CTJ in the News

Original Post (by subscription only)

January 10, 2013

by Heather Caygle

Key Development: Va. Gov. Bob McDonnell proposes eliminating state's gas tax and using additional dedicated sales tax revenue to fund transportation programs.

Next Steps: Federal and state governments will examine funding solutions for surface transportation programs in 2013.

A recent proposal by Virginia Gov. Bob McDonnell (R) to move away from a user-based fee system for surface transportation programs has broad implications and signals a shift in the national conversation about funding transportation, according to several stakeholders.

McDonnell's five-year plan, introduced Jan. 8, would replace the state's gas tax with a 0.8 percent sales tax increase dedicated to transportation funding. If approved, Virginia would be the first state in the nation to eliminate its gas tax.

While eliminating the state's 17.5 cents-per-gallon gas tax, the tax on diesel fuel would remain. The plan would also dedicate additional sales tax revenue to transportation, increase vehicle registration fees by $15, and impose an annual $100 fee on alternative fuel vehicles. The governor's office estimates the changes would generate more than $3 billion in transportation funding for the state over five years.

Transportation policy experts told BNA the proposal to move away from a user-based fee system and rely on other forms of revenue is an example of the ever-evolving national conversation on transportation programs as states and the federal government struggle to find a viable, long-term funding solution....

Carl Davis, a senior analyst at the nonpartisan Institute on Taxation and Economic Policy, said that while McDonnell understands the problem of lagging gas tax revenues, his decision to shift to sales tax revenue is not a good idea.

“Walking away from the gas tax entirely is fundamentally poor tax policy. He's shifting the responsibility away from frequent drivers, long-distance drivers, and commuters on to everybody else and then taking that money back and using it for roads,” Davis said....

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(Original Post)

WASHINGTON | Tue Jan 8, 2013 6:04pm EST

(Reuters) - If U.S. corporations' ability to defer taxation of their foreign profits were limited, as the White House favors, tens of billions of dollars in new government revenue could be raised over a decade, congressional researchers said on Tuesday.

In a report that could fuel the debate about how to tax U.S. multinational companies, the Congressional Budget Office said changes of the sort backed by the White House "would boost both efficiency and tax revenues," raising about $114 billion in 10 years.

That would exceed new revenues available under another approach favored by many corporations. A "territorial system," as promoted by corporate lobbyists and Republicans in Congress, would raise $76 billion in a decade, under one estimate cited by the CBO.

"Countries with territorial ... tax systems collect less tax revenue," all else equal, than countries that tax all corporate profits - foreign and domestic - the same, CBO said.

Congress for months has been laying the groundwork for an overhaul of the U.S. tax code. This may be less likely to happen now that the "fiscal cliff" deal of last week - which raised ordinary income taxes on affluent Americans - has hardened Republican opposition to considering even more tax increases.

But some aides on Capitol Hill still see a corporate tax revamp as possible and various related studies continue to be done.

At the moment, big corporations must pay the top 35-percent corporate tax on foreign profits, but not until those profits are brought into the country from offshore. This exception is known as corporate offshore income deferral.

Because of it, $1.6 trillion in earnings was parked overseas by 290 large U.S. companies at the end of 2011, according to Citizens for Tax Justice, a left-leaning tax think tank.

Corporate lobbyists last year failed to convince Congress of the need for a repatriation tax holiday that would have let them bring those profits home for little or no tax.

Under the territorial approach backed by many corporations, companies could bring foreign profits home with little or no corporate income tax imposed on a permanent basis, not just during a temporary, one-year holiday.

President Barack Obama and fellow Democrats generally opposed the holiday idea and have been cool to the territorial approach. But they agree with Republicans and many businesses that the 35 percent corporate tax rate - among the world's highest - should be cut.

The non-partisan CBO did not make a formal recommendation on any particular corporate tax method.

(Reporting by Kim Dixon; Editing by Kevin Drawbaugh and Tim Dobbyn)

(Original Post)

By Kim Dixon and Kevin Drawbaugh

WASHINGTON | Mon Jan 7, 2013 2:46pm EST

(Reuters) - Prospects for a 2013 overhaul of the U.S. tax code have faded after last week's "fiscal cliff" fight, with Democrats still pushing to raise more government revenue by closing tax breaks and Republicans arguing that the tax debate is over.

The stand-off is crushing any modest post-election hopes that Washington could summon the political will needed for a comprehensive clean-up and simplification of the tax system.

In particular, the toxic atmosphere is denting any hopes of an overhaul of the corporate tax system by cutting the 35 percent rate, one of the highest in the world, while getting rid of a large number of tax breaks and shelters that mean many companies pay a much lower effective rate.

"Maybe there will be some breakthrough I can't imagine...I just don't see it right now," said Bob McIntyre, head of Citizens for Tax Justice, a left-leaning tax think tank, who helped shape the last major tax reform - 26 years ago.

Some tax experts, economists and analysts now fear 2013 could witness a series of narrow agreements made in the face of imminent crises, far from the "grand bargain" some had seen as possible before the stop-gap deal on New Year's Day.

"I suspect the deal has reduced the odds of fundamental tax reform this year," said Donald Marron, director of the Tax Policy Center, a think tank, and a former senior economic adviser to Republican President George W. Bush.

Few things impose more cost and confusion on the economy than the complex, ever-shifting tax code. It has not been rewritten since 1986, when Republican President Ronald Reagan and congressional Democrats teamed up to raise taxes on business, cut them on everyone else and closed many loopholes.

Lawmakers from both parties have agreed for years that another overhaul is badly needed. The tax-writing committees in Congress held several hearings last year intending to lay the groundwork for a big push on tax reform in 2013.

Then came the frantic deal hatched a week ago by Vice President Joe Biden and Senate Republican Leader Mitch McConnell to avert the sharp tax increases and severe spending cuts threatened by the "fiscal cliff."

Dubbed Biden-McConnell, the pact raised ordinary income taxes on household incomes over $450,000 and protected wage incomes below that level from tax hikes. These steps fulfilled campaign promises made by President Barack Obama and represented a defeat for Republicans who had fought tax hikes of any kind.

RUM, RACE TRACKS AND RESTAURANTS

Biden-McConnell also extended tax breaks for NASCAR race tracks, for Puerto Rican rum output, for film and television production, and for retail and restaurant improvements, among other small tax expenditure provisions - reminding Americans of how riddled the tax code is with special favors.

No mention was made in the deal of ending tax breaks long criticized by Obama, such as the "carried interest" provision that lets senior managers of private equity firms pay the lower capital gains tax rate on much of their income. His Republican opponent in last year's presidential election, Mitt Romney, had benefited from that provision because of his earlier role as co-founder of Bain Capital.

At the same time, Biden-McConnell put off for two months deep spending cuts known as the "sequester" and did next to nothing to reduce the deficit.

The next test of whether Congress is able to do more than patch things over for a few weeks will come in late February and early March, when the "sequester" returns; the government again hits its borrowing limit; and funding for the government expires. All three will require congressional action.

Looking toward that, McConnell on Sunday ruled out raising tax revenues on top of the Biden-McConnell tax hikes and said the full focus must now be on spending cuts to curb the deficit.

"The tax issue is finished. Over. Completed," McConnell, of Kentucky, said on ABC's "This Week With George Stephanopoulos."

Republicans are seeking cuts in the Medicare healthcare program and the Social Security pension program as a condition for raising the borrowing limit. Obama has said he will not negotiate over this. Democrats have vowed to keep pushing for more tax revenue, as well as spending cuts, to curb deficits.

House of Representatives Democratic Leader Nancy Pelosi, on CBS's "Face the Nation," said Democrats want "everything on the table from the standpoint of closing loopholes ... Special subsidies for big oil, for example, $38 billion right there."

CORPORATE CODE EYED

Many in the business community want a cut in the corporate income tax rate. Few corporations actually pay that rate, thanks to tax breaks they use to lower their effective rates, sometimes to zero. But the rate is among the world's highest.

The White House unveiled a corporate tax plan in February that has gathered dust for months. Obama has agreed to a lower corporate rate and pledged to pursue that. Beyond such general commitments, however, the details get complicated.

Multinational corporations have pushed for years for a new system to allow them to bring back profits earned overseas at a zero or very low rate of U.S. tax, but companies with chiefly domestic markets are less committed.

Citizens for Tax Justice, a non-profit research and advocacy group, has estimated that 290 major corporations have collectively held nearly $1.6 trillion in profits outside the United States at the end of 2011. As long as these earnings are parked offshore, these Fortune 500-ranked companies do not have to pay corporate income tax on them.

House Ways and Means Committee Chairman Dave Camp, a Michigan Republican, has a plan to revise international corporate taxation, but business groups have been unable to agree on a key detail that would get Democrats on board: how to prevent further movement of businesses to other countries.

Moreover, corporate lobbyists readily admit that cutting corporate taxes while raising individual taxes - not only on high-income earners, but also on wage earners with the expiration last week of Obama's brief payroll tax holiday - would not be a winning political argument with voters.

"An essential ingredient to reform is an agreement on how much tax the system needs to collect," said Clint Stretch, former counsel for Congress' Joint Committee on Taxation.

The "fiscal cliff" deal did not produce that, he said. "Republicans will likely dig in harder on no more new taxes."

(Additional reporting By Patrick Temple-West and Rachelle Younglai.; Editing by Martin Howell and Leslie Gevirtz)

January 6, 2013

by Lisa Myers

VIDEO

Cutting the deficit – or raising money for projects?
With the nation’s debate at nearly $16.5 trillion, increasing at $140 million an hour, the White House and Congress agreed to increase taxes last week. But despite the rhetoric about cutting the deficit, much of that money will be spent on special projects. NBC’s Lisa Myers reports.

Segment features CTJ's Bob McIntyre discussing the cost of the business "extenders," loopholes and cuts for major industries tacked on to the eleventh hour fiscal cliff tax deal.

 

(Original Post)

Monday, 07 January 2013 11:43 By George Goehl, PR Watch | Report

Tax fairness has become a centerpiece of national debate, from the president's reelection to the recent deal surrounding the so-called fiscal cliff. In Illinois, taxpayers want to make sure corporations in the State are paying their fair share as well. According to the Internal Revenue Service, the federal corporate tax rate from 1952-63 -- a period of prosperity and a significant rise in the middle class -- was 52 percent. Today it's 35 percent. By working loopholes and exceptions many corporations are able to reduce their effective tax rate to as low as zero. As it stands corporations doing business in Illinois do not have to disclose to the public what taxes, if any, they contribute to the state.

This lack of transparency inspired Illinois Senate President John Cullerton, D-Chicago, to introduce the Illinois Corporate Tax Disclosure and Responsibility Act. The bill, SB 282, has passed the State Senate and would require publicly held companies to report their state income tax liability. After two years, the information would be made available to the public. Now it's up to the Illinois House to approve the bill and send it to the Governor.

Illinois voters think this is a good idea. According to a new poll by Public Policy Polling, a non-partisan polling firm, 79 percent of Illinois voters think that the state should require corporations to disclose how much they pay in state income taxes. The proposal resonates across partisan lines, with 75 percent of Republicans favoring the idea. As corporations benefit greatly from public infrastructure such as roads, public transportation, job training programs, as well as tax breaks, it seems fair that we know how much they are paying.

Thanks to Citizens for Tax Justice, a public interest organization specializing in tax issues, we get a peek at state income tax rates for some of Illinois' largest companies. According to a CTJ report, Illinois pharmaceutical giant Baxter International paid an effective state income tax rate of negative 3.1 percent between 2008-2010. This means they essentially earned a refund, despite clearing nearly $900 million in profits. Because these numbers represent taxes Baxter paid to numerous states, we have no way of knowing if any of these revenues even made it to Illinois.

The bill is now in the hands of the Illinois House of Representatives. The campaign to advance this legislation has been led by organizations made up of and led by everyday taxpayers. IIRON, Illinois People's Action, Lakeview Action Coalition, Northside P.O.W.E.R. and SOUL are asking that people throughout the State join the fight to ensure we corporations pay their fair share. You can do your part by calling your Illinois State Representative.

America is not broke, but lots of Americans are. One big reason has been changes in our tax code that favor big corporations. Illinois corporations have voiced their opposition to Cullerton's legislation. And yet all the legislation does is require that they disclose how much they pay to the state. Working families in the state are paying taxes. All we want to do is make sure the big corporations are doing the same. If they have nothing to hide, why do they care? If they have something to hide, and Members of the Illinois House are not ready to support this legislation, then we should all care.

(Original Post)

Posted: 01/05/2013 10:21 am EST  |  Updated: 01/05/2013 12:32 pm EST

In the wake of this week's last-minute deal to avoid the so-called fiscal cliff, executives at some of the nation's largest corporations have denounced the compromise, arguing that it does little to solve the nation's long-term debt woes.

"It's a missed opportunity to revive our economy," said Honeywell International chief executive David Cote, one of the leading corporate voices urging a congressional accord, in a statement Wednesday.

"I think it's a joke," said Dick Kovacevich, former chief executive and chairman emeritus of Wells Fargo, in an interview with Reuters.

Yet many of the same executives calling for federal spending cuts and comprehensive tax reform are benefiting from billions of dollars in tax exemptions and carve-outs provided to major corporations. Executives who have banded together in recent months as part of the Campaign to Fix the Debt, a coalition of current and former politicians and business leaders, have at the same time been lobbying to preserve the tax perks their companies have enjoyed for years.

"They're rather hypocritical about their 'shared sacrifice,'" said Robert McIntyre, director of the progressive group Citizens for Tax Justice. "It's shared by anyone but them."

Honeywell's Cote said any real debt proposal needs to include "meaningful entitlement and tax reform." He urged leaders in Congress to "put politics aside and work out a plan that will truly help to expand the U.S. economy over the long term."

Over the past two years, industrial conglomerate Honeywell International has spent more than $14 million lobbying in Washington, including on "international taxation and repatriation."

Many multinational corporations, including those whose executives have come together as part of the Campaign to Fix the Debt, enjoy a benefit that allows them to indefinitely put off paying U.S. taxes on interest income earned overseas. They have lobbied for more than 15 years to preserve the so-called active-financing exemption, and Congress has repeatedly extended it.

This year was no exception. The active-financing exemption was one of the corporate tax benefits included in the fiscal cliff deal earlier this week. The exemption for overseas investment income is estimated to cost more than $11 billion over the next two years, according to the Joint Committee on Taxation.

From 2008 to 2010, Honeywell paid an effective federal tax rate of minus 0.7 percent, according to an analysis from Citizens for Tax Justice and the Institute for Taxation and Economic Policy. A Honeywell spokesman did not respond to questions about corporate tax exemptions.

General Electric, also part of the Fix the Debt coalition, has relied extensively on the overseas investment exemption through the years -- a factor that contributed to its famously low federal tax rate in 2010, the subject of a New York Times investigation. The exemption is important enough that G.E. identifies failure to extend the benefit as a "risk factor" in its annual securities filings. The company told investors that its tax rate would "increase significantly" if the exemption weren't extended by Congress.

A spokesman for G.E., Seth Martin, wrote in an e-mail that the company's tax rate was low in 2010 because of losses in its finance wing during the economic crisis, but that rates have since increased. In the company's most recent annual filing, G.E. said its tax rate was minus 11.6 percent in 2009, 7.3 percent in 2010 and 28.5 percent in 2011. Those rates reflect income taxes paid in all countries, not just the United States.

Martin said G.E. supports comprehensive tax reform, including lowering corporate tax rates but also closing loopholes, "even if it means higher taxes for companies like G.E." He said reforms would encourage domestic economic growth and encourage U.S. multinational companies to invest overseas earnings at home.

The chief executives of major banks with international investments, including JPMorgan Chase's Jamie Dimon and Morgan Stanley's James Gorman, publicly pushed for a sensible resolution to the fiscal cliff. In November, Gorman sent an email to employees, urging them to contact members of Congress. "No issue is more critical right now for the U.S. economy, the global financial markets and the financial well-being of our clients," he wrote.

Morgan Stanley and JPMorgan have lobbied for extensions of overseas tax benefits in recent years. Representatives from both banks did not respond to requests for comment on Friday.

Another corporate tax benefit included in the fiscal cliff deal is a provision known as bonus depreciation, which allows companies that invest in costly equipment to account for depreciation expenses much faster than they otherwise could. In other words, companies can deduct more in expenses now, lowering their taxable income.

Congress has extended the provision each year since 2008 in an effort to spur business investment during the economic downturn. Bonus depreciation is expected to cost $35 billion this year, according to the Joint Committee on Taxation, and those costs are predicted to rise significantly if Congress keeps extending the benefit. Yet a Congressional Research Service report from September found that accelerated depreciation is a "relatively ineffective tool for stimulating the economy."

Verizon Wireless Communications, another Fix the Debt member, has spent more than $30 million lobbying over the past two years. The company lists bonus depreciation as a lobbying priority, along with taxation on foreign earnings.

A spokesman for the Campaign to Fix the Debt, Jon Romano, said the group is not making specific recommendations to the White House and Congress on how to structure a long-term deficit reduction plan. He did not say whether coalition members would be willing to give up corporate tax exemptions, but he said the group believes in "reining in spending, raising revenues and real entitlement reform."

"They all understand that no deal is going to be perfect and that people are going to have to make sacrifices," Romano said. "They've all said they're willing to do that. Everybody is going to have to give something up to get a debt deal that's good for the country."

(Original Post)

2:16 pm on 01/05/2013

What was perhaps most revealing about the final deal reached by President Obama and congressional Republicans to avert the so-called “fiscal cliff”–or “fiscal curb,” as we’ve been calling it at Up w/ Chris Hayes–is what it told us about who Washington actually serves, and what lawmakers think “middle class” actually means.

The deal, of course, raised marginal income tax rates for individuals making more than $400,000 a year. Nominally, as The New York Times reported today, this makes the federal tax code–at least as it appears in statute–more progressive than it has been in decades. The actual effect of the deal, however, was to raise taxes on 77% of American households, while giving away billions in tax breaks to politicians’ corporate patrons.

That’s because lawmakers on both sides of the aisle agreed from the outset not to fight for an extension of the payroll tax holiday signed into law by President Obama two years ago. That provision cut earners’ payroll tax liability by 2%. And while almost all households benefited in some way from the payroll tax cut, it was especially helpful to lower and middle income Americans, both because the payroll tax is capped at the first $110,000 of income and because higher earners tend to make more from investments, which are taxed at lower rates.

This statistic, for example, tells you everything about who lawmakers were really looking out for in the negotiations: Among Americans who make between $20,000 and $30,000 a year, 66.9% pay more in payroll tax than income tax, according to the Tax Policy Center. To those people, the payroll tax is what matters more. It’s what takes the bigger bite out of their paychecks.

Among Americans who make between $200,000 and $500,000 a year, 97.6% pay more in income tax than payroll tax. To them, the Bush tax cuts were a boon. And since income taxes went up only on income over $400,000, it’s easy to see who won in that battle. Citizens for Tax Justice estimates that people who make in the range of $279,000 will get a tax cut of about 3%, compared to just 1.9% for people making an average of $14,000 a year.

This arrangement proves a few things. For one, it turns out Republicans aren’t averse to raising certain kinds of taxes, as long they don’t burden wealthier Americans. “The Republicans have always been against tax cuts for lower and middle income people,” Rep. Jerry Nadler, Democrat of New York, said Saturday on Up w/ Chris Hayes.

The arrangement also proves that neither side really cares about deficit reduction. The payroll tax increase, for example, will save about $95 billion in 2013 alone. But Congress turned around and gave most of that savings away in tax breaks for businesses like NASCAR, Hollywood studios and Wall Street. The Joint Committee on Taxation estimates that those so-called “tax extenders,” tucked into the bill with little notice, will cost $68 billion in 2013.

Lastly, the arrangement lays bare how power is wielded in Washington: Not just in decision-making, but in agenda-setting. The current artificially induced crisis is all about deficits and spending cuts–issues that, studies have shown, are much more important to wealthier Americans. The political class has apparently convinced itself that unemployment is no longer a problem, despite the fact that only 58% of Americans have jobs, essentially the lowest number since 1983 and virtually unchanged since the end of the recession.

The expiration of the payroll tax cut may only make that worse. According to the Congressional Budget Office, the payroll tax cut did much more to stimulate the economy than income tax cuts, because most households pay more in payroll tax than income tax.

As Sen. Tom Harkin, Democrat of Iowa, put it in a floor speech on Monday, the deal is only a victory for the middle class if you skew what “middle class” means.

“If you make $250,000 a year, you’re not middle class. You’re in the top 2% of income earners in America,” Harkin said. “If we’re going to have some kind of deal, the deal must be one that really does favor the middle class — the real middle class, those that are making 30, 50, 60, 70,000 dollars a year. That’s the real middle class in America.”

(Original Post)

By Dan Freed 01/04/13 - 12:53 PM EST

NEW YORK (TheStreet) -- General Electric, (GE_) says it wants to pay higher taxes and close loopholes. Since I was afraid you might not believe me, I got an email from a company spokesman to prove it.

"Like most Americans, GE would prefer a simpler tax code and we support a lower statutory corporate tax rate, closing loopholes and adoption of territorial tax system even if it means higher taxes for companies like GE," reads the message in my inbox from GE spokesman Seth Martin.

Despite striking a deal over the budget Tuesday night, Congress is still expected to battle over corporate tax reform ahead of the confrontation over the federal borrowing limit, better known as the debt ceiling. A showdown is expected to occur in two months time, when Congress will have to increase the limit or risk a U.S. default.

As a champion of loophole exploitation and tax evasion, General Electric will take a keen interest in shaping the debate over corporate tax reform. So when GE says it wants to simplify things and maybe even pay higher taxes, it behooves us to ask--uh--what's the catch there, GE?

The catch is that GE is willing to risk paying just a bit more so it can stop asking Congress for a favor every couple of years and risk being turned down.

GE Chairman and CEO Jeff Immelt told Charlie Rose last month he believes the plan known as Simpson-Bowles is "a great starting point," for tax reform.

That plan would reduce the maximum corporate tax rate, known as the "statutory" rate, to 29% from its current 35% level. It would also adopt a "territorial" tax system, meaning companies would not pay U.S. taxes on profits earned abroad.

One problem with this plan, argues Robert McIntyre, Director of Citizens for Tax Justice, is that GE is especially adept at moving U.S. profits overseas.

"It's money they make in the United States but they claim it's foreign," by using "arcane provisions in the tax code," McIntyre says.

GE saved $8.8 billion on "lower-taxed global operations," from 2009-2011, according to its latest 10-K. The company also made a decision in 2009 "to indefinitely reinvest prior-year earnings outside the U.S.," according to the 10-K.

Further explaining why it likes doing business abroad, GE explains "there is a benefit from global operations as non-U.S. income is subject to local country tax rates that are significantly below the 35% U.S. statutory rate. These non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not subject to current U.S. income tax," according to the 10-K.

One important reason for GE's low tax bill is an "active financing exception," which allows GE and other financial services companies to avoid paying taxes on "certain active financial services income," as the 10-K puts it, such as interest payments on loans made outside the U.S.

Referring to the active financing exception, GE warns in the "risk factors" section of the 10-K that "this provision, which expired at the end of 2011, had been scheduled to expire and had been extended by Congress on six previous occasions, including in December of 2010, but there can be no assurance that it will be extended."

In fact it was extended as part of the budget deal struck by Congress Tuesday night. However, the "territorial" tax system proposed by Simpson-Bowles would mean GE could remove those sentences from the "risk factors."

Just as a company is willing to pay up to settle a lawsuit and give shareholders a degree of certainty, GE would be happy to risk paying a little extra in taxes so it could stop asking Congress to repeatedly extend this active financing exception.

This is the loophole GE wants to close. It's true: if we stop threatening to tax GE's foreign earnings, GE won't need a loophole to be sure we don't do it. Meanwhile, GE's U.S. tax rate goes lower. Sure, as GE says, that's simple. It also sounds like a great deal for GE, but maybe not so great for the rest of us.

Simple sounds great--especially when we're talking about something as complex as taxes. GE is smart to appeal to our desire for simplicity in the tax code. But we must be careful not to be seduced by simplicity: simple and fair aren't the same thing.

-- Written by Dan Freed in New York.

http://www.thestreet.com/story/11804570/1/general-electric-wants-to-pay-higher-taxes.html

Original Post and Audio

January 4, 2013

This week on CounterSpin: The fiscal cliff that was supposed to encourage a big grand bargain wound up producing a much smaller deal on taxes. The headlines say the rich will pay more, the first time in a long time that Congress has voted to make that happen. But is that the whole story? We'll talk to Bob McIntyre from Citizens for Tax Justice about that.

Also on CounterSpin today, what happened to local commercial radio, as a place to hear local bands or learn about local events? That's the question engaged by a new film called Corporate FM – part murder mystery, part love letter to the key community resource that local radio used to be, and of course, a tool for activists resisting the corporate consolidation that’s really only enriching a few big players. We'll hear from filmmaker Kevin McKinney about Corporate FM.

(Original Post)

Jan. 3, 2013 09:02 AM EST
The Unspoken Tax Expenditure
by Robert Goulder

There's a lot of talk in Washington about scaling back tax expenditures for the sake of lowering marginal rates — or preventing future rate increases. Most economists agree that lowering rates, while broadening the base, is the gold standard for tax reform. This explains the chatter about eliminating the deduction for state and local taxes, or limiting the deductions for mortgage interest expense and charitable donations. There's even discussion about modifying the exclusion for employer-provided health insurance. I can remember when such talk was considered heresy. But we're now told that everything must be on the table in order to keep rates down.

The underlying rationale for cutting tax expenditures is perfectly sound, but there's an obvious political problem. Generations of Americans have come to rely on these measures and they don't want them taken away. The burning issue that Congress will face in 2013 is whether there are any preferences buried in the Internal Revenue Code which are, at once, substantial enough to pay for a rate reduction while not being culturally hard-wired into voters' minds.

I recently stumbled upon a position paper from Citizens for Tax Justice which identifies numerous tax expenditures that could be tapped to pay for a rate reduction. The big-ticket item on their list is something that nobody is talking about: the deferral of foreign corporate income. The CTJ scores the elimination of deferral at $583 billion over 10 years. You can see the CTJ paper by clicking here. If lawmakers are serious about taking an axe to tax expenditures, one wonders how long deferral can escape their attention.

Deferral of corporate profits is a subtle concept that merits some explanation. Viewed most plainly, deferral is the ability to earn income in the current year but not pay the related tax until a subsequent year. It's a timing differential, nothing more. Yet, it lies at the very heart of corporate tax planning. Corporations can often delay the U.S. tax hit on foreign profits until those earnings are repatriated from overseas affiliates. This benefit is not available for domestic earnings which are taxed currently — that is, on an accrual basis. Earn a profit in Detroit and it's taxable now. Earn a profit in Dubai and it's taxable when (or if) the firm brings the money back into the country. Keep those profits offshore indefinitely and you may never pay U.S. tax on them. Thus the stories one hears about vast corporate treasuries being parked offshore in places like the Cayman Islands. That's deferral at work.

Deferral is perfectly legal, and has been for a long time. Back in 1962 Congress saw fit to enact a set of anti-deferral rules. The idea was to permit deferral for active income while restricting deferral for passive income. Fifty years on, those rules don't have much teeth. Multinational firms can side-step our anti-deferral laws with relative ease. Tax attorneys joke that "a tax deferred is a tax avoided."

And no discussion of deferral is complete without mentioning the economic incentives it creates. Deferral results in capital invested abroad enjoying higher after-tax returns than capital deployed domestically, other things being equal. In effect, deferral subsidizes foreign investment relative to domestic investment. (Opinions differ on whether deferral also subsidizes foreign employment relative to domestic employment.)

Several observations come to mind here.

First is the price tag. Eliminating deferral gets Congress well over half a trillion dollars. That's real money. Second, I suspect the general public doesn't really care about deferral — certainly not to the same extent they care about the deduction for mortgage interest or the exclusion for health insurance. Most Americans are unaware that deferral even exists, which by implication means they wouldn't be dismayed by its repeal. Third, the business sector will cling to deferral like a mama grizzly bear clings to her cubs. And with good reason. Eliminating deferral would effectively kill transfer pricing as we know it today. That would translate to a major increase in effective tax rates for businesses with foreign operations, although the statutory tax rate (35%) would never change. There's no chance Corporate America allows that to happen without one heck of a fight.

Deferral's revenue score (and dubious economic incentives) doom it to life with a bull's-eye on its back. That's just the way it is. The challenge ahead for the business lobby in 2013 is to keep deferral off the negotiating table when a wide range of political voices are telling us that everything must be on the table for the sake of keeping down rates. Nobody in Congress is mentioning deferral just yet, but you can be darn sure they're thinking about it.