Month: June 2011

In signing a new two-year budget, Wisconsin governor Scott Walker fattened corporate welfare programs while making cuts to just about every public service the working poor depend on, including healthcare, child care, higher education and transportation.  The Center on Wisconsin Strategy has correctly labeled the new budget a “Betrayal of Wisconsin Values.”

According to a release from the Center:

• Funding for Medicaid and BadgerCare, the programs that ensure that all children have access to healthcare, will be cut by $500 million;
• Funding for Child Care, the service that low-income workers depend on to take care of their children so they can go to work, will be cut by $15 million;
• Funding for the Property Tax Circuit breaker, the program that reduces property tax payments for low-income families (many elderly), will no longer be indexed to inflation and will be worth $13.6 million less;
• Funding for technical colleges, education that provides skills for new workers and retraining for displaced ones, will lose $71.6 million, or 25% of its total funding;
• Funding for Public Transportation, for many low-income workers the sole mean of getting to and from their job, will be cut by $9.2 million;
• Funding for the Earned Income Tax Credit (EITC), which provides the working poor with a tax credit to offset regressive payroll taxes, will be scaled back by $56.2 million.  The EITC has been championed by economists across the political spectrum for its significant work incentive and capacity to help the working poor pull themselves out of poverty. 

These and other cuts amount to $2 billion worth of support yanked out from underneath the working poor.  Yet, in his frenzy of service cuts, Governor Walker somehow found room for $2.3 billion in tax breaks over the next decade, in the form of a domestic productio

n activities credit, two different capital gains tax breaks, and a variety of new sales tax exemptions for priorities like snowmaking and snow grooming equipment.

Of all the factors that stimulate a state’s economy by attracting private sector business, corporate taxes are among the least significant.  A skilled workforce capable of getting to job sites is a much higher priority for virtually any smart business owner. Unfortunately, Governor Walker’s budget just put that asset in serious jeopardy.

Photo via Blue Robot Creative Commons Attribution License 2.0

With the Iowa Caucuses almost 8 months away, the Republican primary was in full swing on Monday night as 7 of the Republican contenders battled it out during a debate on CNN. Tax policy took center stage as every single one of the Republican contenders promoted lower taxes as central to their economic platform.

Predictably however, the candidates stayed relatively vague about their specific tax plans.

Former Minnesota governor Tim Pawlenty is the only candidate so far to release an official tax plan, which, among other things, proposes to eliminate the capital gains tax, create only two income tax brackets, and reduce the corporate income tax rate from 35 to 15%. Citizens for Tax Justice estimates that the plan would result in a 73% income tax cut for the Top 400 Taxpayers and cut taxes 41% for millionaires generally.

Even without getting into too many specific plans, the Republican contenders made a few curious claims about tax policy that are in dire need of fact checking:

Representative Michele Bachmann, Minnesota: “What we need to do is today the United States has the second highest corporate tax rate in the world…We’ve got to bring that tax rate down substantially so that we’re among the lowest in the industrialized world.”

While Bachmann would be correct in claiming the United States’ statutory tax rate of 39% (the federal income tax rate is 35 percent and the average state corporate income tax rate is about 4 percent) is on paper the second highest in the industrialized world, she fails to take into account the effect of special tax breaks and loopholes which make the effective rate paid by companies relatively low. According to a 2007 study by the Bush Treasury Department, between 2000-2005 US corporations paid only 13.4% of their profits in corporate income taxes, well below the Organization of Economic Cooperation and Development (OECD) average of 16.1%. The OECD is what Bachmann means by “industrialized world.”

Demonstrating how big the difference between statutory and effective rates can be, a recent CTJ study showed that 12 US corporations together paid an effective corporate income tax rate of (negative) -1.5%, while earning $171 billion in profits over 3 years.

Former House Speaker Newt Gingrich: “The Reagan recovery, which I participated in passing…raised federal revenue by $800 billion a year in terms of the current economy, and clearly it worked. It’s a historic fact.”

Rather than telling a ‘historic fact’, Gingrich is weaving a complete fiction. In claiming that Reagan’s tax cut efforts raised federal revenue $800 billion, Gingrich is assuming that all economic growth was due to Reagan’s efforts, while simultaneously ignoring the effect of inflation and population growth.

Citizens for Tax Justice’s internal estimates put the real cost of lost revenue due to the Reagan tax cuts at 3.97% of GDP or the equivalent of $581.2 billion today. Even former Reagan White House Senior Policy Analyst Bruce Bartlett admits that the Reagan tax cuts DECREASED revenue, adjusting for inflation, by $473.7 billion. In addition, it’s odd that Gingrich would point to the Reagan era to establish his fiscal credentials considering that the national debt tripled during Reagan’s two terms.

This is not Gingrich’s first foray into rewriting historic fiscal realities and it probably will not be his last.

Herman Cain, Godfather Pizza CEO: “We need an engine called the private sector. That means lower taxes…suspend taxes on repatriated profits, then make them permanent.”

Herman Cain’s call for an end to taxing repatriated profits puts him in good company with Republican establishment figures like Republican Speaker of the House John Boehner, who believe that moving the United States toward a territorial system of taxation would stimulate the economy by bringing home offshore capital.

In reality however, such a move would be disastrous for the US economy. Rather than encouraging investment in the United States, US corporations would have a much greater incentive to shift actual operations and jobs offshore because they would not have to pay US taxes on these profits. A better approach would be to end deferral, which would stop these current tax incentives pushing jobs offshore while also encouraging companies to bring more than a trillion dollars in offshore capital back to the US.

How much is enough? On top of the close to $500 million in corporate tax breaks Illinois doles out each year, Governor Pat Quinn now finds himself confronted by a growing crowd of CEO’s demanding even more. In the wake of tax-break lobbying efforts by Motorola, Sears and Caterpillar, the latest corporation seeking preferential tax treatment is CME, owner of the Chicago Mercantile Exchange and the Chicago Board of Trade.  These companies claim that the temporary corporate tax rate hike enacted by Illinois lawmakers earlier this year might force them to pull up stakes and leave if the Governor doesn’t bend the tax code to accommodate their specific industry.  This tactic is widely viewed as an empty threat, but the Governor has said his door is open.

Matt Gardner, author of Balancing Act: Tax Reform Options for Illinois and Executive Director of the Institute on Taxation and Economic Policy, issued the following statement in response to the controversy:

“The real problem with the Illinois corporate income tax rules isn’t the rates, it’s the way the state has lavished industry-specific and even company-specific tax breaks and loopholes over the years.

“CME recognizes the inequities created by these corporate tax giveaways, but ironically, the solution put forward by CME and other highly profitable corporations is to create even more holes in the corporate tax code, further shifting the burden of the corporate tax to those companies not blessed with high-paid lobbying teams. For example, over the last three years, CME paid an effective state income tax rate of 7.7 percent, while Deere & Company  has been paying only 2.2 percent, and Wells Fargo a mere 0.7 percent.

“Capitulating to big businesses’ aggressive lobbying is what got Illinois in this mess in the first place.  The “single sales factor” tax break that lawmakers enacted a decade ago was designed to please manufacturing companies. This single tax break now costs the state close to $100 million a year—and shifts the cost of funding public services away from manufacturers and onto every other Illinois business – with no demonstrable impact on the size of Illinois’ manufacturing sector. Combined with nearly $400 million in other corporate tax giveaways annually, the single sales factor increases the pressure on state lawmakers to hike tax rates in order to preserve a minimal level of growth in the corporate tax.  Repealing the single sales factor is the first thing the governor and legislature can do to make the Illinois corporate tax system more equitable; creating more exceptions for corporations now lining up to renew their expiring deals will create even more instability in the state’s revenues.

“Taxes are part of the cost of doing business, and corporations get a big bang for those bucks: educated workers, reliable energy sources, roads and tracks that get them to work and their product to market, the list goes on.  If CME and other corporations want a stable, predictable economic environment, they should be asking for fewer loopholes, not more.”

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP’s mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. ITEP’s full body of research is available at www.itepnet.org.

Plan Would Cut Personal Income Taxes by at Least 41 Percent for Millionaires Generally

Former Minnesota governor and presidential candidate Tim Pawlenty has released his proposed tax plan, including very specific rate cuts and exemptions for investment income, and vague promises to eliminate tax loopholes. Even if he eliminates all itemized deductions and credits, millionaires would still receive an enormous income tax break under the plan.

Read the report.

CTJ and others have noted that the cost of the Bush tax cuts from 2001 through 2010 was about two and a half trillion dollars. The recent “compromise” that extended them for another two years, through the end of 2012, cost $571.5 billion. But this is only the beginning. If Congress makes permanent the Bush tax cuts or extends them for another decade, the cost will be $5.4 trillion.

Read the fact sheet.

The Mercatus Center, a think tank run by “America’s Hottest Economist,” has attempted to quantify the level of “freedom” enjoyed within each state.  If this sounds impossible, that’s because it is.  A quick look at the “taxes” component of each state’s “freedom score” should make this very clear.

According to the Center, freedom requires that “individuals should be allowed to dispose of their lives, liberties, and properties as they see fit, as long as they do not infringe on the rights of others.”  This, according to the study, requires “a deep distrust of taxation.”

In order to measure the impact of taxes on freedom, the Center does what it correctly describes as a “simple” calculation: it tallies up the size of all tax revenues (with a few exceptions) as a share of the state’s economy.  Basically, more tax revenue means less freedom under the authors’ assumptions — and taxes account for about 10 percent of each state’s overall “freedom score.”  But as everybody outside the Mercatus Center knows, taxes are never this simple.

For starters, states routinely use their tax codes to encourage (and discourage) a huge range of decisions that affect our day-to-day lives.  Most states, for example, offer strings-attached tax incentives designed to spur specific companies into building factories within their borders.  Under the Mercatus Center’s assumptions, a state that uses its tax code to subsidize private sector construction will actually score better on the “freedom” index than an otherwise identical state, simply because the subsidy cuts into its revenue collections.  In reality, however, a state without the subsidy offers a freer and more level playing field with “unhampered markets,” as the authors put it.

Of course, factory construction isn’t the only area where the government tries to manipulate behavior with special breaks.  States offer special tax breaks for everything from competing in a livestock show to purchasing binoculars — each of which the Mercatus Center’s calculations would classify as “freedom enhancing.”

Taxes can also affect freedom in unintentional ways.  For example, a handful of states have placed caps on the rate at which a homeowner’s property tax bill can grow each year.  These tax caps result in huge tax cuts for many homeowners, especially those that have lived in their homes for many years.  Obviously, under the Mercatus Center’s assumptions, these caps are big freedom enhancers.  In reality, however, the opposite is true.

An article in the March 2011 edition of the National Tax Journal showed what anecdotes from homeowners have always suggested: these caps result in a “lock-in effect” where residents are either unable or unwilling to leave their homes, out of fear of losing the tax savings they’ve accumulated over many years.  “Locking” residents into their homes with convoluted property tax breaks is hardly the definition of a free society.  But don’t count on the Mercatus Center’s “freedom index” being able to capture these types of nuanced, but vitally important implications of state tax policies.

Finally, it’s worth noting that the Mercatus index also falls short in its failure to examine who pays taxes.   This is most obvious in the 48th and 49th place fiscal policy rankings received by Hawaii and Alaska, respectively. 

Hawaii’s sales and excise tax revenues are very robust, in large part because of the huge quantities of hotel rooms, car rentals, tours, and souvenirs that are sold to out-of-state tourists.  Similarly, a significant amount of Alaska’s tax revenue (even excluding severance taxes, which the study omits) comes from multinational oil companies. 

In each of these states, many tax dollars flow into state coffers from outside the state — and while every one of those dollars sinks the state lower in the Mercatus “freedom index,” it has little if any impact on the freedom of anybody living within those states’ borders.  For this reason alone, readers should hesitate before taking the authors’ advice that “individuals can use the data to plan a move or retirement.”

At the end of the day, how taxes are collected is equally if not more important than how much taxes are collected.  Economists recognized this a long time ago when they discovered the tax policy principle of “neutrality,”  which basically means that tax systems should interfere with our decisions as little as possible.  A tax system that doesn’t generate much revenue can still reduce our freedom in important ways if it’s applied in a narrow and discriminatory fashion.  Anybody interested in enhancing freedom through tax reform should be focused on the plethora of special breaks contained in state systems — not the overall revenue yield of those systems.

Sales tax laws would be essentially meaningless if retailers were not required to collect the tax every time a purchase is made.  The opportunities for customers to evade the sales tax (either on accident, or on purpose) would be overwhelming.  Every state with a sales tax knows this — and as a result, the vast majority of retailers are legally required to collect and remit sales taxes.

Amazon.com and many other online retailers, however, are the major exception to this broad rule.  A 1992 Supreme Court case carved out a special exemption for any “remote sellers” that don’t have a “physical presence” in a state — like a store or warehouse.  The ruling has allowed the Internet to become an open highway for tax evasion. While customers shopping online owe the same sales tax they would if they shopped in a store, very few actually take the time and effort necessary to pay that tax.

This week, four states (California, Louisiana, Texas, and Vermont) made headlines for their attempts to limit the amount of sales tax evasion occurring through “remote sellers,” while a fifth state (Illinois) will soon have to defend its efforts to do the same in court.  By contrast, South Carolina lawmakers were recently bullied into granting Amazon an exemption from having to collect sales taxes for five years, despite the fact that it will soon have a “physical presence” in the state.

In Vermont, Governor Shumlin recently signed a so-called “Amazon law” that will eventually require all remote sellers partnered with affiliate companies physically based in the state to collect and remit sales taxes (see this ITEP report for more on “Amazon laws”).  Unfortunately, the bill was written so that it won’t take effect until 15 other states have enacted similar laws. 

Six states — Arkansas, Connecticut, Illinois, New York, North Carolina, and Rhode Island — have enacted such laws so far, and many more have given the issue serious consideration.  In the meantime, remote sellers like Amazon will be required to notify Vermont residents of the taxes they owe when making a purchase.

The California Assembly easily passed an Amazon law last week.  That legislation now goes back to the Senate, where a similar bill gained narrow passage last month.  Even if the Senate approves the Assembly’s version of the bill, however, it’s unclear whether Governor Brown will sign the measure.

Louisiana can now be added to the long list of states giving serious consideration to enacting an Amazon law.  The House Ways and Means Committee unanimously passed such a law in late-May, though opposition by Gov. Jindal makes it unlikely that it will be enacted any time soon.

In Texas, Gov. Perry recently vetoed a measure that would have required Amazon.com to collect sales taxes in the state, though the legislature may still try to enact the measure by inserting it into a larger bill that Perry is unlikely to veto. 

Unlike the true “Amazon laws” discussed above, the measure in Texas was designed to prevent Amazon from continuing to skirt its sales tax responsibilities by claiming that its Texas distribution center is actually owned by a subsidiary, and therefore does not amount to a “physical presence.”  The nearby photo is the actual sign in front of the Texas-based distribution center that Amazon claims it does not own.  

In Illinois, the Performance Marketing Association (PMA) has filed a lawsuit challenging the constitutionality of the state’s Amazon law.  The lawsuit is similar to one being pursued by Amazon against New York State.

And in South Carolina, Amazon.com has demanded, and received, a five year exemption from having to collect sales taxes on purchases made by South Carolinians, despite the fact that it plans to open a distribution center in the state (and will therefore meet the Supreme Court’s definition of having a “physical presence”). 

The granting of this exemption represents a stark reversal from just one month ago, when it was soundly defeated 71-47 in the House. 

Brian Flynn of the South Carolina Alliance for Main Street Fairness accurately summed up the unfortunate reality of this situation when he said that “with this economy, [Amazon was] in a good position to strong-arm legislators.”  Fortunately, the exemption is only supposed to last five years — though judging from Amazon’s past behavior, it’s reasonable to expect that the company will undertake an aggressive campaign to extend that five-year window.

When Florida governor Rick Scott took office, he set out to dramatically slash both taxes and public services.  While his most radical proposals were very wisely rejected by the state’s slightly more reasonable legislature, he has unfortunately been partially successful in his crusade.  One of Scott’s biggest tax breaks to date, SB 2142, orders the state’s five water management districts to cut property taxes by $210 million.

But it’s not the average Floridian who’s seeing a big reduction in their tax bill.  Rather it’s large corporations that are getting the big payout.  

According to the Palm Beach Post, the owner of a median priced home in Palm Beach County, for example, will receive a property tax cut of about $28 under the plan.  But some corporations, who own very large and valuable tracts of land, are due to get a tax break of hundreds of thousands of dollars, with a few even breaching the million dollar mark.

Coincidentally, or perhaps not, the biggest corporate benefactors of SB 2142 also happened to be the biggest contributors to Scott and the GOP’s 2010 election campaigns.  Florida Light & Power (FLP) and Walt Disney World were the big winners in Scott’s latest package of corporate giveaways.

FLP made contributions to the Florida GOP in the last election cycle of $1.1 million, while Disney contributed $854,364.  Now these companies are slated to receive an estimated $1.8 million and $1.3 million, respectively, worth of tax breaks each year, which is a pretty good return on investment.

This is just the latest in a string of tax cuts backed by Scott with questionable benefits, and questionable motives as well.  

Scott and the GOP would argue that tax cuts for corporations are necessary to jumpstart the economy, but the numbers don’t back that up.  In fact, a recent Ocala.com article says that Scott’s budget will lose thousands of jobs due to the steep cuts in state spending it requires.

And the public is starting to notice.  Rachel Weiner of the Washington Post noted that 6 out of 10 people surveyed in a Quinnipiac poll disapprove of the job Rick Scott is doing and 54% of respondents said the Florida budget was “unfair” to them.  The article goes on to suggest that Scott may be the most unpopular governor in the country.
 
Floridians have a clear message for Governor Rick Scott:  Mickey Mouse is doing just fine on his own.

Last weekend, North Carolina’s General Assembly gave final approval to a state spending plan for next year that significantly cuts spending, allows temporary taxes to expire, and offers small businesses a new tax break.  The budget now sits on Governor Bev Perdue’s desk and observers are watching closely to see if she will keep her promise to veto a budget that moves the state backwards in education spending.

New North Carolina Speaker of the House Thom Tillis penned an op-ed describing his party’s approach to the Tarheel state’s $2 billion shortfall as a “new choice for North Carolina.”  This choice includes sticking to a campaign pledge not to raise taxes. It slashes funding to the state’s early childhood education programs, K-12 schools, community colleges, universities, Medicaid, court and prison systems, and substance abuse and mental health services resulting in the loss of thousands of government jobs. 

But, there are alternatives to rolling back North Carolina spending to unprecedented levels, laying off government workers, and securing the economic recovery the state’s new leaders seek.  

As the North Carolina Budget and Tax Center points out, the most damaging cuts in the final legislative budget agreement could be altogether avoided if lawmakers would extend two temporary taxes and close other major tax loopholes in the state. 

First, Governor Perdue included an extension of ¾ of the 1 cent sales tax increase in her budget plan.  Second, advocates have also called on state leaders to extend a temporary personal income tax surcharge for the state’s wealthiest taxpayers as well as a surcharge for profitable corporations. Finally, tax loopholes abound and for years lawmakers have talked about, but failed to act on, comprehensive tax reform that would ensure more fair and adequate revenues in the short- and long-term.

Unfortunately, unless a minimum of 2 of the 5 democratic House members who voted in support of the budget are convinced to change their minds, it appears a veto from the governor could be overturned and the ‘new choice’ for North Carolina will be in effect for at least a year in the state.

Bucking his repeated “no new taxes” pledge, Republican Governor Brian Sandoval worked with Republicans and Democrats alike in Nevada to pass a $6.2 billion budget deal,  including the extension of $620 million in temporary tax hikes.

Sandoval is part of a growing trend of state leaders forced to renege on “no new taxes” pledges after hitting the brick wall of fiscal reality.  Lawmakers in other states have been similarly forced to reconsider irresponsible no new tax pledges after taking a more sober look at their state’s fiscal conditions.

What brought Sandoval back to reality was a Nevada Supreme Court decision, which ruled that the state government could not siphon off $62 million in funding from the southern Nevada sewer district. The ruling, which Sandoval called a “game changer,” created a new budget hole of about $656 million, since the budget counted on hundreds of millions of dollars from similar unconstitutional revenue grabs from local governments. This revenue hole could not be responsibly filled without the tax extensions. Nevada is actually one of many states where courts have played a critical role in upending the budget debate.

Sandoval’s reversal represents a big loss for movement conservatives in Nevada, who lost their chance to dramatically cut Nevada’s services while making the governor they opposed look reasonable by comparison.

Unfortunately, even with the additional revenue, the final deal still included significant cuts such as the elimination of a $5.7 million property tax rebate program for low-income seniors.  In addition, the deal regrettably did not include the comprehensive sales tax reform proposal pushed by Democratic lawmakers.

On the plus side, Nevada’s legislative session also included two modest breakthroughs in the effort to increase the level of scrutiny and taxation of the state’s extraction industries. Despite the powerful influence of mining in the state, both houses of the Nevada legislature repealed constitutional provisions limiting taxes on mines to 5 percent of the net proceeds of minerals and raised $24 million in additional revenue by having the mining companies give up health care tax deductions.