An interview with Greg LeRoy and Matt Gardner 

Public Service Reporter conducted the following Q&A with Greg LeRoy and Matt Gardner. LeRoy is executive director of Good Jobs First, a project of the Institute on Taxation and Economic Policy (ITEP), a nonpartisan, nonprofit research and education organization that works on government taxation and spending policy issues. Gardner is an ITEP policy analyst. More about the two organizations can be found at http://www.goodjobsfirst.org/.

Regarding the politics of taxation: People want more services but they also want lower taxes. How do we reconcile such contradictory desires and influence debate at the federal, state and local levels?

Ooh, nothing like a fastball for openers! We think it's important to always personalize government services: Your taxes pay for your  child's teacher, your  highway, your  police protection, etc. Also, taxes, like wages, are a relative thing. So it's really important to remind people which taxes fall hardest on low-income people and which tax breaks are a windfall for the rich. The United States, historically, has had an anti-government streak. We do not revere our public employees the same way some European and Asian societies do. But with public sentiment so favorable to government employees since Sept. 11, and with so much disgust at the private sector since Enron, perhaps the pendulum is swinging back toward fairness.

What are the primary components of a state's tax system?

The main elements are consumption taxes (e.g., sales and excise taxes); which comprise 35.7 percent of state and local tax revenues; property taxes, which constitute 29.5 percent of revenues; and income taxes (mostly personal, a little corporate), which are 27.3 percent of revenues. States also get revenue from federal programs, as well as fees and interest.

Please explain the link between federal tax policy and state revenues.

Most states simplify their tax systems by using federal income definitions as a starting point for both personal and corporate income taxes. This means that states automatically allow many of the same deductions as the federal system--and it means that when new federal tax cuts are enacted, state revenues will often fall, too. Perhaps more important, this relationship is a two-way street: Because federal income taxpayers can deduct state and local income and property taxes (but not consumption taxes) from their federally taxable income, these taxpayers' federal tax bills change whenever income and property taxes change--but in the opposite direction. Whenever a state cuts income and property taxes, a substantial percentage of the state tax cut is never received by state taxpayers; instead, it goes to higher federal income taxes, because these taxpayers have less state income tax to deduct. This means that states can essentially force the federal government to pay for more than a third of progressive income tax hikes--and that a substantial amount of state income tax cuts are not transferred to state taxpayers but to the federal government.

It is clear that there is an ideological divide over what constitutes sound tax policy. In your opinion, what is sound tax policy and how do we achieve it?

Sound tax policy is progressive and treats people equally at similar income levels. It does not distort economic decisions, play favorites or try to pick winners.

What reverberations will states experience from the Bush administration's $1.35 trillion tax cut?

Because the Bush tax cut will drastically reduce federal revenues, federal support for everything from schools to economic development will probably suffer. Also, states vary a lot in their income profiles. So a high-income state like Connecticut is enjoying much larger tax breaks than a low-income state like Mississippi under the Bush plan enacted last year.

There is growing scrutiny of corporate tax credits--more specifically, the failure of companies to uphold their end of the bargain. Why is it essential for FPE/AFT members to demand accountability?

States and cities spend more than $50 billion a year in the name of economic development. Programs include property tax abatements and tax increment financing (both of which often hurt school funding), corporate income tax breaks, tax-free bonds, enterprise zones and training grants. Taxes typically make up 80 percent or more of the total dollars. The trouble is, such expenditures are notoriously loose, seldom audited and often abused. But thanks to grassroots organizing, the tide is starting to turn. Nine states have enacted some form of annual disclosure so taxpayers can see which companies got subsidies. At least 19 states have enacted "clawbacks," or money-back guarantees, that require companies to refund a subsidy if they fail to deliver. And at least 37 states have attached job quality standards--such as wage and health care requirements--to their development programs.

Congress extended the taxation moratorium on e-commerce earlier this year. What are the implications for states and localities?

State and local governments lost an estimated $13 billion in sales tax revenues in 2001 because of the untaxability of e-commerce. Extending the moratorium means these losses will only worsen as the importance of e-commerce grows. The most populous states--which generate the most untaxed sales--will lose the most. And the corporate benefits will flow in a very biased manner to states like California and Washington, home to many of the biggest e-commerce firms.

Editor's note: This spring, the ITEP will release Who Pays? a new 50-state study of tax systems. Also, Good Jobs First is hosting its first national conference July 11-13 near Baltimore, Md.