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Thursday, April 15, 2010

The benefits and pitfalls of tax policy

On the day by which Americans have to file their taxes or get an extension here is an illustration of how tax policy can hurt or help.

State and local governments have been hit particularly hard by the recession due to declining tax revenues and increased expenses for unemployment, Medicaid and other programs. The expected shortfall for states and local governments is a whopping $469 billion over the next three years. It’s also estimated that a further 900,000 state and local government jobs could be lost. There are two solutions – cut costs or raise taxes.

Here is how 6 states are dealing with the problem.

VIRGINIA: Virginia faces a $2.2 billion shortfall over the next two years. The conservative Governor (he of the Confederate honoring proclamation) said he would veto any tax increase. The result is a $730 million cut in education, freezing enrollment in a health insurance program for low income children, ending the school breakfast program, closing State parks and requiring state workers to take 10 days unpaid leave a year. The result is schools suffer; teachers are laid off, parents of low income children will wait until the last minute to seek health care and when they do it will be in the emergency room and will end up costing the state more. As a result, the economy in the state will contract even further and the quality of education will decline.

MINNESOTA is doing much the same but is also taking away health care for 20,000 people while cutting corporate taxes by 20%. CALIFORNIA, normally a progressive state has a totally dysfunctional government where 50% plus one of the general population can vote for a spending initiative but a 2/3 majority in the State Senate has to agree to pass any tax increases and the Republicans veto any tax increase. The result is that almost 800,000 state employees have seen their salaries cut 10% with another 5% cut on the way. School funding has been cut by billions. Over 20,000 teachers have been laid off with more to come and over 200,000 children have or will lose their health insurance.

OREGON, a more progressive state was facing a $2.5 billion shortfall with similar cuts. Instead voters in Oregon passed short term tax increases on the wealthiest 2.5% of Oregonians and on the richest 7% of corporations to shave over $1.1 billion off the shortfall despite an onslaught of ads funded by Oregon corporations. As a result Oregon will be able to fully fund education and other services without any cuts. The same scenarios happened in NEW YORK and WISCONSIN where small, short term tax increases for the wealthiest will be enough to offset any potential cuts.
It doesn’t require a genius to see which states will be in better shape in a few years. In New York for example, people earning over $500,000 a year will pay 2% more in state taxes while those earning $250,000 to $500,000 will pay 1% more. They will barely notice it but schools, teachers and those in need of assistance for health care will certainly notice the benefit of not enduring cuts.

Republicans however believe that the cure for any and all economic situations is tax cuts. This flies against all rational economic theory but they’re sticking to it despite the fact that across the board tax burdens are at historical lows. It reminds me of the accepted cure for most illness well into the 19th century. It was believed that bleeding a patient (literally draining x amount of blood from the victim) would cure the illness and if they died, they were going to die anyway and if they recovered they were going to recover even though bleeding inevitably slowed the recovery.

Next: How the richest Americans pay less tax proportionately than the middle class.

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