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“The consensus seems to be that Biden will attempt to raise corporate taxes and be unsuccessful in doing so. And, he does not have the political capital to get a program that is reasonably popular. Americans seem to like divided government, and that is what we have,” McCullough said.

WASHINGTON, May 15 (Reuters) - The White House last week gave Republican lawmakers a list of proposals to reduce the deficit by closing tax loopholes as part of debt ceiling talks, and each item was rejected by Republican negotiators, the Washington Post reported on Monday, citing three sources.

Senior White House officials floated the tax plans on a phone call with Republicans, the Post reported. They included a measure aimed at cryptocurrency transactions and another for large real estate investors, it reported.

Senate Republicans balked at the idea of closing a tax loophole for crypto investors in ongoing debt limit and budget talks after President Joe Biden floated the proposal. Biden tweeted Tuesday that Democrats think Congress should cut “tax loopholes that help wealthy crypto investors” as opposed to slashing funds for other government functions. The loophole, known as a “wash sale,” allows crypto investors to claim losses by quickly selling and repurchasing their digital assets. The rule prohibiting that practice doesn’t currently apply to virtual currencies. “When we’ve had our menu of available options that there’s been a lot of support for, that’s been one of them,” Senate Finance Committee Chairman Ron Wyden (D-Ore.) said. Closing the loophole has been proposed as a pay-for by both parties, and is estimated by the Joint Committee on Taxation to raise nearly $17 billion over a decade. While Democrats said it’s a revenue raiser that garners support, Republicans doubted it could be a solution for debt limit negotiations. Sen. Thom Tillis (R-N.C.), a member of the Finance Committee, said the recent crypto losses may mean that the measure wouldn’t actually raise as much revenue anymore. The collapse of FTX in November and subsequent meltdown in digital assets has led to a renewed spotlight on the under-regulated market as investors scramble to recover.

Congress is heading into a heated debate about how much taxes should be raised to finance President Biden’s Build Back Better agenda. While pragmatic Democrats may not agree with every proposal being considered, there is one that the whole party should unite behind: closing the step-up basis loophole.

When investors sell an asset, such as a stock or bond, they are usually required to pay capital gains taxes on any increase in the asset’s value since they purchased it (the “basis”). But under current law, if the original owner dies before selling the asset, those unrealized gains are never subject to income taxes. Whenever the heir sells the asset, they are only required to pay taxes on the increase in value since they inherited it (the “stepped-up” basis).

Since 2006, economist and former Bush-era White House adviser Greg Mankiw has been encouraging economists and policy makers to join the Pigou Club, which advocates for a tax on carbon. The idea goes back to economist Arthur Cecil Pigou, who, in 1920, proposed to tax market activities that generate externalities — costs that are not included in a product’s market price, such as the healthcare costs of using tobacco. In the case of carbon, such a tax would raise revenue for the government while making sure those who choose to burn fossil fuels (say, when you drive your car to work) adequately take into account that choice’s damage to the environment and the health and safety of others.

Although fundamentally a good idea, carbon tax proposals have repeatedly failed to gain political momentum — and they may not even be the best solutions available. Maybe it’s time to retire the Pigou club.

For years CCL has advocated for Border Carbon Adjustments (BCA) to help with competitiveness issues and carbon leakage when Canada imposes a carbon pricing policy.

BCAs are tariffs thus perceived as protectionist and thus a rallying cry of a trade war

The American carbon tax, an alluringly simple policy once hailed by environmentalists, scholars, and politicians as a cure-all for climate change that, for all its elegance in economic models, could not overcome its enduring unpopularity with the American public, died last month at its home in Washington, D.C. It was 47.

The death was confirmed by President Joe Biden’s utter lack of interest in passing it.

It is worth noting that the sovereign wealth fund model may weaken a publicly-funded guaranteed income program’s potential to be redistributive – shrinking income inequality by raising tax burdens on wealthy individuals and corporations and distributing it to those at the bottom of the income hierarchy. Investing large sums of public money in sovereign wealth funds could undermine this objective if the best strategy for growing the fund is investment in large corporations, “blue-chip-stocks”, and private equity firms.51 Such an approach could perpetuate the funneling of money upward on the income spectrum, and further harm the environment by encouraging investment in unsustainable extractive industries like oil and natural gas.

Over the past decade, inequality has gained increasing prominence in academic and policy circles. Importantly, one of the most significant shifts in the study of inequality is a growing appreciation of geographic inequality, specifically inequality across the 50 US states. Sparked in part by the landmark work of Raj Chetty and his colleagues, which has demonstrated that geography matters— where a child is born, or where an economically vulnerable family lands, shapes their wellbeing, and ultimately their life chances (Chetty and Hendren 2018; Chetty, Hendren, and Katz 2016; Chetty et al. 2020). Growing attention to the geographic aspects of inequality has focused greater attention on distributional inequalities within and between particular settings and jurisdictions (country, state, or local area). Social policy and policy variation are central to our understanding of these distributional inequalities.

The recent economic and public health crises— from the Great Recession of 2008 to the COVID- 19 pandemic— shine a bright light on these geographic inequalities and raise important political and policy questions not just about the extent of government or public responsibility for provision in relation to market or family responsibilities (Esping- Andersen 1990; Titmuss 1958) but, just as importantly, about what level of government might most efficiently, effectively, or equitably take on that public responsibility (Beland and Chantal 2004; Freeman and Rogers 2007; Obinger, Castles, and Leibfried 2005). Such jurisdictional or geographic inequalities are especially important for economically vulnerable families. Not only do the demographic and employment characteristics of poor families leave them disproportionately exposed to economic dislocations and business cycles (Bitler, Hoynes, and Kuka 2017; Moffitt and Ziliak 2020), but their place of residence and the ways they are positioned in relation to a shifting, geographically variable safety net offer a disparate and uneven policy response (Jusko and Weisshaar 2019; Laird et al. 2018). A bright light has also been pointed at not only the racially disproportionate impact of these economic and public health crises but also the multifaceted ways that racism is embedded in the design and implementation of social safety net policies (Alexander and Stivers 2020; Carten 2016; Michener 2019; Soss, Fording, and Schram 2011).

As the widely expected recession sparked by the COVID-19 pandemic takes hold, the impact in some states will be unnecessarily harsh — especially if the recession is relatively deep — due to the state’s failure to adopt policies that support families and communities during a downturn, our review of state policies in four key areas finds. More specifically, people in states with inadequate budget reserves, weak unemployment insurance systems, relatively inaccessible Medicaid programs, and/or expensive higher education systems are particularly likely to struggle during the recession if they lose their jobs or enter the recession looking for work with few family resources to support them. Mississippi is the most poorly prepared. It’s the only state that ranks in the bottom ten across all four categories, while Florida, Louisiana, New Hampshire, and South Dakota rank among the worst in three categories. That said, every state likely will face significant budget gaps in the coming months, even those best prepared for the downturn, and will need aggressive help from the federal government.

The pressures on state finances from the COVID-19 pandemic and resulting likely recession are mounting and will quickly become severe. Sales taxes, which make up a third of state revenues, are rapidly collapsing as restaurants and stores across the country close their doors and lay off their workers. Data are not yet available on the full scope of this collapse, but there is little doubt it is drastic, perhaps unprecedented. Income taxes, which make up another third of state revenues, also will decline sharply as mass layoffs rapidly push down people’s income and therefore their income taxes. Plus, the steep drop in the stock market means that wealthy people will soon begin reporting massive capital losses on their quarterly tax returns, further reducing state revenue.

Turning to the substance of our argument, the standard goal of macroeconomic policy in general is to be "countercyclical," stabilizing the economy by moderating both booms and busts. 7 Extremes in either direction can lead to unwanted effects, whether they be job loss or excessive inflation. 8 During downturns, this means that government may have a role to play in stimulating the economy, such as through increased spending, tax cuts, or expansionary monetary policy. 9 Traditional microeconomic theory also offers similar prescriptions, counseling that transfers of wealth from richer periods (booms) to poorer periods (busts) increase overall social welfare. 10

States are in a difficult bind when it comes to stabilization policy, however. Their revenues are tied to the business cycle, so that budgets get tighter just when the need for countercyclical spending increases. 11 Raising taxes to make ends meet is contrary to the usual macroeconomic recommendations and is especially difficult in a modern climate where tax increases drive away productive citizens and businesses. Whereas Congress can largely avoid this dilemma simply by borrowing, states risk driving out citizens with excessive debt, and nearly all state legislatures face legal constraints to maintain a balanced budget. Those legal constraints, moreover, are sensible responses to the incentives of legislatures in prosperous times, which would otherwise likely take on excessive debts. 12

In many states policymakers are starting 2023 legislative sessions with calls to layer more tax cuts on top of wasteful ones already enacted over the past two years. But with state revenues slowing and a potential recession looming, such a path could pose serious harm for workers, families, and communities nationwide.

States should instead be taking the opposite approach: avoiding additional short-sighted tax cuts, reversing or at least trimming recently enacted ones, and enacting policies to raise revenues where possible. That way, their revenue systems and the vital public services they support will be better prepared for a rocky economic road that could lie ahead.

Some state policymakers have overreacted to the possibility of new revenue by proposing major income tax rate cuts, even cuts whose cost would exceed the highly uncertain estimate of new revenue. For instance, Idaho Governor Butch Otter proposed personal and corporate income tax rate cuts and other cuts totaling about $200 million annually after the state projected that revenues would rise by nearly $100 million due to the federal changes.8

Given the substantial uncertainty around the ultimate revenue impact, states should respond cautiously. They also should be prudent because new threats to their fiscal stability loom, including the potential for cuts in federal aid for states and localities and the inevitability of another recession.

State Balance Levels Reached New AllTime Highs in Fiscal 2022 Recent balance trends and current fund policies demonstrate how states have taken actions to strengthen their rainy day funds, also known as budget stabilization funds. In fiscal 2021, state rainy day fund balances reached a then new high of $121.8 billion, a 58 percent increase over fiscal 2020 levels. This steep increase in reserves was largely the result of stronger than anticipated revenue growth in fiscal 2021 that led to large surpluses and additional rainy day fund deposits in many states. Rainy day funds continued growing in fiscal 2022 to total $134.5 billion, another all-time high; this growth was widespread, with 43 states recording year-over-year increases. According to enacted budgets, a majority of states plan to continue increasing their rainy day funds in fiscal 2023. As a share of general fund spending, total rainy day fund balances reached 13.3 percent in fiscal 2021 and dropped slightly to 12.4 percent in fiscal 2022 due to the significant increase in expenditures that year. (See Figure 10.) The median rainy day fund balance as a share of general fund spending was 10.3 percent in fiscal 2021 and 11.6 percent in fiscal 2022, and is expected to tick up slightly to 11.9 percent in fiscal 2023. While reserve levels continue to vary by state, 44 states reported rainy day fund balances representing at least 5 percent of their general fund expenditures in fiscal 2022 – including 30 states with balances exceeding 10 percent of spending.

Total balances include general fund ending balances and the amounts in states’ budget stabilization or rainy day funds. In fiscal 2021, total balances more than doubled to reach a then new high of $241.3 billion, equivalent to 26.4 percent of total general fund spending that year. The median balance was even higher, at 27.1 percent, for fiscal 2021. This rapid growth in state balance levels was driven mostly by revenues beating state forecasts – by a considerable margin in many cases. Based primarily on preliminary actual data, state total balance levels continued to grow rapidly in fiscal 2022 from an already high baseline, reaching $342.9 billion, or 31.7 percent as a percentage of general fund spending. In states’ enacted budgets for fiscal 2023, total balance levels are expected to decline; this likely reflects states’ plans to spend down a portion of their larger-than-expected ending balances from the prior year, including for one-time investments. (See Figure 11.) Additionally, fiscal 2023 balance projections in this survey are likely to be less up-to-date (and less reflective of more recent improvements in revenue performance) than fiscal 2022 balance figures that were reported based on preliminary actual data for most states.

Growth in State Budgets and Reserves Remain Strong After Two Years of Record-Breaking Increases and Surpluses State fiscal conditions remain strong in fiscal 2023, following record-breaking increases in general fund revenue in fiscal 2021 and spending in fiscal 2022. Enacted budgets for fiscal 2023 provide for a 6.7 percent increase in general fund spending compared to preliminary actual levels for fiscal 2022. This follows 18.3 percent spending growth in fiscal 2022, the highest annual spending increase ever recorded in the Fiscal Survey of States since its inception in 1979. Adjusted for inflation, general fund spending grew 9.6 percent in fiscal 2022.

States saw two consecutive years of double-digit percentage revenue growth and collections far exceeding budget forecasts in fiscal 2021 and fiscal 2022. States experienced annual general fund revenue growth of 16.6 percent in fiscal 2021, the highest annual revenue increase in the history of the Fiscal Survey, followed by 14.5 percent in fiscal 2022. Adjusted for inflation, general fund revenue grew 12.7 percent in fiscal 2021 and 5.8 percent in fiscal 2022.

There is a growing consensus among commentators and policymakers regarding the adverse effects of revenue volatility on state and local budgeting. In the years preceding the two most recent recessions, state and local tax revenues surged, permitting an expansion of government services and tax cuts. 26Link to the text of the note These boom-year fiscal policies generated political expectations regarding the level of services and taxes going forward. With the onset of each recession, however, state and local governments faced yawning gaps between expenditure levels and tax receipts - prompting demands for federal assistance. In other words, volatility played two separate and equally [*417] important roles in creating the conditions for fiscal crisis - surging tax receipts during the boom years stimulated demand for new programs and tax cuts, while plunging tax receipts during the bust years made continued satisfaction of those demands impossible. The implicit counterfactual here is that more stable revenue levels across time would have translated into more consistent and realistic public service demands, thereby minimizing the likelihood of (or at least reducing the severity of) budget imbalance in the down cycle.

This Article takes a new look at the tax assignment question and argues that the literature has largely misidentified the costs of state redistributive tax-and-transfer systems. The relevant costs, at least within the range of plausible current policies, are not from tax migration and crippling state tax competition, but rather from poor risk management - suboptimal insurance against income shocks, both for states and their residents. Thus states have some space to perform redistribution, but insurance against low income should be addressed nationally. The problem is that the central tool for both redistribution and income insurance is the same: the progressive income tax.

A redistributive tax-and-transfer system, and a progressfive income tax in particular, not only funds the operations of government and provides for income redistribution, but also acts as a form of insurance against uncertain future income. This aspect of a progressive income tax is often forgotten in analyzing the tax, and that is particularly true in the fiscal federalism literature. 3 Because a progressive income tax provides for relatively high taxes when incomes are high, and for low taxes, exemptions, and transfers when incomes are low, it acts to reduce the volatility in annual after-tax income for taxpayers, and reducing volatility is the classic function of insurance. Thus one can distinguish the redistributive function of an income tax - redistributing income from those with high ability or endowment to those with low ability or endowment - from the insurance function of an income tax - a given taxpayer paying some premium today that is a function of the expected value of potential transfers to her in the future.

As a historical matter, the states preceded the national government established by the Constitution of the United States. The national government did not divide a unitary nation into administrative regions. From the perspective of the residents of the various states, however, that history does not lessen the impact of inequality. To be sure, the ability of states to allocate their resources differently from other states is generally considered to be a feature, not a bug, of federalism. Federalism allows the states to tailor their taxing and spending decisions to match the preferences of their citizens. Those preferences, however, operate in a framework of dramatically differing capacities. States' divergent tax [*1535] bases mean that a given level of taxation will yield much more revenue in some states than in others. These financial constraints impose varying limits on citizens' choices, depending on where they live. When it comes to raising revenue and investing in schools, roads, or other priorities, citizens of poorer states have fewer options than citizens of richer states. Not only are the interstate disparities unfair, but they also undermine the values generally associated with federalism. 14Certain states have less ability than others to offer a broad range of choices to their citizens, or even a minimum level of support to all of their inhabitants. As discussed below, compared with citizens of poorer states, such as Mississippi and West Virginia, citizens of wealthier states, such as Connecticut and Delaware, have access to resources that are one and a half to two times as large, depending on the measure chosen. 15I argue that greater financial equality is essential for a well-functioning federal system. In a federal democracy, the principle of equality does not require that citizens receive equal levels of government services without regard to where they live or their particular preferences. That promise of uniformity is not consistent with federalism. 16Equality does, however, require that citizens have equal opportunity to receive equal levels of government services. The current system of federalism in the United States does not honor that principle.

More broadly, the results presented above highlight the importance of distinguishing between the letter of the law and the actual implementation on the ground, both for deriving theoretical predictions about the impact of policies and for testing these predictions empirically. Analyses that focus on formal statutes, policies, and regulations alone, while ignoring the significant discretion that comes into play during the implementation process, risk drawing the wrong inferences about the causes and consequences of public policy. For example, the problems of uneven implementation are generally overlooked in the expansive literature on welfare migration. Motivated by the provocative argument made by Peterson and Rom (1989), scholars have examined whether states with relatively generous welfare regimes—measured in terms of spending, eligibility requirements, and benefit coverage—become “welfare magnets” that attract impoverished migrants from stingier neighbors, generally finding no evidence of such migration. If poor people make locational choices based on differences in actual welfare outcomes rather than formal welfare rules, however, they may be reluctant to move based on statutory promises alone if they expect actual implementation to falls well short of what the laws provide. While one may interpret the evidence from existing studies to mean that poor people do not respond cross-state differences in welfare policy, the null results may also indicate that the intrastate variation in implementation significantly weakens the attraction of even the most generous statutory welfare provisions by shaping the expectations of potential beneficiaries.

First, market- and disposable-income poverty rates vary across states, but we see greater cross-state variation in disposable-income poverty than in market poverty. When only accounting for market income, the percentage of households with children who fall under the poverty threshold ranges from a high of 28 percent in Mississippi to a low of 9 percent in Minnesota (a cross-state range of 19 percentage points; see fig. 3). Looking at disposable-income poverty, the extent of cross-state variation declines from a high of 13 percent in Louisiana to a low of 3 percent in Minnesota (a cross-state range of 10 percentage points). A similar pattern is found for households without children: market-income poverty ranges from 30 percent in West Virginia and Mississippi to 11 percent in North Dakota and New Hampshire (a cross-state range of 19 percentage points); disposable-income poverty ranges from 23 percent in Mississippi to 7 percent in New Hampshire (a cross-state range of 16 percentage points).

Figure 3.