The Bush/Obama tax hike on working families

Tonight, the editors of The Wall Street Journal might be visited by three ghosts, but until that happens, they will still be publishing stories like the one today blaming public-sector workers’ pensions for local property tax increases. They lead with the example of a suburban Philadelphia municipality, and since this is the news division of the paper instead of the loony editorial page, they do attempt some even-handedness, for instance by allowing an AFSCME leader from Illinois to have his say. But there can be no doubt about the emphasis, with the headline that “Pensions Push Property Taxes Higher.”

Of course, the headline could just as easily have read “Wall Street malfeasance leads to middle-class tax increases at local level,” since pension funds around the country are in trouble mostly because they were plowing money into the speculative investment banks’ insane schemes. And because the firms that used to insure municipal bonds don’t have such high credit ratings after all, restricting municipalities’ access to credit. And because tax revenues are shriveled because of the rotten economy brought on by Wall Street’s irresponsibility and the corporations’ refusal to hire despite their enormous cash reserves. And so on. But this would not be a congenial line for the demographic that usually reads the Journal (your present commentator is an exception, to say the least). You can get a flavor for how that demographic does think by reading the troglodyte comments that accompany the article, but I would not recommend it.

There is a lot that can be said about this; it has thousands of variations everywhere, including cities like Pittsburgh; everywhere you turn, there are no good choices. Attempts to take it out on the workers are maddening: While it’s true that public sector workers have pensions while private sector workers increasingly do not, shouldn’t the point be that everyone deserves a pension, rather than that no one does? And shouldn’t everyone be angry that corporations are sitting on $2 trillion in assets, while teachers are being laid off in New Jersey and elsewhere? Doesn’t it amount to an obscenity when Chris Christie, Scott Walker and Tom Corbett call for “sacrifice” from teachers and firefighters, while “investment” bankers are getting tax breaks?  Not only is the carefully-stoked resentment against public-sector workers galling when you look at the big picture, it is a combination of downright silly and dangerous when you get to the specifics: If a part of you resents that firefighters get to retire at 50, have you really thought through your resentment? Does anyone really think it would be a good idea to remove the option for public safety workers like this to retire at an age when they’re still in top physical condition — with the result that we’ll have firefighters on the job well into their 50s or even later? If Xanadu Richard Mellon Scaife’s house catches on fire, does he really want a geriatric battalion to be handling the water hoses? Even he must not relish the thought of having to buy a new mansion.

Also of interest in the Journal article are the examples of local property tax hikes, all of which — quite apart from pension difficulties and even the current economic crisis — are the latest in a long-term trend: the steady increase in the tax burden on the working class since Bush increased taxes on the majority to pay for his tax cuts for the rich.

This is not something that meets with widespread discussion or even acknowledgment, but it is true. It is relatively common knowledge that the Bush tax policies, while they lowered the income tax rates for everyone, still gave much more in tax breaks to the wealthiest people in the country who need it the least. But it is not as well-known that without enough Federal support for essential services, state and local taxes go up to make up the difference, unless there are service cuts instead (and often, it is both). The Federal government has the “No Child Left Behind” unfunded mandates for standardized testing in schools, for instance; and there are expensive Homeland Security requirements on local governments as well. With the tax cuts mostly for the rich at the Federal level, and consequently less money available for funding these state and local programs, states and localities need to raise revenue to cover the gap. The result is that for most families, the lower taxes at the Federal level under Bush are more than offset by local and state tax increases.

This story varies from state to state and town to town, but the overall pattern is unmistakable. Federal taxes have become less progressive since Bush, but state and local taxes are spectacularly unfair and getting worse. In Pennsylvania, for instance, we have a flat state income tax (grossly unfair, since higher-income people who can afford to pay more end up paying the same rate as people with lower incomes, who need the income more); the state also relies on sales and tobacco taxes, which are even more regressive than a flat income tax percentage-wise, even when you take into account the sales tax exemptions for food and clothing (exemptions which some Republicans have proposed to eliminate in the past). I designed the following chart based on some data in an Institute on Taxation and Economic Policy report from November 2009 (I think my chart is a little easier to understand than theirs); it shows what Pennsylvania families paid in state and local taxes in 2007.

Source: Institute on Taxation and Economic Policy, November 2009

This means that if you’re a family in the middle — making around $50,000 a year, say — then you paid nearly twice as much a share of your income (9.6%) in Pennsylvania state and local taxes as a family that made over a million dollars that year (5.0%). The poorest people in the state (average family income: $10,500) were paying even more than that, with more than 11 cents on the dollar going to state and local taxes. Note that this is before you take the Federal deduction offset into account; if you do, you’ll find that the wealthiest 1% of Pennsylvania households paid less than 4% of their income in state and local taxes in 2007, and that the differences between the income cohorts are even larger.

All of this is why I am unconvinced by progressive apologetics for the recent agreement on taxes between the White House and Senate Republicans. Fairness demands that we should apportion most of the blame to the Republicans: they are the ones who pushed for the extension of Federal tax breaks for the higher brackets, so that Federal taxes on everyone else would also have increased if they did not get their way, and they also held up extended unemployment benefits for the victims of this recession. Yet fairness also demands that while the effective tax increase on working families was initiated by Bush nearly ten years ago, Obama must now “own” this as well, since he is the one who hammered out this agreement with the Republicans and advocated for it strongly against Congressional opposition coming from his left. On balance, it would have been better to allow all of the Bush tax rates to expire, and then taken the fight directly to the Republicans, correctly blaming them for the Federal tax increases on middle-income people, and also demanding extended unemployment benefits. To do this would have taken some organized pressure from the left, and frankly I find it to be an academic (in the worst sense) question whether the President is open to such a fight; in fact I think he is ideologically comfortable in the so-called “center,” but that is less important than the fact that organized pressure from the left would have required a response from him as well as the Republicans. Taking a stand and fighting on tax policy and unemployment insurance would have been a course involving real risk, but not as much risk as the actual deal just concluded.

Why do I say this? Because of stories like the one highlighted in The Wall Street Journal. The tax deal contained enormous waste, with a quarter of the tax benefits going to the wealthiest 1% of households, which was exactly what the Republicans wanted. In return, the potentially stimulative provisions came in the form of extended unemployment benefits (unambiguously a good thing) and the payroll tax “holiday” (of dubious value, since it will be hard to rescind, and the Republicans can use it to set us all up for Social Security benefits cuts). Yet the stimulative effect of all of these is going to be more than offset by the fiscal crisis at the state and local level, which is bad enough to begin with and is about to get worse. Let’s remember that the best and most effective portions of the 2009 stimulus bill — which was not big enough — were the portions granting Federal aid to the states. To take the largest example, in the Medicaid program, the Federal government subsidizes part of the cost in the form of the Federal Medical Assistance Percentage (FMAP); the stimulus bill has increased this Federal contribution to state budgets for the last several years, and those increases are going to expire. The Republicans will not be interested in renewing extended FMAP, unless perhaps the rest of us agree to turn over even more money to the rich.

The result is that the already awful state budget situation will get much worse. Cuts in services, increases in regressive state and local taxes, hiring freezes and layoffs of public sector workers, cuts in public sector wages and pensions: all of this is going to be a drag on the economy that will very likely outweigh the potentially positive effect of the “good” elements in the Federal tax deal.

No one is talking about the obvious solution here, which is for the government to tax the rich and start directly creating jobs. It is not as if there isn’t plenty of work to do in rebuilding neglected infrastructure, making the transition to cleaner forms of energy, and investing more in education rather than laying off teachers. If the wealthy and their corporations won’t put their hoarded money to work in doing this, then the rest of us should take it away from them and put it to better use. Why not stand up and demand this? That’s the kind of tax revolt I can get behind.