Month: March 2011

New Report from CTJ Explains the Right Way to Reform Corporate Tax – and Why the Amnesty Is the Worst Possible Change

Corporate leaders are conducting a massive campaign for what amounts to a tax amnesty for corporate profits shifted out of the United States, especially profits shifted to offshore tax havens.

In 2004, Congress approved this sort of holiday, which allowed U.S. corporations that brought offshore profits to the U.S. to pay U.S. taxes at a rate of just 5.25 percent instead of the normal 35 percent. Corporate leaders claimed they would use the money brought back to create jobs, but several empirical studies found that the holiday did not lead to job creation, and many of the companies that benefited actually reduced their U.S. employment. The money was largely put towards stock repurchases, effectively putting it in the hands of shareholders.

Washington Resists the Repatriation Holiday — But for How Long?

During the debate over the economic recovery act in early 2009, Senator Barbara Boxer offered an amendment to provide another repatriation holiday. Concluding that the 2004 holiday was a corporate giveaway that enriched shareholders without creating jobs, most Senators opposed the Boxer measure, which failed by a vote of 42-55.

The Obama administration reiterated that it opposes a repatriation holiday — unless it is part of a comprehensive corporate tax reform. In another blow to proponents of the holiday, the leading Republicans of the Congressional tax-writing committees said the same thing.

U.S. Chamber of Commerce Admits that Job-Creation Rules Attached to Tax Holiday Won’t Work

Some lawmakers who support a repatriation holiday argue that the conditions attached to the 2004 measure could be strengthened in a second holiday so that companies cannot benefit without creating jobs or otherwise directly investing in their U.S. operations. 

But this argument is so weak that even the U.S. Chamber of Commerce openly rejects it. At a panel discussion organized by Tax Analysts, Martin Regalia, a senior vice president for the Chamber, said that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.

Regalia said that the case for a repatriation holiday is that it’s good for America when a company brings offshore profits back to the U.S., even if the profits go directly to shareholders.

Regalia did not use the more recognizable terms that describe this type of thinking, perhaps because it is so widely discredited: Trickle-down economics, or supply-side economics.

Democratic Insiders Hired to Promote the Amnesty for Corporate Tax Dodgers

With all this going against the repatriation holiday, why do the corporations think they can win? Because this time they are far more organized and are devoting far more resources to lobbying. They have effectively bought off some highly influential Democratic insiders, as well as Republican insiders. The coalition in favor of the holiday includes Adobe, Apple, Cisco, Google, Kodak, Microsoft, Pfizer, Oracle and others. A Business Week article explains:

The team’s chief communications strategist is Anita Dunn, the Democratic media consultant who served as President Barack Obama’s interim communications director during his first year in office… The lead lobbyists are former Representative Jim McCrery of Louisiana, who was the ranking Republican on the House Ways and Means committee, and Jeffrey A. Forbes, the former chief of staff to Senate Finance Chairman Max Baucus (D-Mont.).  

New Report from CTJ Explains What Congress Should Do Instead

A new report from Citizens for Tax Justice explains that Congress should adopt a system that taxes all profits of U.S. corporations, no matter where they are earned. U.S. corporations would continue to get a credit, as they do now, for any taxes they pay to a foreign government, to avoid double-taxation. (The comprehensive tax reform offered last year by Senators Ron Wyden and Judd Gregg would do this.)

In this system, U.S. corporations would never have a tax-related reason not to repatriate their offshore profits because those profits would already be subject to U.S. taxes anyway.

In theory, the U.S. does have a “worldwide” tax system in which all profits of a U.S. corporation are subject to U.S. taxes, but it undermines this rule by allowing U.S. corporations to “defer” their U.S. taxes on offshore profits until those profits are brought to the United States (until those profits are “repatriated”). Deferral provides an incentive for corporations to move jobs overseas and to shift profits to offshore tax havens.

Many corporate leaders want Congress to permanently exempt offshore profits (adopt a “territorial” system, in other words) but that would only increase the incentives to shift jobs and profits offshore. So would allowing corporate leaders to believe that Congress will call off almost all of the U.S. taxes on offshore profits every few years with a repatriation holiday.

Repatriation Holiday Provides Greatest Benefits to the Worst Corporate Tax Dodgers

The CTJ report also explains that a repatriation holiday provides the greatest benefits to corporations that engage in the very worst tax avoidance. Multinational corporations that are conducting real business offshore and paying taxes to a foreign government have much less to gain from a repatriation holiday. On the other hand, a company that has shifted profits to a Cayman Islands subsidiary that conducts no real business and pays no foreign taxes would benefit enormously.

Grover Norquist, President of Americans for Tax Reform and leader of the anti-tax movement, is used to getting his way, at least when it comes to politicians from conservative parts of the country. Many conservative lawmakers have signed ATR’s “Taxpayer Protection Pledge” which is a promise to oppose tax increases in any and all circumstances.

But these are not normal times, and Norquist’s grip on conservatives may be loosening, one finger at a time. The country faces a long-term budget crisis that requires long-term solutions. But most of the debate so far has been over the GOP’s proposals for immediate cuts in discretionary spending that will slow down our economic recovery without doing much to address the long-term problem. Something has to change.

In this environment, lawmakers are more willing to consider spending cuts and revenue increases than they were before. Towards the end of last year, a majority of the members of the President’s fiscal commission voted in favor of a plan to slash spending and dramatically overhaul the tax system in a way that would raise some revenue. The three Republican Senators on the commission voted in favor of the plan, and Grover Norquist naturally disapproved.

In reality, the fiscal commission’s plan was outrageously conservative. CTJ and other observers objected that it relied on spending cuts for two thirds of the deficit reduction while relying on increased revenue for just one third. But for Republican lawmakers, supporting even one dollar of new revenue can incite the wrath of Norquist and raise the specter of a primary challenge.

Now a “gang of six” Senators — three Republicans and three Democrats — has been meeting and talking about deficit reduction in a way that would involve reducing spending and increasing revenue. The Republicans include Mike Crapo and Tom Coburn (Senators on the fiscal commission who voted in favor of the plan) and Saxby Chambliss. It seems likely they will propose something similar to the commission’s plan.

The Republican members of the gang of six certainly don’t champion tax increases in the traditional sense, but are willing to consider raising revenue through eliminating tax expenditures, that is, government spending through the tax code. Senator Coburn has been especially forthcoming. He’s even written OpEds about particular tax expenditures, like the subsidy for ethanol, that need to be cut.

Of course, anti-tax crusader Norquist has criticized the negotiations as a “transparent attempt to hike taxes,” which he says violates the taxpayer protection pledge that the three Republicans have signed.  In a thoughtful and carefully-worded letter, the three responded to Norquist that they were working to “protect taxpayers, not special interests.”

An article in Politico went so far as to say Norquist’s threat has been “a nonfactor” inside the bipartisan talks. That’s not a good sign for someone in the business of scaring politicians into an extreme and rigid ideology.

Every year around this time, lots of cutesy articles begin to appear listing a few bizarre tax breaks that you might be able to claim.  We don’t necessarily want to jump on that bandwagon… but we just can’t help ourselves.  If you live in Colorado, here’s one tax break you need to know about!  See how this break is already saving Tom Cruise, Kurt Russell, and Goldie Hawn boatloads of money!

Lots of states and localities offer property tax breaks for farmland, and in Colorado, as it turns out, it’s pretty easy to become a farmer for tax purposes.  According to The Denver Post, actor Tom Cruise pays a paltry $400 in tax on an $18 million, 248 acre tract of land because he lets “sheep graze around the mansions for brief periods each year.”  Now, it’s certainly nice of Mr. Cruise to feed those sheep, but it sounds like Colorado may have gone a little overboard in attempting to encourage that behavior.

Rep. Tom Massey, a Republican, apparently agrees.  Massey recently broke from his party by proposing a bill that would stop granting agricultural exemptions to residences unless the residence is integral to an agricultural operation.  Farmers like Mr. Cruise could still enjoy the agricultural break on the portion of their land used for “farming,” but they would have to pay property taxes on their homes at the same rate as everyone else.  If anything, it sounds like the bill doesn’t go far enough since it would still allow an enormous tax break on the vast majority of Mr. Cruise’s 248 acres, but most Republicans have lined up against the proposal anyway.

Frankly, the arguments in opposition to the bill have been almost as strange as the tax break itself.  Rep. Chris Holbert, for example, complained that the bill would “change the rules and take more money out of [Coloradans’ pockets.]”  Well, yeah, that’s what usually happens when a tax loophole is closed.  But another group of lawmakers are claiming the bill is unnecessary because county assessors are already allowed to decide whether property should be classified as agricultural or residential.

So which is it?  Is this bill “changing the rules” too much, or not at all?  More than likely, the opposition has a lot more to do with politics than policy.  In addition to Tom Cruise, Kurt Russell, and Goldie Hawn, The Denver Post’s (very incomplete) survey of questionable “farm owners” included a state senator, the state’s treasurer, an energy industry billionaire, a media mogul, and the chairman of Discovery Communications.  Clearly, this is an issue that many lawmakers just don’t want to deal with.

The Iowa Fiscal Partnership has issued a policy brief about the destructive tax cuts that are being proposed in the state legislature. The cuts being debated carry a hefty price tag, $1.6 billion, most of which is from a proposal to cut income tax rates by 20 percent across the board.

As we’ve previously noted, these income tax cuts are very regressive. ITEP found that the wealthiest 1 percent of Iowans would receive an average of $6,822, while those in the bottom quintile would enjoy a break of just $18 on average.

According to IFP, the revenue picture in Iowa is improving and the budget can be balanced without drastic cuts to spending and without raising taxes. But it’s mind boggling that legislators would want to cut taxes as they’re just barely crawling out of a fiscal crisis.

Charles Bruner, Executive Director of the Child and Family Policy Center, recently said, “Nobody is saying we’re flush with revenues, but the picture has improved and we can get through without major cuts. But that assumes we don’t dig a bigger hole with unnecessary and unwise cuts in revenues.” For more on the tax cut proposals and why they are shortsighted, read IFP’s report.

In more disturbing tax cut news, the Kansas House has passed legislation that would link the state’s personal and corporate income tax rates to changes in revenue. If revenues increase, the rates for the state’s two major progressive taxes will decrease. Eventually the income tax could even be phased out altogether. 

Supporters of the legislation say that this proposal will increase the likelihood that businesses will locate in the state. But a more thoughtful critique was offered by two state Representatives in explaining their vote against the proposal. “When it (the income tax) is gone, our three-legged stool is cut to two — and the worst two we can choose. [The] sales tax is a regressive tax that impacts low-wage earners most.” The legislation now goes to the state Senate.

California Governor Jerry Brown’s proposal to raise $9.3 billion in sorely needed revenue to help close a $26 billion budget gap through 2013 is in jeopardy.  In January, he pitched the idea of allowing voters to decide whether or not to extend temporary tax increases (first enacted in 2009 and set to expire this year) for another five years. 

Governor Brown needs a two-thirds majority of state lawmakers to place such a measure on the ballot, and to date, the governor has failed to garner support from a single Republican lawmaker (he needs four to vote with him).  

California’s constitutional deadline for passing a budget is June 15th.  Originally, Governor Brown had set a self-imposed deadline of March 10th to gain approval for his tax extension plan to ensure time to get the question on the ballot by early June.  That date has come and gone with no avail, so Brown is now seeking ways around the Republican blockade and still hoping something can be worked out in time for June. 

One alternative under consideration is a November vote on the measure which would be placed on the ballot through a petition drive rather than the legislative process.  But, that would mean the vote would come long after the budget deadline forcing lawmakers to cut billions of dollars more from an already depleted state budget. 

All eyes are on California and its popular governor to see if he can work things out in time for a June vote on the tax extension, but time is certainly running out.

We’ve noted before that lobbyists for extractive industries extract billions of dollars out of taxpayer pockets through special tax loopholes and subsidies at the federal level. Unfortunately, this is true at the state level as well. Even when states face unprecedented budget shortfalls and are considering harsh spending cuts, petroleum and mining lobbyists are working hard to preserve and expand their tax subsidies.

One particularly egregious example is Nevada’s Barrick and Newmont mining companies, which produce 90 percent of the gold in Nevada, worth over $500 million dollars. Recently, neither company reported any taxable income from their mines.

Interestingly, a Nevada State Tax Director recently admitted that the state has not even audited the industry for at least two years — and then entered into an ‘abrupt’ retirement.

Some legislators are proposing to limit tax deductions for mines to raise hundreds of millions of dollars. But Governor Brian Sandoval opposes the measure and it looks like proponents will not be able to overcome his veto.

In Alaska, oil industry lobbyists have found a friend in Republican Governor Sean Parnell, who is seeking to cut oil taxes and increase subsidies by at least $1.8 billion a year.

Governor Parnell says this will spur “investment” in the state. But the whole point of the tax is to ensure that oil profits result in investment in the state. As Democratic State Senator Bill Wielechowski explains, without the oil taxes, companies would take the billions in profits produced in Alaska and invest them in places like Venezuela or Ecuador. 

The new oil tax cuts do not come as a surprise to Democratic State Representative Les Gara, who contends that petroleum company representatives played a direct role in crafting the Governor’s legislation.

North Dakota seemed to have resisted extraction lobbyists when the State House rejected a measure strongly promoted by the energy industry. The state’s current oil extraction tax is automatically reduced when the price of oil falls below $50 a barrel. The proposed measure would scrap that rule and instead reduce the tax as production increases.

Republican Majority Leader Al Carlson tried to ressurect the measure by sneaking the language into another oil bill without a proper hearing.

The Grand Forks Herald editorialized that the legislature must study the effect of the measure through a “neutral source” rather than relying on the “self-interested arguments from the oil industry.” Fortunately, the measure is being held up in the Senate, which will likely guarantee that the public will get to review the changes the energy industry is proposing.

A New York Times article explains how General Electric has obtained a negative corporate income tax rate on its U.S. profits. Its public filings show that it had $26 billion in U.S. profits over the last five years. Instead of paying federal corporate income taxes, G.E. actually received a net benefit of $4.1 billion from the IRS over that period.

The article quotes CTJ’s director:

“’Cracking down on offshore profit-shifting by financial companies like G.E. was one of the important achievements of President Reagan’s 1986 Tax Reform Act,’ said Robert S. McIntyre, director of the liberal group Citizens for Tax Justice, who played a key role in those changes. ‘The fact that Congress was snookered into undermining that reform at the behest of companies like G.E. is an insult not just to Reagan, but to all the ordinary American taxpayers who have to foot the bill for G.E.’s rampant tax sheltering.’”

Here are some other highlights:

– President Obama has “designated G.E.’s chief executive, Jeffrey R. Immelt, as his liaison to the business community and as the chairman of the President’s Council on Jobs and Competitiveness, and it is expected to discuss corporate taxes.”

– G.E.’s tax department includes nearly 1,000 people who are instructed to “divide their time evenly between ensuring compliance with the law and ‘looking to exploit opportunities to reduce tax.’”

– G.E.’s tax avoidance played a starring role in convincing Reagan to adopt tax reform in the 1980s. “’I didn’t realize things had gotten that far out of line,’ Mr. Reagan told the Treasury secretary, Donald T. Regan, according to Mr. Regan’s 1988 memoir. The president supported a change that closed loopholes and required G.E. to pay a far higher effective rate, up to 32.5 percent.”

– “That pendulum began to swing back in the late 1990s” when Congress enacted a tax break for “active financing.”

– G.E.’s tax department’s director, a former Treasury official, literally “dropped to his knee” when begging Ways and Means Committee staff, then under the leadership of Congressman Charles Rangel, to extend the tax break for “active financing.”

– Rangel reversed his opposition to extending the “active financing” tax break that day, after G.E.’s lobbying and after Congressman Crowley of Queens argued that it would help banks in his district.

– Provisions of President George W. Bush’s huge corporate tax cut bill in 2004 were “so tailored to G.E. and a handful of other companies — that staff members on the House Ways and Means Committee publicly complained…”

– “Since 2002, the company has eliminated a fifth of its work force in the United States while increasing overseas employment. In that time, G.E.’s accumulated offshore profits have risen to $92 billion from $15 billion.”

An op-ed by CTJ director Bob McIntyre that ran in several newspapers this week refutes Newt Gingrich’s recent claim that the government shutdown of 1995 led to a balanced budget. McIntyre writes:

In a Feb. 27 article in the Washington Post, Gingrich argues (a) that Republicans did not cause the government shutdown and (b) that the shutdown was a brilliant tactical move by Republicans. The shutdown, he says, led inexorably to the 1997 “Balanced Budget Act,” which he claims produced the federal budget surpluses we enjoyed from fiscal 1998 to 2001.

Gingrich’s insistence that he deserves none of the blame, but all of the (supposed) credit for the 1995 government shutdown is humorous, and I thank him for the laugh. Not so funny is Gingrich’s cockamamie theory that the so-called 1997 “Balanced Budget Act” and its companion bill, the “Taxpayer Relief Act,” led to the budget surpluses that began in 1998…

Read the op-ed

On Wednesday, Rep. Jan Schakowsky introduced legislation to add additional brackets to the federal income tax so that millionaires and billionaires would be taxed at higher rates than they are today.

A rate of 45 percent would apply to taxable income starting at $1 million and rates would increase up to 49 percent for taxable incomes over $1 billion. Citizens for Tax Justice found that the bill would raise at least $78.9 billion if enacted for 2011. This is a little more than the $61 billion that Republicans would like to cut for the rest of this fiscal year from Pell Grants, nutrition, housing and other programs that struggling families rely on, particularly during this recession.

Millionaires make up about 0.2 percent (that’s the richest one fifth of one percent) of taxpayers, and yet they received about 17.6 percent of the income tax cuts that were extended at the end of last year. (And millionaires certainly benefitted disproportionately from the estate tax cut that was part of that compromise.) And yet, none of the Republican spending proposals would require this group of taxpayers to share in the sacrifice that they claim is needed to reduce the budget deficit. Congresswoman Schakowsky’s proposal demonstrates that there is a fairer way to reduce the deficit.

Ultimately, of course, we need fundamental tax reform that eliminates loopholes, raises revenue and makes the system fairer and simpler. Until that happens, the only fair alternative is to require the best off Americans to contribute at a higher rate than they do today.