’s 2013 agenda.

Regressive Taxation 101

The Daily Kos has this great article on regressive taxes - the same message TFT has been sharing for years, and will continue to share until our upside-down tax structure is turned rightside up and provides a level playing field for low- and middle-income families and enough revenue to adequately support our public structures we all need to grow and thrive in our state.
Some excerpts:

More than 80% of Americans are burdened more by state and local sales taxes alone than they are by income taxes. Only for the top 1% of earners do income taxes take a greater percent of their income than sales and property taxes.

Why is this? Because most Americans do something really interesting with the money that comes their way: they spend it. They buy food. They buy clothes. They buy toothpaste, toys, tool chests and toilet paper. Through that spending, they create demand. What doesn't get spent on consumables gets turned into the kind of long term assets that most people need to get by in the world. It turns into a roof over their heads and transportation to get to work. Which creates more demand. More jobs.

By spending their money, the majority of Americans fuel the health of the economy. They're the juice in the system. The churn. The fire in the boilers.

Meanwhile, up at the top end of the scale, those top 1% of earners don't neither spend their income or turn it into property. They don't consume it. They don't convert it. They just sit on it. This chart alone is enough to demonstrate that cutting the tax for those at the top is worse than pointless. The very rich are not turning their money into things / demand / jobs. They have so much more than they need that their money is simply stagnant. Sending them more cash would be no more effective than throwing it into a volcano.

Unfortunately, those spending and converting actions that most Americans engage in are attacked by regressive systems that hit from dollar one. These are not invisible taxes. They're all too visible. They're part of every transaction, large or small. They're the reason your dollar bag of pretzels can't be purchased with a dollar. They're the reason that new Chevy or Ford costs you extra both when you buy it and every year you own it.

The overall impact of eliminating sales tax and most income tax deductions is that over 80% of Americans would pay less tax and the tax directly eliminated would be the one they face every day in their transactions.


http://farm6.static.flickr.com/5028/5631100899_2403fd2af0_o.jpg

Ban an Income Tax in Tennessee: Not so Fast!

Jeff Woods from the Nashville City Paper summarizes an exciting turn of events regarding the proposed ban on a state income tax in Tennessee:

In a comical bit of political theater Wednesday, state House Democrats may have found a way to foil Republican efforts to amend the Tennessee constitution to ban the state income tax.

With the help of a couple of Republicans, who doubtlessly will hear from party leaders about this, Democrats on the House Finance Subcommittee managed to change the anti-income tax resolution to prohibit any increases in the sales tax as well. That, of course, would hamstring state government’s taxing capacity and leave lawmakers without much way to plug budget holes if necessary in the future.

With a straight face, Rep. Jimmy Naifeh, D-Covington, offered the amendment. As House speaker in 2002, Naifeh tried and failed to enact an income tax as part of reform legislation that would have lowered the sales tax. The resulting furor led to the defeat of some Democrats in the next elections.

“This is a friendly amendment,” Naifeh deadpanned as he made his motion, pointing out that Tennessee’s maximum sales tax rate is the nation’s highest at 9.75 percent.

“We’re hurting those people who can afford it the least. A bigger percentage of their income goes for the sales tax than someone who makes $100,000 or $200,000 or whatever.”

“I think it’s just common sense,” he said as some Republicans tried to table his amendment. “I guess if you vote to table this, then you’re voting that we should have more sales tax at some point in time. I hope that we’re not thinking that when we need funds again that we’re going to go and raise the sales tax. It’s against all humanity to do that.”

Reps. Dennis Roach of Rutledge and Steve McDaniel of Lexington were the Republicans who voted with the Democrats.

Rep. Glen Casada, R-College Grove, then tried to postpone action on his resolution, but the subcommittee went ahead and adopted it with Naifeh’s amendment.

The Senate already has voted for the anti-income tax resolution. It needed also to pass the House by a majority in this General Assembly and then by a two-thirds majority in both the House and Senate in the next. Then the resolution would have gone on the ballot for voter approval in the 2014 elections.

In 2002, a state income tax won 45 votes in the House. The state Supreme Court has ruled three times — most recently in 1964 — that the constitution already prohibits an income tax. But in 1999, the state attorney general issued an opinion saying the tax was permissible. Supporters of a constitutional amendment say it’s needed to resolve the issue.

Income Tax Ban hearing Wed. March 23

TFT Board Member Jennifer Tlumak penned this great op-ed in the Tennessean speaking out against the proposed Income Tax ban, and TFT Member Phil Schoggen's op-ed was also printed last week in the Chattanooga Times Free Press.
The House Finance Subcommittee will hear the bill Wed. March 23 - if you'd like to join us in attending the hearing and showing support for this revenue option, please call 865-687-9600 or email elizabeth@fairtaxation.org. We'd love to have you and your elected officials need to hear from you.

An excerpt from Phil's op-ed:

"Last Monday, the governor released his new budget for the coming year. But that budget relies entirely on cuts of several million dollars instead of revenue increases through closing of tax loopholes. So he proposes to reduce state expenses through reductions in funds to TennCare and public higher education, and by closing several group homes for children and shrinking programs of early education for children, among others. But the state budget had already been reduced, and the state is among the lowest-ranked states in services provided. How do we ever expect Tennessee to get out of the bottom of the state services barrel?

Amending the constitution is a momentous undertaking with long-lasting consequences. It should not be easy, and it should not be attempted without careful consideration. Amending the constitution in a way that limits the General Assembly’s future options for generating revenue is a risky proposition and a statement of exaggerated self-esteem. It says “We, in this General Assembly, know every circumstance that could possibly occur in the future. None of them could justify ever having an income tax, and we don’t trust our successors in future General assemblies to not pass an income tax.”

It’s not hard to imagine circumstances that would call for an income tax. A depression or another severe recession might reduce revenue to the extent that an income tax becomes essential to the continuation of a state government that serves citizens adequately.

An earthquake on the New Madrid fault or a severe outbreak of tornadoes will require funding for relief and reconstruction efforts that exceeds the capacity of the existing tax structure, which is so heavily dependent on very high sales and food taxes. With both of these potential disasters, it’s not a question of “if” but “when” they will occur, as the tragic events in Japan have so recently demonstrated.

Even without these disasters, Tennessee revenue is down because an ever smaller part of economic activity is subject to our sales tax. Severe cuts in state services have been imposed in an effort to keep the budget balanced. If the proposed amendment passes, it would take at least three years to amend it out of the constitution and pass an income tax. How much would Tennessee suffer in the meantime?

This resolution is an insult to the constitution, its framers and to current and future citizens and their elected representatives. They all deserve more respect."

‘New Normal’ Not Good Enough - We Need Revenue with Justice!

Gov. Haslam said Monday in his State of the State address that Tennesseans face a $1.4 billion revenue shortfall, noting that this “reality will frame this budget” and that this is the “new normal.”

The revenue shortfall is not an inevitability reality – it is a choice. Tennessee’s elected officials have revenue options that could give two-thirds of Tennesseans a tax cut, support local businesses and the state’s economic growth, AND raise more than $1.4 billion in new revenue. They choose to ignore those options – that is the reality.

The status quo for Tennessee – revenue generated overwhelmingly by one source, the highest sales tax in the nation – has left us underfunded and kept us ranked behind the rest of the nation and our neighboring states in key quality of life issues. By declaring this to be the “new normal,” Gov. Haslam is telling Tennessee he is willing to settle for last, or maybe next to last, place.

“Gov. Haslam proposes cutting up to 2.5% from every state department, saying the government has to spend less,” said John Stewart, former TFT board chair. “At the same time, a portion of public money is being directed away from needs of Tennessee taxpayers and redirected toward large corporations.”

The proposed budget includes a $92 million gift to Electrolux, a company that recently closed a distribution center in Chattanooga to move it to Georgia. Electrolux has proposed a new center in Memphis, claiming that the almost $100 million gift in state funds was promised by the Bredesen administration. The leading Internet retailer, Amazon, has also promised to build two distribution centers in Tennessee, but only if it receives a special exemption from having to collect the Tennessee state sales tax. The Dept. of Revenue is considering a rule-change to cave in to this demand, throwing away at least $35 million in annual revenue for Tennessee, and handing Amazon a significant competitive price advantage over all other Tennessee retailers.

It’s one thing to be “business friendly”; it’s quite another to be promiscuous with taxpayer dollars! Gov. Haslam’s proposed budget takes money from Tennessee’s colleges, TennCare, and pre-K and gives it to corporations that aren’t even based in Tennessee and refuse to follow Tennessee’s laws,” said Phil Schoggen, Nashville TFT member “This is outrageous – Tennessee needs jobs, but giving millions of dollars to mega-corporations who don’t need the subsidies is not the way to do it.”

Gov. Haslam’s address emphasized the importance of job creation and education. Local businesses create up to 80% of our private-sector jobs, but they are hurt by the state’s high sales tax, competition from online retailers, and economic development deals that funnel money to large, out-of-state corporations. The high sales tax sends Tennessee shoppers and Tennessee jobs across the borders into neighboring states with lower sales tax rates.

Higher education is only attainable when it is affordable – college tuition has increased 74% in the last 10 years because of state budget cuts. Furthermore, the HOPE Scholarships, funded by a regressive and "voluntary" tax, goes disproportionately to the well-off who wind up paying little in tuition. "In the meantime, other students must take on personal debt to obtain a college degree. that debt isn’t going to help the state economy in the future,” said Anne Mayhew, a retired professor from Knoxville . “The state needs to increase funding to our pre-K programs, colleges and universities if we’re truly going to have a competitive workforce and economic growth in the future.”

In balancing the state budget, our elected leaders have two options: budget cuts or revenue generation. Lately, they have ignored this second option.

“Gov. Haslam claimed in his address that ‘the people of Tennessee want us to fix the budget shortfall and not raise their taxes,’” said Jennifer Tlumak, TFT board member “That could be accomplished by asking corporations to pay their fair share and by asking higher income residents to pay at a level comparable to what lower income Tennesseans are paying in taxes, thereby avoiding program cuts that hurt all our communities. We need revenue and we need justice.”

Tennesseans for Fair Taxation is a statewide non-profit organization that works at the intersection of revenue and justice to create a tax system that invests in Tennessee, its people, and its communities.

TFT’s proposals would raise at least $1.4 billion with the following measures:

1. Close corporate tax loopholes that allow multi-state corporations to shelter income earned in, and owed to, Tennessee ($110 million).
2. Require online and out-of-state retailers to follow the law our local businesses must follow and collect sales tax on items sold in Tennessee ($100-$365 million).
3. Eliminate the single-article sales tax cap on big-ticket items, so those making expensive purchases pay the same tax rate paid by those making inexpensive purchases ($85 million).
4. Eliminate the tax on groceries, reduce the general sales tax and implement a broad based personal income tax with generous exemptions (2/3 of Tennesseans would get a TAX CUT and pay no income tax and an additional $1 billion in revenue would be raised).

NO on the proposed Income Tax ban in Tennessee

TFT Board Member Erica Thomas has this great guest column in Memphis' Commercial Appeal:
Reliance on sales tax causes an imbalance
Tennesseans should tell their legislators they're against a prohibition on state income tax because it ensures the highest earners pay the most.
An excerpt: "While Tennesseans grapple with the potential loss of state services and funding to our communities, Kelsey and Casada are sponsoring a measure that would permanently remove one revenue option from ever being considered in the state, locking Tennessee into what could be a perpetual revenue shortfall. On Feb. 8, Kelsey introduced Senate Joint Resolution 18 that would enshrine in the Tennessee Constitution a prohibition against any tax on incomes or payroll. The Senate approved the measure Wednesday and the House will soon take up the issue.

Tennesseans for Fair Taxation has long advocated a system of taxation that requires those with the greatest ability to pay and who benefit most from our government to pay more of the cost of government. According to the Institute on Taxation and Economic Policy's "Who Pays?" report in November 2009, Tennesseans earning less than $17,000 a year pay 11.7 percent of their meager income in state and local taxes while those earning $228,000 annually pay only 4.5 percent of their abundant income. Tennessee's tax structure is the fourth most regressive tax system in the nation -- meaning that incomes are more unequal after taxes than before. It is our excessive reliance on sales and other consumption taxes that causes the imbalance. The only way to correct this "upside-down" tax structure is to add a broad-based income tax and simultaneously reduce the oppressive sales tax."

Why the Rich Should Pay Their Fair Share

As our state Senate considers a constitutional amendment today that would ban an income tax in Tennessee, we turn to this evidence from truth-out.org of such a measure's short-sightedness and harm to our state's future economic growth and jobs creation:

"Reduced taxes on the rich leaves them with more money to influence politicians and politics. Their influence wins them further tax reductions, which gives them still more money to put to political use. When the loss of tax revenue from the rich worsens already strained government budgets, the rich press politicians to cut public services and government jobs and not even debate a return to the higher taxes the rich used to pay. So it goes - from Washington, to Wisconsin to New York City.

How do the rich justify and excuse this record? They claim that they can invest the money they save from taxes and thereby create jobs etc. But do they? In fact, cutting rich people's taxes is often very bad for the rest of us (beyond the worsening inequality and hobbled government it produces).

Several examples show this. First, a good part of the money the rich save from taxes is then lent by them to the government (in the form of buying US Treasury securities for their personal investment portfolios). It would obviously be better for the government to tax the rich to maintain its expenditures, and thereby avoid deficits and debts. Then, the government would not need to tax the rest of us to pay interest on those debts to the rich.

Second, the richest Americans take the money they save from taxes and invest big parts of it in China, India, and elsewhere. That often produces more jobs over there, fewer jobs here, and more imports of goods produced abroad. US dollars flow out to pay for those imports and so accumulate in the hands of foreign banks and foreign governments. They, in turn, lend from that wealth to the US government because it does not tax our rich, and so we get taxed to pay for the interest Washington has to give those foreign banks and governments. The largest single recipient of such interest payments today is the People's Republic of China.

Third, the richest Americans take the money they don't pay in taxes and invest it in hedge funds and with stockbrokers to make profitable investments. These days, that often means speculating in oil and food, which drives up their prices, undermines economic recovery for the mass of Americans and produces acute suffering around the globe. Those hedge funds and brokers likewise use part of the money rich people save from taxes to speculate in the US stock markets. That has recently driven stock prices higher: hence, the stock market recovery. And that mostly helps - you guessed it - the richest Americans who own most of the stocks.

The one kind of significant wealth average Americans own, if they own any, is their individual home. And home values remain deeply depressed: no recovery there.

Cutting the taxes on the rich in no way guarantees social benefits from what they may choose to do with their money. Indeed, their choices can worsen economic conditions for the mass of people. These days, that is exactly what they are doing."

State Income Tax Does Not Harm Recruitment or Cause Residents to Flee

The Center on Budget and Policy Priorities lays it on the line: It is a myth that taxing those with high incomes causes them to flee states with these tax policies:
"States are addressing huge, recession-induced revenue shortfalls by cutting everything from kindergarten funding to services for Alzheimer’s patients — and more deep cuts are on the way. Policymakers should ask those who can best afford it to pay somewhat more, solid in the knowledge — and despite assertions to the contrary — that they won’t flee from higher income taxes. In short, policymakers should base taxes on the cost of meeting real needs, not on unfounded fears."
Read the full story here

News Sentinel says Income Tax Ban a Bad Idea

This from the Feb. 9 News Sentinel:

TAX BAN WOULD ALSO HAMPER OPENNESS

A constitutional amendment definitively barring a state income tax has been introduced once again into the Tennessee General Assembly.

The joint resolution contains a provision that should send a chill up the spine of everyone who cherishes open government, regardless of their position on an income tax.

The resolution would be a step toward amending the state constitution to prohibit the state and all local governments from levying income or payroll taxes. Other than a tax on interest and dividends, the constitution doesn't authorize the General Assembly to levy an income tax, but it doesn't explicitly bar such a tax either.

The most troubling aspect of the resolution, however, is an addition that would close the windows on government activities in Tennessee by allowing the only public notice of the amendment to be postings on the Secretary of State and General Assembly websites. That's unacceptable.

The joint resolution is sponsored by state Sen. Brian Kelsey, R-Germantown and state Rep. Glen Casada, R-Franklin. Local lawmakers like state Sens. Jamie Hagood and Stacey Campfield, as well as state Reps. Steve Hall and Frank Nicely, have signed on as co-sponsors.

A similar measure was allowed to die last year, but the measure might have a better chance this year with Republicans firmly in control of both legislative houses.

Regardless of the amendment's content, the fiscal note accompanying the resolution should give everyone pause.

If the resolution is adopted by both houses, it then would have to be approved by the next General Assembly, which convenes in 2013, before heading to the voters in 2014.

Article XI, Section 3 of the state constitution requires the publication of the amendment in between the legislative votes. That's traditionally meant publication in the state's newspapers. The fiscal note attached to this bill, however, "assumes" that electronic publication alone complies with the constitution.

While the constitution was adopted before the Internet was an option and its use is open to interpretation, we don't think that posting a notice on a government website is sufficient. Too many Tennesseans - about one in four - don't have computers or access to the Internet. The government in such cases should be proactive in pushing information out to the people rather than forcing citizens to go digging through government websites to find it.

If government websites are considered adequate as the only venue for public notice, then all public notices - announcements of public meetings, invitations to bid on government contracts, foreclosures and others - could become harder to find as well.

One might even argue that confining public notices to government websites is like letting foxes guard the henhouses. Just wait and see what sort of slip-ups start happening in public notices then.

The point of the publication requirement is to inform more, not fewer, people, and changing it in this manner should be viewed as an affront to every Tennessee resident.

The question is this: if Kelsey and Casada believe this amendment is right for Tennessee, why won't they use the tried-and-true method of telling Tennesseans about it? What are they afraid of?

© 2011, Knoxville News Sentinel Co.

Why We Need an Income Tax

Sen. Bill Borah's 1909 treatise on the topic is enlightening.
An excerpt:
"The income tax is the fairest and most equitable of the taxes. It is the one tax which approaches us in the hour of of prosperity and departs in the hour of adversity. Certainly, it will be conceded by all that the great expense of government is in the protection of property and wealth. There is no possible argument founded in law or morals why these protected interests should not bear the proportionate burden of government."
Borah also explains that the income tax and not the sales tax, can ensure that a family's basic needs are met. The income tax is levied only after one's family has been fed, children's educations have been secured, and expenses have been met. A sales tax, on the other hand, is levied on the goods we must buy to feed our children, to educate our children, and to care daily for our families. A compelling read!!