Regional Taxation in State Tax Reform

This article describes and evaluates a specific subset of state tax reforms—i.e., those involving regional approaches to funding subnational public goods. Reforms examined include those where policymakers devise new multijurisdictional fiscal arrangements to address regional objectives that conventional local governments, by virtue of their more limited geographic scope, are unlikely to tackle. As used in this article, the term “region” refers to a geographic area (1) constituting less than the entire jurisdiction of a state, and (2) encompassing more than one local government jurisdiction. A “regional tax” is therefore any tax (fee, assessment, etc.…) limited in its application to a geographic area so defined. A closely related policy is “regional tax base sharing”—i.e., the imposition of a tax on a base that is shared among several local jurisdictions, with the proceeds distributed among those localities. There are numerous instances of regional taxation and regional tax base sharing across the U.S. subnational public finance landscape. Some of these examples are familiar to a tax policy audience (such as the Minneapolis-St. Paul tax base sharing system), while others are less well known (such as the Denver Scientific and Cultural Facilities District). In most cases, the fiscal arrangement examined governs multiple counties spanning an entire metropolitan region. Following an evaluation of both successful and failed efforts at regional tax arrangements, the article considers possible extensions of these policies, discussing how regional taxes or tax base sharing might figure in tax reform efforts under consideration in California

Beyond Bailouts: Federal Options for Preventing State Budget Crises

More than two years after the official end of the Great Recession, state governments still face significant budget deficits that cannot be addressed without further drastic spending cuts or substantial revenue increases. The structural origins of the ongoing state fiscal crisis are well known. Excessively procyclical revenue structures, combined with spending obligations that increase with economic downturns, have resulted in a budget dynamic for the states that is not sustainable over the long term. The consensus solution to this problem is for states to save money during boom times (via budget stabilization or “rainy day” funds) and to draw on those savings during recessions. Unfortunately, numerous studies have shown that states do not save anywhere close to an adequate amount for this to be an effective strategy. As a result, during each of the past several downturns, states have turned to the federal government for fiscal assistance—often derisively termed “bailouts”—to address fiscal imbalances. Yet these bailouts have their own problems, including creating an incentive for states not to establish adequate rainy day funds, which in turn increases the likelihood of future bailout demands. To escape from this vicious cycle, we propose a set of federal policy reforms to facilitate state savings. We offer a menu of policy options, rather than a single solution, because we argue that existing evidence does not clearly explain why states do not save. Therefore, we first analyze the possible sources of failure and then tailor a number of remedies for each; in nearly all cases, it is clear that states would be unable to overcome the problem on their own, making federal intervention particularly apt

Tax Reform and the American Middle Class

This essay examines how concern for the economic plight of the middle class should influence debates over federal tax reform. It begins with an overview of data on two key developments in American economic life over the past quarter century. The first is the deteriorating economic position of the middle class, a long-term trend illustrated by stagnant income growth, job polarization, and more limited economic opportunities as compared to earlier eras. The second development is the declining federal tax burden of the American middle class, including historically low average tax rates and relative tax shares, not just for the federal income tax but for all federal taxes combined. The reduction in middle class tax burdens was not the result of a well-conceived, comprehensive plan, but rather the result of numerous unrelated tax changes designed to remove the poor from the income tax rolls, convert welfare into “workfare,” lower taxes for families with children, and provide political cover for tax cuts for the wealthy. The juxtaposition of these two empirical developments presents policymakers with a dilemma in crafting tax reform proposals, especially those designed to address the country’s long-term fiscal imbalance through increased revenues. One approach would be to address these challenges exclusively through increased tax burdens on the wealthy while maintaining (or continuing to reduce) middle class tax burdens. While the impulse to pursue such a strategy is understandable in light of the economic vulnerability experienced by middle-income households, this approach also carries with it several costs, including a likely erosion in the fiscal viability of federal spending programs designed to provide income security for low- and middle-income households. In recognition of these costs, the essay considers an alternative strategy of increasing middle class tax burdens (as well as those of higher income households) with an eye toward ensuring the long-term fiscal viability of federal social safety net and other programs aimed at promoting economic mobility. This latter approach calls for less progressive taxes (perhaps even regressive taxes) to support more progressive spending programs

Is New York’s Mark-to-Market Act Unconstitutionally Retroactive?

It is well known in tax literature that rudimentary tax planning strategies enable wealthy individuals to avoid state and federal income tax on much of their true economic income. Indeed, the existing income tax has been described as being effectively optional for those who derive their income chiefly from the ownership of assets rather than the provision of services. The reason is — except for a few relatively narrowly tailored deemed-realization rules — both state and federal income taxes rely on the realization principle. Under realization accounting, taxpayers generally do not owe tax on economic gains until they sell their appreciated assets. Moreover, this is so even when taxpayers fund lavish lifestyles by borrowing against their appreciated asset

Caveat IRS: Problems with Abandoning the Full Deduction Rule

Several states have passed — and many more are considering — new tax credits that would reduce tax liability based on donations made by a taxpayer in support of various state, local or non-profit programs. In general, taxpayer contributions to qualifying organizations — including public charities and private foundations, as well as federal, state, local, and tribal governments — are eligible for the federal charitable contribution deduction under section 170. In a previous article, we explained how current law supports the view that qualifying charitable contributions are deductible under section 170, even when the donor derives some federal or state tax benefit by making the donation. We referred to this treatment as the “full deduction rule.” Some commentators have suggested that Treasury and the IRS could change existing law, whether through new regulations or by issuing a new interpretation of existing regulations, to limit the deductibility of taxpayer contributions when they trigger a state or local tax benefit to the donor. Many legal and administrative concerns are associated with those actions. In this report, we argue that even if the IRS has the legal authority to implement the changes absent new legislation, it should decline to do so

State Responses to Federal Tax Reform: Charitable Tax Credits

This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits. A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this Full Deduction Rule is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return. In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule. The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules. It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute

The Initial Conditions of Clustered Star Formation III. The Deuterium Fractionation of the Ophiuchus B2 Core

We present N2D+ 3-2 (IRAM) and H2D+ 1_11 - 1_10 and N2H+ 4-3 (JCMT) maps of the small cluster-forming Ophiuchus B2 core in the nearby Ophiuchus molecular cloud. In conjunction with previously published N2H+ 1-0 observations, the N2D+ data reveal the deuterium fractionation in the high density gas across Oph B2. The average deuterium fractionation R_D = N(N2D+)/N(N2H+) ~ 0.03 over Oph B2, with several small scale R_D peaks and a maximum R_D = 0.1. The mean R_D is consistent with previous results in isolated starless and protostellar cores. The column density distributions of both H2D+ and N2D+ show no correlation with total H2 column density. We find, however, an anticorrelation in deuterium fractionation with proximity to the embedded protostars in Oph B2 to distances >= 0.04 pc. Destruction mechanisms for deuterated molecules require gas temperatures greater than those previously determined through NH3 observations of Oph B2 to proceed. We present temperatures calculated for the dense core gas through the equating of non-thermal line widths for molecules (i.e., N2D+ and H2D+) expected to trace the same core regions, but the observed complex line structures in B2 preclude finding a reasonable result in many locations. This method may, however, work well in isolated cores with less complicated velocity structures. Finally, we use R_D and the H2D+ column density across Oph B2 to set a lower limit on the ionization fraction across the core, finding a mean x_e, lim >= few x 10^{-8}. Our results show that care must be taken when using deuterated species as a probe of the physical conditions of dense gas in star-forming regions.Comment: ApJ accepte