Tax Reform

In his 2/13/08 State-of-the-State address, Minnesota Governor Tim Pawlenty announced that he would create a 21st Century Tax Reform Commission to recommend tax reforms for the 21st century economy. Related to this, he also noted:

• the state has a serious deficit
• tax policies, job climate and large government have harmed economic growth
• there is a need to reduce taxes
• Minnesota should join other states and cap property taxes
• there is a need to move the tax system from the 1960s to the 21st century
• tax reforms should "encourage job growth, income generation, investment, entrepreneurial activity, research and exports"

Well, as the title of this blog would suggest, I think this is a good move for Minnesota. But, it won't be easy -- change rarely is.

The presidential candidates have mostly "tweaking" ideas for our tax system; they don't seem to be focused on the incredible budget and tax issues that will face the new president during the first term. Or, perhaps they just aren't being asked the right questions.

Pending fiscal challenges include:

President Bush has mentioned providing a tax deduction for health insurance. His 2009 budget proposal has more of the details:

1. Employees would be required to include in income the amount their employer pays to provide health care coverage for them. This amount would be reported on the employee's W-2 so they wuold know how much it is.
2. Employees (and others) could deduct what they spend on health insurance (or what their employer spends on them and they have to report as income). The deduction is limited to $15,000 ($7,500 for single coverage) and appears to be allowed as a deduction even if the individual does not itemize their deductions. It is also called a "standard deduction" and it appears you get that much even if you don't spend that much on your "qualified coverage."

Basically, the rationale is that this change should bring the insured - the patient, back into the health care COST decisions. Today, most employees with employer-provided health benefits probably cannot tell you how much their employer pays and how much they pay. They are also likely not aware that the government is giving them a tax break by not requiring them to pay income or payroll taxes on the benefit they get when their employer pays for their health insurance. And, most states match the tax break. It is very generous.

2007 was a year of examining our corporate income tax system and considering alternatives -- but only as a preliminary step to further discussions and debate.

The US combined federal and state corporate tax rate is one of the highest among industrialized countries due to reforms in those countries in the past several years. Many believe that lowering the federal income tax rate on corporations would help make U.S. companies more competitive in the global market. House Ways & Means Committee Chairman Charles Rangel included a corporate rate reduction in his "mother of all tax reform" bills (H.R. 3970) introduced in October 2007. That bill also included some base broadening to help pay for a lower tax rate.

But, there are many issues to consider:

California continues to have budget deficiencies. The Legislative Analyst's Office (LAO) projects a $1.9 billion deficit for the current year if no actions are taken to bring the budget into balance. And, it gets worse. The LAO projects a shortfall of $8 billion for 08/09 and another $8 billion for 09/10. Thereafter, with debt to fund prior deficits paid off, the annual shortfall is projected to be a mere $3 billion per year.

Wow!

Here are some ideas to address the shortfall:

Congressman Rangel's "mother of all tax reform" bills - H.R. 3970, is an interesting mix of items. It includes repeal of the individual AMT, an increase in the standard deduction, a new individual surtax, a lower corporate tax rate and a 1-year extension of 32 temporary provisions.

What would it take to get major tax reform enacted? I think at least the following:

As promised, on 10/25/07, Congressman and Chair of the House Ways & Means Committee Rangel introduced the "mother of all tax reforms." Major provisions of the bill include repeal of the alternative minimum tax (AMT) for individuals after 2007. The cost of the repeal is about $800 billion over 10 years. His bill, H.R. 3970 (text, summary), pays for AMT repeal and some expansions of provisions benefiting low to middle-income taxpayers with a 4% surtax on individuals with income over $100,000 ($200,000 if married) and 4.6% for income over $250,000 ($500,000 if married).

The proposal also lowers the top corporate tax rate from 35% to 30.5% and cuts back on some preferences such as: