WHEREAS:
Over the past three years, state and local governments; have been devastated by the most severe fiscal crisis since the 1930's. The deep and prolonged Reagan recession, and the Administration's cuts in federal aid, deprived state and local governments of needed revenues. The legacy of the fiscal crisis persists for many state and local governments with services below pre-recession levels and fund balance reserves well below prudent levels; and
WHEREAS:
State and local taxes account for nearly one dollar out of every three paid by the American taxpayer. It is critically important that these revenue are collected based on the concept of ability-to-pay; and
WHEREAS:
Recent trends in state and local taxes show a continued shifting away from corporate taxes and toward higher individual taxes and a greater reliance on regressive user fees and excise taxes. Of the additional revenue raised between fiscal years 1980 and 1983, individual income taxes rose by 35% while corporate income taxes fell by 2.4%. Meanwhile, miscellaneous taxes, consisting mainly of regressive user fees and alcohol and cigarette taxes, rose a staggering 52%; and
WHEREAS:
A new round of the taxpayer's revolt is spreading across the nation. It is being fueled by large tax increases enacted to make-up for shortfalls in revenues caused by both the recession and the continued unfair shift of state and local taxes away from corporations and the well-to-do and onto middle and lower income families. Under the guise of promoting tax reform and controlling "out-of-control" government spending, anti-government groups are, once again, promoting regressive tax initiatives that will dismantle vital public services; and
WHEREAS:
Simplistic and regressive initiatives to cut or limit taxes do not address the onerous inequities of existing tax systems. Effective tax reform strategies are needed, particularly for the major state and local government tax revenues: the personal and corporate income tax, the general sales tax, and the property tax.
Personal Income Tax
WHEREAS:
The graduated personal income tax is the most equitable mechanism for raising revenues. It is critical that progressive income taxes be made the cornerstone of tax systems in order to offset the regressivity of the other state and local taxes; and
WHEREAS:
The income tax is extremely under-utilized by state and local governments, raising less than one-quarter of total taxes. Ten states now have no broad-based state income tax. Of the forty states that do levy an income tax, five states have only proportional rates, while most other states have nominal graduated tax brackets that "top off" at relatively low incomes; and
WHEREAS:
Many state personal income taxes have other flaws, which undermine the fairness of the personal income tax and deprive state governments of substantial revenues, including permitting the deductibility of federal income taxes, allowing favorable capital gains treatment, and conforming to federal treatment of Individual Retirement Accounts; and
WHEREAS:
Income tax regressivity is particularly severe at the local level. These taxes typically have no exemption or standard deductions and are levied only on wages and salaries. As a result, most local income taxes are no more than payroll taxes in disguise; and
WHEREAS:
A progressive personal income tax is the most convenient vehicle for reducing the tax burden on low income taxpayers. It also has the ability to generate new tax revenues automatically during periods of economic growth. Such automatic growth responsiveness is desirable in order to help governments meet the inevitably rising costs of providing public services to a growing population.
States Tax
WHEREAS:
The general sales tax is a major source of state tax revenue, raising over one-third of all state tax revenue. Unfortunately, sales taxes also place heavy burdens on low and moderate income families. This regressivity can be severe, but it can be offset either by exempting necessities from the sales tax base or by adopting an income tax credit for sales taxes paid; and
WHEREAS:
Most general sales taxes do not cover all business transactions. Services such as data processing, advertising and consulting typically fall outside the sales tax. These business sales exemptions are very costly and unfairly place the sales tax burden on individual consumers. Business services meet the needs of business consumers in the same way that purchases of goods do. As the economy becomes more service and information oriented, the use of business services will grow and represent a larger share of business sales. Not including business services in the sales tax base will significantly undermine the adequacy and fairness of the sales tax; and
WHEREAS:
Many states' sales tax systems exclude services purchased by individual consumers from the tax base. Since higher-income individuals spend a greater share of their incomes on services (e.g., legal and accounting assistance) than do lower-income individuals, this artificial limitation of the sales tax base to goods results in lower income households bearing a disproportionate share of the sales tax burden; and
Property Taxes
WHEREAS:
The passage of Proposition 13 in California and Proposition 2½ in Massachusetts highlighted the unfairness of the property tax and the excessive burdens it places on low and moderate income families. As currently structured in most jurisdictions, the property tax is a regressive tax. Meat-axe cuts of the Proposition 13 and 2½ type actually heighten the unfairness of the property tax; and
WHEREAS:
If properly structured and fairly administered, property taxes are a loophole-free, stable and important source of revenue. As currently administered, the property tax places an unfair burden on low and middle income families. An effective mechanism for dealing with this problem is the "circuit breaker," which is now used in 30 states. This device provides property tax relief based on income and level of tax. A circuit breaker is the best means of targeting relief to both homeowners and renters. Another way to improve the fairness of the property tax is to tax commercial or industrial property at higher rates than residential property through the use of "split roll" or "classification" methods of assessment; and
WHEREAS:
Property taxes can be extended to apply to "intangible" property — stocks, bonds, etc. — as well as to real estate. Simple fairness demands that the financial assets of the well-to-do be taxed on the same basis as the major asset of the typical middle income fami1y, the value of their house. Intangible property taxes have the advantage of being highly progressive, and raise significant revenues at low rates of taxation.
Business Taxes
WHEREAS:
A dramatic shift in the direct tax burden paid by businesses versus that paid by individuals has taken place over the last twenty-five years. In 1957, businesses paid 37 percent of total state and local taxes. In 1980, they paid only 31 percent. At the same time, the share paid by individuals has risen from 63 percent to 69 percent; and
WHEREAS:
The Reagan Administration's 1981 tax cut contained a time bomb for state governments. Since almost all states follow federal tax rules and definitions, their tax revenues have been cut as well unless they have acted to "decouple" themselves from federal law, particularly federal depreciation rules; and
WHEREAS:
Increased concern over economic development has sparked intense competition among states, and even in localities within states, for industry. Both state and local governments have too frequently opted for tax breaks to businesses, which will continue to increase the disparity in the tax burdens borne by businesses and individuals; and
WHEREAS:
Business tax breaks provided by state and local governments do not promote economic development or entice businesses to remain in or relocate to an area. Large corporations, which tend to be the prime beneficiaries of many tax breaks, are being rewarded for doing exactly what they would have done without any tax advantage; and
WHEREAS:
Many states rely on the ineffective arms-length method for determining corporate income taxes earned in a state. The arms length or the separate accounting method of apportioning corporate income permits multi-state and multinational firms to shift profits among subsidiaries in order to avoid paying taxes. A more effective and fair method for determining corporate profits within a state is the worldwide unitary method, which allocates profits of the integrated corporation (including closely held subsidiaries) to a state based on the share of worldwide sales, property and personnel located there. In a recent decision the Supreme Court upheld the constitutionality of the worldwide method. Because it is primarily large corporations that can take advantage of the arms-length loophole, many small business groups are strong proponents of the worldwide unitary method.
THEREFORE BE IT RESOLVED:
- That AFSCME urges state and local governments to achieve more equitable and responsive tax systems by:
- Relying more heavily on progressive personal and corporate income taxes for financing the growing demand for public services.
- Not permitting the deductibility of federal income taxes, favorable treatment of capital gains income, and conformity to the federal Individual Retirement Accounts exemption.
- Adopting an income tax credit or exempting necessities from the sales tax base to offset the regressivity of sales taxes.
- Broadening the base of the sales tax to include services, including those purchased by businesses.
- Adopting a "circuit-breaker" system to provide property tax relief for low and middle income homeowners and renters, and adopting higher effective tax rates on commercial and industrial property.
- Extending the property tax to intangible property.
- Transforming regressive local wage taxes to broadbased graduated income taxes through such means as piggy-backing on existing state income taxes.
- Rejecting the use of "economic development" tax breaks for businesses, which erode the tax base, promote destructive competition among states, and provide a windfall subsidy to businesses without producing benefits to the local economy.
- Decoupling state business income taxes from the Accelerated Cost Recovery System federal tax depreciation rules.
- Adopting the "unitary method" of corporate taxation that allows states to tax a fair share of multinational and multi-state corporations' worldwide earnings.
- Joining the Multi-state Tax Commission so that, through uniformity of codes, states can more fairly assess the tax liability of interstate and international businesses.
- That AFSCME urges the Federal Government to reject any legislation which would prohibit the states from utilizing the unitary method of corporate income taxation.
SUBMITTED BY:
International Executive Board