•  The "domestic production deduction" - sometimes also known as the "qualified production activities income" or QPAI deduction - is a large corporate tax break enacted by the federal government in 2004. It is doubling in size in 2007, and tripling by 2010. 
• Some 18 states have disallowed the deduction, even though states typically base their tax codes on the federal. But 29 other states allow it, costing them a billion dollars per year or more. (The rest are unaffected.) '
• The tax break is unjustified as state economic policy. The main beneficiaries are large, profitable, multi-state corporations. They can benefit even if they have no in-state employees. 
• Disallowing the deduction is administratively straightforward. The revenue that would be saved can be used for other, more productive purposes.

Key Findings

•  When states cut taxes too much, they undermine and destabilize the revenue streams necessary to pay for education, transportation, health care, and other public services.  
• During the economic boom of the middle and late 1990s, many states enacted tax cuts, some of them quite large. Proponents argued that big tax cuts would improve a state’s fiscal and economic performance.  
• Those improvements did not occur. When the economic boom ended six years ago, states with big tax cuts had larger budget problems and larger job losses than states that had shown more fiscal restraint.  
• Even as the economy has recovered, the top tax-cutting states continue to lag behind.

Key Findings:

• A current services budget is an estimate of the expenditures required to maintain the current level of state services and benefits in an upcoming year. 
• Thirteen states plus the District of Columbia prepare some form of current services baseline. 
• A state current services baseline estimate takes into account inflation, caseload and population changes and previously-enacted program expansions and eliminations.

Key Findings

• In closed-door final negotiations on the “tax extenders” package, House and Senate negotiators added a tax break benefiting high-income taxpayers that was never passed by either the full House or Senate.
• The measure, which the House Ways and Means Committee approved on September 27, would make Health Savings Accounts more lucrative as tax shelters for high-income individuals.
• The measure would increase the amounts that could be contributed to HSAs each year, thereby allowing those who could make these additional contributions to shelter even more of their income from taxation.
• The measure also would encourage people with HSAs to increase the amounts they spend for health care — undercutting claims that HSAs lower health care spending — because the bill would allow people to put much more money into their HSAs each year than they would need to cover the high deductible in their health plans.
• The GAO recently issued a study which shows HSAs are being used disproportionately by high-income individuals and indicates many of these people are using HSAs as tax shelters.

Key Findings

• Congress reconvenes in mid-November to complete work on the annual appropriations bills, including the bill that (among other things) provides funding for “Section 8” housing vouchers. A key issue will be how to distribute the voucher funds that the bill provides.  
• The formula for distributing funds included in legislation that the House Financial Services Committee recently approved would make the most efficient use of these funds. Under the funding level Congress seems likely to provide for housing vouchers in 2007, this formula would avoid any cuts in the number of vouchers in use and allow agencies to restore many of the vouchers lost in recent years. 
• In contrast, maintaining the existing distribution formula, as a bill approved by the House Appropriations Committee would do, would result in the loss of 26,000 vouchers, despite spending the same amount of money. 
• The Senate Appropriations Committee has approved a bill that contains some, but not all, of the changes contained in the Financial Services Committee bill; under it, new voucher cuts would not occur, but most of the earlier voucher cuts would not be restored.

Note: This report is accompanied by state-by-state fact sheets which show the impact of the competing formulas on each public housing agency in the state.

Key Findings

• An extensive body of research shows that covering low-income parents increases enrollment by eligible children in health insurance programs, thereby reducing the number of children who are uninsured.
• Parental coverage also appears to improve children’s use of health care, such as preventive care.
• Policies that cut back coverage for low-income parents are likely to result in reduced coverage for children as well, and hence in more children becoming uninsured.
• Covering low-income parents also increases their own insurance coverage and access to care.

Key Findings:

• In September, Congress shifted $5.3 billion that Senate appropriators planned to devote to domestic programs to the defense and homeland security appropriations bills. As a result, $5.3 billion will have to be cut from other appropriations bills the Senate Appropriations Committee has approved — bills that largely fund domestic programs — when Congress reconvenes after the election.
• If the $5.3 billion reduction is achieved through an across-the-board cut, funding levels for all of the programs funded by those other bills will need to be cut 1.1 percent below the levels that Senate appropriators had approved. Since many of these programs already are slated for cuts, the cuts would now be deeper.
• For example, if the funding levels approved by the Senate Appropriations Committee were reduced by an additional 1.1 percent, Head Start would be cut a total of $221 million below the level needed to maintain current services (i.e., below the 2006 funding level adjusted for inflation). Education for the Disadvantaged Children (which includes Title I) would be cut a total of $479 million, while Pell Grants would be cut a total of $864 million and the National Institute of Health would be cut a total of $666 million.
• These new cuts would be on top of the $12 billion that has been cut from domestic appropriated programs over the past two years. The President has proposed to continue cutting these programs in each of the next five years.
• The action by Congress to shift $5 billion to the defense bill in September means that the efforts made by some moderate Republican lawmakers to mitigate cuts the White House proposed in domestic programs seem likely largely to fail.

Key Findings

• A House-passed 2007 funding bill would result in the deepest shortfall in public housing operating subsidies — the funds that enable local housing agencies to maintain developments, pay utility bills, and keep rents affordable to needy families — in more than 25 years. The Senate Appropriations Committee passed a version that provides some added funds but still falls far short of what is needed.
• Much of the underfunding stems from HUD’s failure to request funds to cover sharp utility cost growth in recent years.
• Faced with deep shortfalls in 2007, many local housing agencies will have to balance their budgets through steps that harm the vulnerable people they serve, about half of whom are elderly or have disabilities.
• Funding shortfalls in 2005 and 2006 have already forced some agencies to raise rents on the neediest households, defer safety-related improvements, and make other painful cuts.

Key Findings

• States that cut taxes significantly in 2006 typically did so in ways that hide the true cost and will make it harder to balance budgets in the future.
• Of the 10 states enacting tax cuts in 2006, nine “backloaded” the tax cuts, meaning that the bulk of the cost will occur in future years for which budgets have not yet been written.
• Those future revenue losses will exceed $5.1 billion per year, more than five times what states have budgeted for. This level of revenue loss could reduce states’ ability to meet existing or emerging needs in areas like education, health care, and transportation.

Key Findings

• TABOR would put a severe squeeze on the state budget, potentially requiring 1/6 of the budget to be eliminated over time.
• State aid to localities, which is 36 percent of the state budget, would face substantial cuts, particularly in education funding.
• TABOR also tightly limits local expenditures, causing further cuts in education, as well as cuts in public safety, road maintenance and other services.
• Residents faced with deteriorating services would likely respond by voting to override the TABOR limit — thereby maintaining or even increasing local property taxes. This is what happened in Colorado, where limits were overridden in most localities.
• Several other states have enacted property tax relief in recent years, but the methods they used would be precluded under TABOR.

Misunderstanding of the Treasury Study Mars Some News Accounts

Some of the reporting on the Treasury analysis has made a basic mistake.  The Treasury study found that making the tax cuts permanent would increase the size of the economy over the long run — i.e., after many years — by 0.7 percent, if the tax cuts are paid for by unspecified cuts in government programs.  This is a very small effect.  If it took 20 years for the 0.7 percent increase to fully manifest itself (Treasury officials have indicated it would take significantly more than ten years but have not been more specific than that), this would mean an increase in the average annual growth rate for 20 years of four-one-hundredths of one percent — such as 3.04 percent instead of 3.0 percent — an effect so small as to be barely noticeable.  Moreover, after the 20 years or whatever length of time it would take for the 0.7 percent increase to show up, annual growth rates would return to their normal level — that is, they would be no higher than if the tax cuts were allowed to expire.

Several news reports, however, mistakenly said that the Treasury found that making the tax cuts permanent would lead to a 0.7 percentage point increase in the annual growth rate.  If true, that would be an enormous economic benefit; it would increase the size of the economy by 40 percent after fifty years.  It would be more than fifty times larger than the 0.7 percent increase in the size of the economy over several decades that the Treasury study actually found.