Connecticut Gas Taxes: Playing Politics with a Serious Crisis

The Connecticut House and Senate each approved a bill early Thursday morning that adds to the state’s existing $150 million deficit by cancelling a scheduled increase in the state’s tax on wholesale earnings from gasoline sales. Governor Rell is expected to sign the measure. The bill prevents what would have been a 0.5% increase in the petroleum wholesale earnings tax, which industry lobbyists are claiming would have increased prices at the pump by about 5 cents.

The estimated cost of this bill has been pegged at $25 million. It may at first seem odd that Connecticut lawmakers have decided to make cutting taxes a top priority when the state is facing a budget deficit and numerous counties have been forced to scale back vital public services whose benefits almost certainly outweigh their costs. Even in the face of these serious budgetary issues, one of the first reactions from Democratic House Speaker James A. Amann was that “We didn’t raise taxes, so we’re pretty proud of what we’ve done.”

What’s going on here? Why is restricting revenues such a priority when it couldn’t be more obvious that state and local governments need more funds to provide the services Connecticut families have come to expect?

The answer: It’s an election year! Republican legislators, outnumbered 44 to 107 in the House and 13 to 23 in the Senate, have opted for a strategy of supporting viscerally appealing, though often fiscally irresponsible plans designed to gain some positive publicity and win votes in November. The majority of those plans have been ignored by the Democrats in power (for the most part with good reason), though with gas prices as high as they are, the Democrats decided not to take the political risk associated with appearing uninterested in the effects of high fuel costs on Connecticut families.

This isn’t at all surprising. Many state lawmakers across the nation have latched on to the headlines being generated by high fuel prices by proposing gas tax reductions much better suited for winning votes than for actually helping anybody in need. This plan in Connecticut is no different.

Even if we put aside our skepticism of the petroleum industry’s figures and accept their estimate that this bill will prevent a 5 cent increase in the price of gas, few observers could seriously suggest that avoiding this increase will do anything to improve the financial situation of Connecticut families. During the brief debate that occurred earlier this year over a proposed suspension of the 18.4 cent federal gas tax, that plan was heavily criticized for only providing the average driver with a $30 tax cut. The Connecticut bill would save drivers less than a third of that amount, though it would play a noticeable role in driving the state government millions deeper into debt.

Well aware that this bill would only provide a negligible tax cut for the average family, one legislator insisted, in typical election-year fashion, that it is important to “let our citizens know that we are very concerned about what they’re up against”.

That’s what makes this whole debate so discouraging. The problem is not just that Connecticut lawmakers are shamelessly hunting for votes – it’s that in the face of a serious crisis for lower-income families, lawmakers have decided that “letting our citizens know we’re concerned” is more important than actually doing something meaningful to help them.

Even if Connecticut legislators wished to avoid a needed restructuring of their state’s regressive tax system, this does not change the fact that much better options exist for providing real assistance to families hurt by high fuel costs. Instead of offering across-the-board tax relief that benefits both Connecticut’s wealthiest, as well as its poorest families, a targeted low-income gas tax credit of the type enacted in Minnesota could have distributed more gas tax relief to lower-income families at a similar cost. Alternatively, Connecticut could have given consideration to enacting a modest Earned Income Tax Credit (EITC) or a meaningful low-income, refundable property tax circuit-breaker. Admittedly, an EITC or circuit-breaker would cost more than a gas tax cut or gas tax credit, but if legislators are genuinely “concerned”, wouldn’t it be worth it to find the money somehow? Until legislators readjust their priorities from winning votes to improving the lives of those struggling to make ends meet, Americans shouldn’t expect any relief beyond the kind of poorly targeted and gimmicky tax cut passed in Connecticut.

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Alabama case contests discriminatory property tax restrictions

In a court case filed earlier this year in Alabama, lawyers for several rural schoolchildren and their parents hope to demonstrate that Alabama’s regressive tax code unconstitutionally disadvantages children in poor, rural counties by limiting the ability of localities to raise a reasonable amount of revenue with which to fund education. The plaintiffs’ approach in this case involves a thorough accounting of the history of Alabama’s property tax, with the intent of demonstrating that these policies were purposely enacted to destroy the ability of counties to pay for African Americans’ educations with money raised from wealthier white landholders. If this approach proves itself effective, the requested remedy is a mandate requiring the governor and legislature to work together to rewrite Alabama’s property tax law in such a way as to make it non-discriminatory.

Though there may be reason to question the use of the courts in securing tax policy reform, what is interesting about this case is the way it demonstrates the unsavory original intent behind many of Alabama’s property tax limitations. The district court hearing the case conceded as much in an earlier case when it stated that “constitutional provisions governing the taxation of property [in Alabama] are traceable to, rooted in, and have their antecedents in an original segregative, discriminatory policy”.

According to the plaintiffs’ official complaint, following Reconstruction, Alabama’s white elites exploited widespread racial resentments in order to gain enactment of their favored regressive tax policies. In the post Civil War period, the tax base, which had been focused on the slave trade, was redirected onto land. But when blacks were enfranchised, wealthy whites who owned significant tracts of land in the “Black Belt” feared that if blacks were granted local autonomy, they would vote to raise property taxes (which would hit hardest those well-off enough to afford significant amounts of property) in order to support their own education. Though the idea of funding public services for the poor with money drawn from more fortunate members of society is hardly controversial today, at the time the prospect of privileged whites having to pay for the education of “inferior” African Americans was extremely unsettling. Limiting the amount of tax that could be levied on property thus became a top priority.

One of the earliest manifestations of this sentiment can be founded in the 1875 Redeemer Constitution. Caps on the rate of property taxation were implemented, largely in order to protect wealthier whites from tax increases in predominately black localities. At the time, and for some years after, manipulative assessment schemes served a similar end.

Later, in 1891, the Apportionment Act explicitly allowed for funds to be transferred from black to white schools. This removed any impetus for whites to increase property taxes to fund their own schools, and made property tax caps even more useful.

Subsequent to these policies came the adoption of the 1901 Alabama State Constitution, still in effect today, which the plaintiffs claim was created with the explicit goal of “disenfranchising blacks and maintaining white supremacy” in the state. That claim seems relatively uncontroversial, as the Constitution established a poll tax, as well as literacy and landowning requirements for voting that kept African Americans effectively disenfranchised and segregated from the rest of society until the 1960s. With blacks disenfranchised, the constitution also established a referendum requirement for all local property tax changes.

In addition to the disenfranchisement of blacks was a solidifying of state-level control of local tax issues. The plaintiffs describe state intervention into local property tax policy as an important “fall-back provision for guaranteeing the maintenance of white supremacy in black majority counties”. Unlike some county governments, the state was certain to maintain a white majority of legislators.

Although discriminatory voter laws, segregation, and inconsistent property assessments were eventually struck down in court in the 60s and 70s, the crippling effects of other Alabama tax laws contained in the state constitution continue to this day. In response to a federal district court ruling that struck down the irrational assessment system that had been used in Alabama for decades, the Alabama legislature passed a “Lid Bill” amendment that was ratified by voters in 1972. The amendment (Amendment 325) established fair market value assessment ratios for all kinds of property (30% for utilities, 25% for other business property, and 15% to residential, farm, and forest lands) and imposed an absolute lid on all ad valorem taxes of 1.5% of fair market value. To see why “split roll” property taxes of this type are a poorly targeted way to shift the tax burden from residents to businesses, see this policy brief from the Institute on Taxation and Economic Policy (ITEP).

A second Lid Bill in 1978 lowered the property assessment ratio to 10% for residential, agricultural, and forest land and measured value not as “fair market value” but rather on the land’s “current use.” Requiring land to be taxed on the value of its current use results in a huge tax break for wealthy landowners and speculators. As the court brief explains, “Seventy percent of Alabama’s land mass is forest land, but due to the 10% assessment ratio and current use provisions of the 1971 and 1978 Lid Bill Amendments, forest land contributes only 2% of all property tax revenue.”

To add yet another layer of unfairness, the Lid Laws revoke local autonomy by requiring a lengthy three stage process if a locality wishes to raise property taxes. First, the locality’s commission or council must vote to request that the legislature pass a local constitutional amendment that would raise the locality’s property taxes. Then the state legislature must approve the constitutional amendment, with at least 60 percent of both chambers voting in favor. Finally, a majority of the locality’s voters must approve the amendment in a referendum. As the icing on the cake, if any member of the Legislature objects to the amendment, then it is sent to a statewide vote (and thus, most people voting on it will not even be subject to the locality’s property taxes). These extremely cumbersome requirements not only undermine local control but also impede the state legislature from promptly dealing with more important state business.

Unlike the debates that had taken place in the late 1800s and early 1900s, the discussion of whether to enact the 1970s Lid Laws was much less openly racist. But with George Wallace, a famous segregationist, in the office of the governor, race was certainly a visible issue. Given the history of Alabama tax policy, it’s not at all surprising that the plaintiffs conclude that,

There is an historical pattern of the racial motives behind the property tax provisions in the Alabama Constitution: There is a direct line of continuity between the property tax provisions of the 1875 Constitution, the 1901 Constitution, and the amendments up to 1978.

But aside from the existence of racial biases in the intent of Alabama tax law, what is more useful to point out is the existence of anti-poor (and as a corollary, anti-black) biases in the effect of the law.

The confluence of anti-tax provisions in effect in Alabama makes obtaining sufficient revenues from property taxes nearly impossible. Alabama property taxes are the lowest in the nation as a share of personal income. According to the court brief, in 2003, Alabama spent $5,908 per K-12 student, compared with a national average of $7,376 per student, making it the fourth lowest ranked state. The correlation between property taxes and school spending is no coincidence and it has serious negative consequences for Alabama schools, and in turn for the state’s long-term economic growth. Many school buildings are old and crumbling, and some are so overcrowded they have been forced to use trailers for overflow classrooms. Alabama is among the bottom ten states in writing scores with 76% of 8th graders writing below grade-level.

But a look only at property taxes and school funding does not provide a view of the full picture. Simply put: low property taxes are not the same thing as low taxes overall. Due largely to unusually high sales taxes and an almost-flat income tax, lower- and middle-income Alabamians actually end up paying a very significant amount of their income in state and local taxes. According to ITEP data, the poorest 20% of Alabama residents (earning less than $16,000 a year) pay about 11.2% of their income in state and local taxes under 2008 tax law. That’s well over two times the percentage paid by the richest 1 percent, or those with average incomes of more than $999,400.

A large contributor to this outcome is the entrenched preference for sales taxes in Alabama’s tax code. Sales taxes are exempted from the referenda requirements in place for raising property taxes, so many localities rely on these to fund schools. Sales taxes run as high as 11% in some parts of Alabama and according to ITEP estimates, the bottom 80% of taxpayers pay over five times as much in sales taxes as they do in property taxes. Sales taxes are also notoriously vulnerable to economic slowdowns. Making matters worse for Alabama’s sales tax is that it is littered with numerous needless exemptions for various goods and services (each of which contribute to the need for such high sales tax rates in the state) while groceries continue to be subject to the tax. Grocery taxes hit the poor the hardest since such a large portion of a poorer family’s income goes to paying for groceries. Alabama is one of only two states where sales tax is fully applied to groceries.

Alabama also has a seriously flawed income tax code. Up through 2005, Alabama required a family of 4 to start paying income taxes on $4,600 of income. This threshold was raised to $12,600 in 2006, but it’s still the fourth lowest in the nation (and a family of four is considered poor if they made less than $19,961 in 2005). Its higher tax brackets kick in at such low income levels (Almost 70% of Alabama taxpayers paid at the top rate in 2006) that the wealthiest 20% of Alabamians actually manage to pay out less of their income in income taxes than the middle 20%. This is in large part because Alabama is one of only seven states that allow a full deduction from state income taxes of federal income taxes paid. Since the wealthy pay much more federal income taxes than the poor and middle class, this sharply reduces the effective tax burden of the state income tax on the wealthy.

How can this be changed? Much of the problem lies with Alabama’s constitution, which has kept Alabama’s tax code among the most regressive in the nation. (Incidentally, the 1901 constitution was only ratified by rigging the vote in Alabama’s Black Belt – the referendum actually lost outside the Black Belt where there was no vote rigging). Entrenching tax policy in the state constitution is never a good idea as it makes it far too difficult to adjust the law to confront new challenges. A movement away from this process would be a great first step.

The legacy of tax unfairness is inexorably linked to the legacy of racial injustice in Alabama. The intentional racial bias in Alabama’s tax system may be less visible today, but effects on low-income Alabamians are still very plain. Aside from all the legal and historical arguments raised by this court case, one thing is clear: the solution proposed by the plaintiffs – that the Governor and legislature work to enact serious reforms to Alabama’s tax system – is absolutely necessary. Alabama property taxes are the lowest in the country and K-12 and higher education have both noticeably suffered as a result. High sales taxes and an essentially flat income tax exacerbate this imbalance. It’s time for Alabama to break away from its humiliating past and enact a tax system designed with 21st century considerations in mind.

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Gas Taxes: When Is An ‘Increase’ Not An ‘Increase’?

Facing the clashing realities of rising transportation costs and widespread opposition to tax increases, state governments are turning to tolls, fees, and less visible local sales taxes wherever possible. But though increasing the gas tax has been perceived as political suicide by many politicians, tinkering with this traditional centerpiece of transportation funding is worth a second look. Gas taxes are intended to charge drivers for their use of public roads, and when gas tax revenues consistently fall short of the amounts needed to maintain those roadways, increasing that tax makes great intuitive sense.

Aside from all this, in most cases raising the per-gallon gas tax can boost revenues without actually “increasing” taxes in the traditional sense. This paradox, where a “tax increase” may not actually be a “tax increase” at all, arises primarily from the odd structure of the gasoline tax. Unlike traditional percentage-based sales taxes where the tax you pay is a fixed amount of every dollar you spend (typically 5-7 cents per dollar), gas taxes are levied as a fixed amount per gallon (typically 15-35 cents per gallon at the state level).

Under a traditional sales tax, as the price of goods increase, tax revenues increase accordingly. With a 5% sales tax rate, for example, the tax owed on a $3 gallon of milk is 15 cents. If after a few years milk has increased in price to $4 as a result of inflation, the tax per gallon will rise to 20 cents. This increase in taxes paid is in essence identical to what occurs when the legislature decides to increase the per-gallon tax on gasoline, but it receives none of the negative publicity. Additionally, given that inflation increases the cost of providing public services, such tax increases are in fact a necessary component of any sustainable method of financing government.

Though this problem plagues every government relying on per-gallons gas taxes, taking a look specifically at Minnesota’s recent gas tax increase is particularly illuminating. Legislators in Minnesota who were involved in the tax increase are currently taking a lot of criticism for being “tax-first liberals” unconcerned with perceived out-of-control government spending.

Using data released by the U.S. Energy Information Administration, the 2 cent gasoline tax enacted in Minnesota in 1925 was at the time equivalent to a 9% tax (when gasoline cost 22 cents per gallon). Where does Minnesota stand today now that their tax was recently increased from 20 to 28.5 cents? This may come as a shock to some, but today’s 28.5 cent tax is still the same as a 9% rate (assuming, conservatively, that gas costs $3.07 per gallon). Without the 8.5 cent hike, the effective gas tax rate would have been only 6.5%. For some perspective, Minnesota gas taxes have been levied at effective rates of 20% or more for 13 of the past 83 years, most recently in 1988 and 1989.

A similar result can be shown by examining the effects of inflation over this time period, using data from the Consumer Price Index (CPI). Adjusted for inflation, the 2 cents collected on each gallon of gas in 1925 was the equivalent of what would be a 24.4 cent tax today. By setting the rate at 28.5 cents, what the legislature has done is little different from what inflation does to percentage-based sales taxes, though inflation of course does not have to face any of the harsh criticisms currently directed at Minnesota legislators.

Data released by the U.S. Census Bureau also suggests that Minnesota’s 8.5 cent hike may not really be a tax increase by yet another measure: as a share of consumer income. While many meaningful measures exist for measuring tax changes, what has the most meaning for consumers is tax as a percentage of personal income. Data on this measure do not extend as far back, but what is clear is that a smaller portion of Minnesotans’ budgets is going to paying the gas tax than at almost any time in the last 30 years. In 1977, 0.7% of income earned by Minnesotans went to paying the gas tax. The trend since then has been steadily downward, reaching a low of 0.3% of income in 2005. The 8.5 cent hike will certainly change this figure, though not by enough to negate the overall trend. This trend can be observed in nearly every state, and it demonstrates plainly that despite numerous per-gallon tax increases across the nation over the past few decades, gas taxes have become a less important component of taxpayers’ daily budgets and daily lives. If transportation is to continue to be adequately funded, the portion of taxpayers’ budgets devoted to its funding it will have to rise.

Summing up, it should be clear that states are justified in regularly increasing their per-gallon gas tax rates. Doing so is necessary for maintaining transportation infrastructure, and doing so should, in reality, be relatively painless since inflation is always hard at work minimizing and eventually negating the impact of such increases.

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