Month: May 2011

On Wednesday, Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) to provide a tax holiday for corporations that repatriate offshore profits, similar to the widely panned repatriation holiday enacted in 2004. The holiday is essentially a temporary tax exemption for corporate offshore profits, which some corporate leaders see as a second best alternative to a permanent exemption. (See related story.)

Brady’s bill, like the 2004 measure, would reduce the federal corporate income tax rate on repatriated offshore profits from 35 percent to a token 5.25 percent.

Most companies with offshore profits would not actually have to pay 35 percent even under current law if they repatriated them, because they receive a credit for any foreign taxes that they have already paid. The final section of CTJ’s recent report explains that the repatriation holiday therefore provides the greatest benefits to those corporations that shift their profits to countries with no corporate income tax (tax havens).

A recent report from the Center on Budget and Policy Priorities summarizes the various studies concluding that profits repatriated under the 2004 measure largely went to shareholders in the form of increased dividends or stock buybacks rather than job creation.

Rehashed Trickle-Down Economics

Some business leaders say that increased dividends is itself a positive result because it means increased income in the U.S.

The problem is that this tax cut comes at a huge cost and is funneled to wealthy shareholders. Congress’s Joint Committee on Taxation recently found that a repeat of the 2004 repatriation holiday would cost over $78 billion over the course of a decade.  In other words, the argument in favor of a repatriation holiday that boosts dividends is simply a rehash of trickle-down economics.

Encouraging Companies to Shift More Profits and Jobs Offshore

But even if Congress wanted to encourage corporations to repatriate their offshore profits (regardless of what those profits are used for) the repatriation holiday fails at that goal in the long-run.

Enacting a second repatriation holiday will send a signal that Congress is willing to call off almost the entire corporate income tax on offshore profits every few years. This would actually encourage companies to shift even more profits offshore to countries where they are not taxed very much (tax havens) and then simply wait for the next repatriation holiday.  

Democrats Supporting Repatriation Holiday Have Long History of Opposing Fair and Responsible Taxes

Brady’s bill has five co-sponsors, and the three Democrats among them are likely to receive the most attention.

One is Jared Polis (D-CO) who famously drafted and circulated a letter in 2009 that was signed by several freshmen House Democrats who opposed the surcharge that the Democratic caucus was considering to help finance health care reform.

The letter, which included factual inaccuracies, argued that higher taxes on the rich hurt small businesses. The Democrats changed their surcharge so that it would only affect millionaires, as a result of this letter.

The other two Democratic co-sponsors are Jim Cooper (D-TN) and Jim Matheson (D-UT). Both signed a letter last year calling for the extension of the Bush tax cuts even for the richest taxpayers. Both also signed a letter calling specifically for the extension of the special low rate of 15 percent on capital gains and dividends, perhaps the most indefensible provision among the Bush tax cuts.

Microsoft’s purchase of Skype for $8.5 billion provides a perfect illustration of why adopting a true worldwide corporate income tax system is critical to our economic future.  

According to the Wall Street Journal, the cash for Microsoft’s purchase of Skype (a Luxembourg-based company) will come out of its $42 billion in liquid assets held in foreign subsidiaries.

Because it is purchasing a foreign company with its overseas assets, Microsoft can avoid paying any U.S. tax that would be due if it had repatriated foreign earnings in order to purchase a US company for the same amount. Based on the company’s effective foreign income tax rate disclosed in their most recent SEC filings, a repatriation of $8.5 billion dollars would cost Microsoft somewhere in the neighborhood of $1.1 billion in U.S. tax.

As a Forbes commentator opines, the Microsoft-Skype deal demonstrates the harmful incentive created in our current system that encourages companies to invest in overseas companies rather than domestic ones. The fear is that this deal may just be “a harbinger of things to come.”

How can the US stop encouraging companies to invest abroad rather than at home?

By adopting a pure worldwide tax system.

Under a pure worldwide system, any US company’s foreign profits would be immediately subject to the US tax rate with a credit for any foreign taxes paid. This is similar to the current system except that the company would not be allowed to “defer,” or delay indefinitely, its U.S. taxes by keeping its foreign profits offshore.

A pure worldwide system would mean that Microsoft would face the same tax rate regardless of where it earned its profits. This would remove any incentive for shifting profits offshore and remove any obstacles to repatriating foreign profits.

Spinning the Truth

Never missing an opportunity to toe the line of corporate leaders and their shareholders, the business press tried to spin the news as proof that the US needs to enact corporate tax cuts and a repatriation holiday. They argue that high rates in the US are the cause of US companies like Microsoft holding billions in profits overseas rather than investing them domestically.

They could not be more mistaken in their solution.

First, tax repatriation holidays may actually worsen the situation by encouraging companies to hoard profits abroad in order to wait for the next holiday or even to use them as a hostage in demanding another repatriation holiday.

In fact, Microsoft is part of a coalition lobbying for a repatriation holiday so that it can bring some of its $42 billion in overseas liquid assets back to the U.S. and pay little or no tax.

Second, as CTJ’s Director Bob McIntyre explained in his testimony to the Senate Budget Committee, simply lowering corporate taxes is unlikely to be effective and would encourage a race to the bottom as other countries feel pressure to respond by further reducing their rates.

Finally, lower corporate income taxes would of course deprive us of revenue that we need to reduce our budget deficit.   

We hope that the Microsoft-Skype deal can be seen for what it is: another reason for the adoption of a pure worldwide corporate income tax system.

Last week the Hawaii legislature sent Governor Neil Abercrombie a package of tax changes designed to help close the state’s yawning budget gap.  Among its most notable components are the partial repeal of the state’s nonsensical deduction for state income taxes paid, and a new limitation on itemized deductions taken by wealthy taxpayers.  Both of these changes will help mitigate the upside-down, regressive nature of Hawaii’s itemized deductions — a move that ITEP has urged many states to consider.

If Governor Abercrombie signs the legislature’s tax package into law — as he is expected to do — Hawaii will become the first state in the nation to place a cap on the overall size of itemized deductions. 

Married taxpayers earning over $200,000 per year will be prevented from sheltering more than $50,000 of their income from tax via itemized deductions, while single taxpayers earning over $100,000 will be limited to a $25,000 deduction. 

ITEP recommended a similar option in its August 2010 “Writing Off Tax Giveaways” report, and the Hawaii legislature actually passed a cap of this type last year that was eventually vetoed by then-Governor Linda Lingle.

If this bill becomes law, itemizers will still be able to take a deduction much larger than the $2,000 per-spouse “standard deduction” enjoyed by many Hawaii residents.  Nonetheless, the cap will go a long way toward reducing tax regressivity while also raising much-needed revenue for the state.

Hawaii’s legislature chose to collect additional revenue from itemized deduction reform by partially repealing the deduction for state income taxes paid.  Hawaii residents earning over $200,000 per year (or $100,000 in the case of a single filer) will be unable to take this deduction, while taxpayers earning under that amount will continue to benefit. 

Allowing taxpayers to deduct their state taxes on their state tax forms is a bizarre policy with no real rationale.  Instead, it exists only because Hawaii has “coupled” its itemized deduction laws too closely to federal rules, where the state tax deduction is used as a form of revenue-sharing. 

Gov. Neil Abercrombie rightly called the state tax deduction an “absurdity” in his State of the State address.  The vast majority of states have already abandoned the state income tax deduction — most recently in New Mexico and Rhode Island, both of which repealed the deduction in 2010.

In addition to these progressive reforms, the legislature’s plan also raises significant revenue by temporarily suspending various sales tax exemptions for business activities, and by delaying a scheduled increase in the state’s standard deduction and personal exemption.  Rental car taxes, vehicle registration fees, and the vehicle weight tax are also slated to rise under the legislature’s plan.

Perhaps the most disappointing part of the final package is that it does not include the Governor’s proposal to eliminate the pension exemption for middle- and high-income retirees.  This already costly tax break is almost certain to grow rapidly in size as Hawaii’s population advances in age.  Moreover, this break creates inequities between Hawaii residents with different forms of income, offering nothing to low-income, elderly residents that must continue to work in order to make ends meet.

But while the legislature deserves some criticism for failing to rein-in costly retiree tax breaks, it also deserves much praise for including revenues as part of its budget solution, and in particular for using itemized deduction reform as tool for enhancing the fairness and adequacy of Hawaii’s tax system.

For months, Governor Rick Snyder has been trying desperately to enact massive business tax cuts paid for with new taxes on pension income and the elimination of the Earned Income Tax Credit (EITC).  Unfortunately, a modified version of Snyder’s plan passed both houses of the state legislature yesterday and is now on its way to the Governor’s desk, where it will soon be signed into law.  In a bit of good news, however, the excellent advocacy work done by the Michigan League for Human Services (MLHS) and others ultimately resulted in the EITC being spared from complete elimination — though it has been scaled back by some seventy percent.

The stated purpose of Gov. Snyder’s plan is to slash taxes on businesses by some 80 percent (or $1.7 billion per year) in order to create jobs in Michigan.  There are many reasons to be skeptical of the true job-creation potential of these tax cuts, and even Gov. Snyder confessed that “I can’t guarantee results.” But most lawmakers internalized this line of argument so thoroughly that it had not been debated in quite some time.

Rather, the majority of the debate focused on how to pay for Gov. Snyder’s “job creation plan.”  The Governor proposed doing this through a package of income tax increases that critics rightly pointed out would fall most heavily on the poor and the elderly. 

The House quickly recognized that passing the Governor’s proposal as-is would have been political suicide, and responded by scaling back the tax increases on the elderly, and by offering an extremely small, token tax cut to low-income working families as a replacement for the EITC.  These changes did little to alter to overall distribution of the Governor’s plan, but they did add just enough window dressing for the plan to gain passage in the House by the slimmest of margins, 56-53.

After passing the House, the bill faced a tough uphill fight in the Senate where many Republicans were very excited about showering the state’s business community with tax cuts, but much less excited about the personal income tax hikes that would be needed to make this happen. 

In the end, the most notable change to occur in the Senate was the reintroduction of the EITC, set at a level equal to 6 percent of the federal credit.  Given that Michigan’s current EITC is equal to 20 percent of the federal credit, this change will still result in a steep tax hike on low-income families. 

Nonetheless, the 6 percent credit is an enormous improvement over the measly, $25 per-kid credit that the House proposed as a replacement to the EITC.  And perhaps most importantly, it leaves Michigan’s progressive community with a great starting point to begin rebuilding the state’s tattered safety net when the political climate eventually becomes more favorable.

Ultimately, the Senate vote was even closer than in the House.  The legislation passed out of the Senate only when a 19-19 tie was broken by Lt. Gov. Brian Calley.  Clearly, there are a lot of people that are very unhappy the massive tax shift currently underway in the state of Michigan.  For the meantime, however, it appears that the state’s elderly and poor residents will just have to get used to paying a lot more, so that the business community can pay a lot less.

The agricultural property tax loophole we first told you about in March was closed on Monday when Gov. John Hickenlooper signed HB1146.  Tom Cruise was among the most famous beneficiaries of the loophole, saving thousands of dollars in taxes because of his decision to allow sheep to “graze around the mansions for brief periods each year.” 

At this point, it remains unclear whether this new law will cause farmer Cruise to put away his shears and focus on his acting career.

Prior to the enactment of HB1146, property owners in Colorado were eligible for hefty agricultural tax breaks if they could prove that they tried to make a profit through agriculture.  As the Denver Post points out, “that’s a standard so lenient that some property owners qualify by letting cattle [or sheep] graze a few days out of the year.” 

Unsurprisingly, many very influential people jumped at the chance to exploit this obvious flaw in the state’s tax code.  In addition to Tom Cruise, the Denver Post reported that Kurt Russell, Goldie Hawn, a state senator, the state’s treasurer, an energy industry billionaire, a media mogul, and the chairman of Discovery Communications all benefited from this loophole.  Countless other well-off of landowners in Colorado undoubtedly benefited as well.

The new law mostly fixes this problem by allowing county assessors to apply the normal, residential tax rate to up to two acres of land inside an agricultural parcel, including the land located underneath a residence. 

In order to protect real farmers, assessors will not be allowed to apply the residential rate to any part of the land if the actual residence is “integral” to a farming operation.  Pseudo-farmers like Tom Cruise, however, will almost certainly see their homes taxed at the residential rate, assuming they don’t fill their mansions with farming equipment in the very near future. 

A state task force reportedly found that most taxpayers affected by the change live in Colorado’s resort areas.

Unfortunately, this new law left another glaring agricultural tax loophole intact.  Developers and big businesses are still allowed to save millions in property taxes by conducting a similar style of “farming” on large swaths of vacant land.  Assessors in the state are continuing to push for the closure of this loophole as well.

Earlier this week, the Institute on Taxation and Economic Policy released a new report highlighting the key tax components of Connecticut’s recently enacted budget, which raised more than $1.4 billion in new taxes to mitigate cuts to core services.

 
The mostly progressive tax package includes increases in personal income taxes for the state’s best-off residents, a new 30 percent refundable state Earned Income Tax Credit, a reduction in the state’s property tax credit, an increase and expansion of the sales tax, a new ‘Amazon’ tax, a corporate income tax surcharge, a lowered threshold for the estate tax, and increases in cigarette and alcohol taxes.

In a year when most state leaders across the country have embraced an anti-tax, cuts-only approach to addressing short- and long-term budget woes, Connecticut lawmakers boldly took a stand for the vital role of government and for progressive tax policy.  Connecticut’s approach addresses current fiscal challenges and is forward-looking, putting the state on a path towards fiscal and economic recovery.

State policymakers and advocates still in the throes of crafting their state spending plans for next year should look to Connecticut as a guide for a sensible approach to addressing ongoing fiscal woes.

Rhode Island remains one of a handful of states seriously considering revenue increases to help address significant state budget shortfalls. 

In March, Governor Lincoln Chafee put forth a plan that would expand the state’s sales tax base to several dozen services currently not taxed and lower the state sales tax rate from 7 to 6 percent.  He also proposed a new 1 percent sales tax on some currently exempted goods and a variety of changes to business taxes.  Altogether, his revenue plan would have closed around half of a $331 million budget gap.

At legislative hearings in April, dozens of special interests lined up in opposition to Chafee’s sales tax expansion plan, which has since stalled in the legislature. 

Last week, an alternative revenue-raising plan emerged.  Representative Larry Valencia filed a bill for a temporary personal income tax surcharge of 4.1 percent on the state’s wealthiest residents, which would raise around $130 million. 

Rhode Island’s top marginal tax rate of 5.99 percent currently applies to taxable income of $125,000 and above for all taxpayers.  Under Rep. Valencia’s plan, a fourth bracket would be created.  Married couples with taxable income of $250,000 and single people with taxable income more than $200,000 would pay 10.09 percent on their incomes above those amounts.  

An Institute on Taxation and Economic Policy analysis of the proposal found that only 2 percent of the state’s taxpayers would be impacted by the tax increase.  More than 90 percent of the increase would be paid by the wealthiest 1 percent of Rhode Islanders, who have average incomes of close to $1 million.

Representative Valencia considers his bill a reversal or ‘recapture’ of the federal tax cut wealthy Rhode Islanders will receive as a result of the extension of the Bush tax cuts Congress enacted last December.

Just weeks after a six-month effort by Georgia lawmakers to enact ambitious tax reform legislation fell apart, Governor Nathan Deal is signaling that lawmakers may be asked to continue their deliberations on this issue when they return for a special legislative session on redistricting this August.

But if Deal’s views on the shape of “tax reform” are any indicator, a special session could run into the same difficulties encountered during this year’s tumultuous regular legislative session.

The failure of this year’s tax reform effort was due to an inexorable rule of tax accounting: when you design a tax plan that is revenue-neutral overall and gives big tax cuts to the wealthiest families, someone else has to pay higher taxes.

But Deal’s stated goal of shifting to a “consumption-based approach” to revenue-raising would necessarily reserve the biggest tax cuts for the very best-off Georgians, and the Republican leadership’s Grover Norquist-inspired refusal to raise any new revenues through tax reform means inevitably that middle- and low-income families will foot the bill for these high-end tax cuts.

Lawmakers who correctly found this “Robin Hood in reverse” swap unpalatable this spring will presumably feel the same way come August.

The sad part of the story is that this year’s tax battles began as an honest discussion of important tax reform principles. When an appointed Georgia tax reform commission issued its recommendations in January, the focus of the plan was on achieving a more sustainable Georgia tax system by eliminating unwarranted tax loopholes — and the original proposal would have done a decent job of achieving this important goal.

But in the hands of Republican leaders in the state legislature, the plan’s loophole-closing provisions gradually fell by the wayside under pressure from special interests, which meant that this formerly revenue-neutral plan ended up being a revenue loser that missed important opportunities to modernize the state’s tax system.

In their zeal to satisfy Grover Norquist and his no-new-taxes acolytes by removing provisions that would have hiked taxes on anyone at all, legislative leaders lost sight of the broad tax-reform principles that had motivated the reform commission in the first place.

More than anything, this outcome shows the utter incompatibility of the “no new taxes” mantra with the type of sustainable tax reforms that are needed at both the federal and state level. If lawmakers insist that tax reform can’t involve tax hikes on anyone, but must include substantial tax cuts for the best-off Americans, sustainable tax reform simply can’t happen.

Recognizing the dire fiscal straits faced by the state, Democratic lawmakers in Nevada are pushing for a $1.5 billion plan to reform the sales tax to raise revenue and avoid harsh cuts in public services.

One of the smartest parts of the plan would raise roughly $600 million in new revenues by expanding the state’s sales tax base to include services. Half of the revenue raised from sales tax base expansion would be used to pay for a reduction in the overall sales tax rate. The other half of the revenue would go towards addressing the state’s budget gap. 

As the Institute on Taxation and Economic policy explains, applying the sales tax to services increases revenue and also makes the sales tax less economically distortionary.

A coalition of the Retail Association of Nevada and the Nevada Resort Association are looking to improve Nevada’s sales tax base in another way. They call for legislation requiring Amazon.com and other e-commerce companies to collect sales taxes on items sold to Nevadans. The measure could generate at least $16 million in much-needed revenue.

Bryan Wachter, the President of the Nevada Retailers Association, points out that the biggest victims of the failure to collect these taxes are the “mom-and-pop retail establishments” that face an “uneven playing field” as they have to collect sales taxes that e-commerce sites do not.

These proposals would be major steps in the right direction, but they’re no panacea for Nevada. Even if the Democratic plan and e-commerce legislation is adopted, Nevada’s tax system will remain highly regressive and incapable of meeting the state’s fiscal needs in the years to come.

To meet the long-term challenge of creating a more equitable and adequate tax system, the Progressive Leadership Alliance of Nevada (PLAN) recently released a plan entitled “Bridging the Gap”, which includes a state individual and corporate income tax, changes to the state’s extraction tax system and other key reforms.

Addressing the Economic Club of New York on Monday, Republican House Speaker John Boehner told reporters that Congress should be “looking seriously at a territorial tax code,” according to CQ Today.

Under a territorial system, the offshore profits of a U.S. corporation would be exempt from U.S. taxes.

A recent report from Citizens for Tax Justice explained that this would cause serious problems.

First, corporations would have a greater incentive to engage in profit-shifting, meaning practices used to disguise U.S. profits as foreign profits. A common example is the manipulation of transfer pricing to shift corporate profits into tax havens (countries that do not tax, or that barely tax, certain types of profits).

Second, corporations would have a greater incentive to shift actual operations — and jobs — to other countries.

Our current system already encourages these practices because U.S. corporations are allowed to “defer” their U.S. taxes on their offshore profits. But the incentives would be even greater under a territorial system, in which corporations would NEVER pay U.S. taxes on their offshore profits.

Other countries that have adopted territorial tax systems are experiencing these problems, and the European Union is considering adoption of a different system to allocate profits among EU member states.

As CTJ’s report explains, the best alternative would be for Congress to repeal the rule allowing U.S. corporations to “defer” their U.S. taxes on offshore profits. Corporations could continue to get a credit for any taxes paid to a foreign government (just as they do now) which prevents any profits from being taxed more than once.

Possible Amnesty for Corporate Tax Dodgers

Some corporate leaders have argued that if Congress does not permanently exempt their offshore profits, then lawmakers should temporarily exempt them with the sort of tax holiday for repatriated corporate profits that Congress enacted in 2004. Boehner expressed openness to this idea on Monday.

Several studies of the 2004 effort showed the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists. An economist with the U.S. Chamber of Commerce recently admitted that any attempt by Congress to attach job-creation requirements to the tax holiday simply will not work.

Read more about the proposed repatriation tax holiday.

Calls for Slashing Public Services, But No Revenue Increase from Profitable Corporations

Speaker Boehner also said that the corporate tax should be reformed but should not raise any more revenue than it does today. This came during a speech in which Boehner demanded that “trillions” be cut from public services — a goal that would be impossible without sharply cutting Social Security, Medicare, and Medicaid — but refused to consider any revenue increases.

A recent report from CTJ explains why corporate tax reform should be “revenue-positive,” meaning we should raise more tax revenue from corporations than we do today.

Almost two-hundred organizations have signed onto a letter urging Congress to adopt a revenue-positive corporate tax reform.  

The letter notes that a 2007 report from President Bush’s Treasury Department found that the share of profits paid in taxes is lower for U.S. corporations than the average for OECD countries.

Sign your organization onto the letter urging Congress to raise revenue by reforming the corporate tax. (Deadline: End of Friday)

Send a letter on your own behalf urging Congress to raise revenue by reforming the corporate tax.