Month: June 2011

On Saturday, the organization U.S. Uncut demonstrated at Apple Stores in several cities in protest against the company’s lobbying for an amnesty for offshore tax dodging by corporations, also known as a “repatriation holiday.”

This video shows what happened in the Apple Store in Washington, DC. U.S. Uncut has more information about the protests that took place in Boston, San Francisco, Chicago and other cities.

U.S. corporations, in theory, pay U.S. corporate income taxes on all of their profits, regardless of where they are earned. But they are allowed to “defer” (to indefinitely delay) those U.S. taxes on foreign profits until those profits are “repatriated” (brought back to the U.S.).

Some corporate leaders have called for a permanent exemption of U.S. taxes on offshore profits (a “territorial” tax system) while others have called for a temporary exemption, which is essentially what the “repatriation holiday” is.

As CTJ has explained before, the “repatriation holiday” is an amnesty for corporate tax dodgers rather than a break for companies doing real business abroad.

Multinational corporations that are conducting real business offshore and paying taxes to a foreign government have much less to gain from a repatriation holiday. Their offshore profits are tied up in offshore investments, making it much less likely that they would bring those profits home in response to a tax holiday. And when they do bring those profits back to the U.S., they can do so under current law without paying the full 35 percent tax rate, because they are likely paying taxes to the government of the foreign country in which they are operating. (The U.S. taxes are reduced for each dollar paid to the foreign government to avoid double-taxation.)

On the other hand, a U.S. corporation that shifts its profits to a post office box in the Cayman Islands or another tax haven is likely to benefit enormously from a repatriation holiday. These profits may not be taxed at all by the foreign government, meaning they would be subject to the full 35 percent rate under current law.

So it’s entirely fair for U.S. Uncut and others to be outraged that Apple and other companies are lobbying for a repatriation holiday and claiming that it will help the U.S. economy. Congress tried this in 2004 and it failed to lead to any job creation. In fact, many companies that benefited actually reduced their U.S. workforce.

Congress’s official revenue estimators recently concluded that a repeat of the repatriation holiday would cost $79 billion over ten years. That’s partly because U.S. corporations are likely to respond to a second repatriation holiday by shifting even more of their profits to offshore tax havens since they will have concluded that Congress is willing to call off almost all U.S. taxes on those profits every few years.

Will Nearly Double Budget Deficit if Continued, Mostly Benefit the Rich

State-by-State Fact Sheets

Ten years ago, on June 7, 2001, President George W. Bush signed into law the first of several tax cuts that drove the balanced budget he inherited from President Clinton deep into the red. Last year, Congressional supporters of Bush’s policies pushed through an extension of these tax cuts through the end of 2012.

• Many lawmakers want to extend the Bush tax cuts again into 2013 and beyond, which would almost double the federal budget deficit.
• 47.2 percent of the benefits of this tax cut extension would go to the richest five percent of the nation’s taxpayers.
• The richest one percent would receive an average tax cut of $68,079 in 2013.
• The poorest 60 percent of taxpayers would receive an average tax cut of just $487 in 2013.

See the national data and state-by-state fact sheets.

Last week, former partners in the law firm of Jenkens & Gilchrist, the former head of accounting firm BDO Seidman, and a former Deutsche Bank broker, were convicted on criminal charges related to a tax shelter scheme that reportedly generated fake tax losses of more than $7 billion. The case illustrates the sort of tax cheating that often goes undetected and which would become less common under a proposal supported by Citizens for Tax Justice.

In December, Deutsche Bank entered into a related non-prosecution agreement with the Department of Justice, admitting criminal wrongdoing and agreeing to pay a $554 million fine in connection to its involvement in tax shelter cases that generated $29.3 billion in bogus tax benefits for their clients.

Five other defendants, former partners at the law firm or the accounting firm, previously pled guilty to criminal charges in the case.

The charges of tax evasion and conspiracy carry possible prison terms of more than 20 years and multi-million dollar fines. DOJ Tax Division attorney John A. DiCicco said that the verdict “sends a loud and clear message that dishonest tax professionals will be held accountable for their crimes.”

In the next few weeks, Senator Carl Levin is expected to introduce a new version of the Stop Tax Haven Abuse bill, which would increase civil penalties for promoting tax shelters. The maximum penalty for knowingly aiding or abetting a taxpayer in understating their tax liability would be 150 percent of the aider-abettor’s gross income from the activity.

That kind of civil penalty, and the possibility of a criminal conviction, should give tax shelter promoters reason to think twice about helping the wealthy dodge their taxes.

“Sunset” provisions (or expiration dates) recently played a big role in allowing Washington State lawmakers to eliminate special tax breaks for filmmakers, computer server farms, and newspapers.  Unfortunately, a tax break for out-of-state banks was spared from the chopping block, due in no small part to its lack of a sunset provision.

Washington does a much better job than most states in making information available about the plethora of special breaks contained within its tax code.  Oddly, however, Washington also makes it much more difficult than most states to modify or repeal any of those breaks, since it requires supermajority support in the state legislature in order to raise tax rates or repeal tax breaks.

The unfortunate effects of this supermajority requirement were recently on full display in the Washington State House of Representatives. Last week, a minority of lawmakers was able to block the repeal of a tax break for out-of-state banks, while education and health care were slashed in order to balance the state’s budget. 

The Washington Budget and Policy Center (WBPC) points out that this problem could have been eliminated going forward had voters been allowed to decide this November on a proposal that would have given a simple majority of legislators the ability to repeal narrow tax breaks.

But in Washington and other states, a different method of addressing the unwarranted bias in favor of tax breaks is continuing to garner significant attention.  Specifically, Washington was able to get three narrow tax breaks off its books — for filmmakers, computer server farms, and newspapers — by simply allowing them to sunset (or expire) as scheduled. 

In Washington’s case, the value of sunsets is particularly pronounced, since tax breaks would otherwise continue to be in effect even after a majority of lawmakers decided they were ineffective.

Even in states without such supermajority rules, sunsets can be incredibly useful in forcing action. They require lawmakers to explicitly debate and vote, every few years or so, on tax breaks that otherwise would remain safely tucked away deep in the state’s tax code.

But sunset provisions are not the norm in Washington.  According to a recent WBPC analysis, only 37 of Washington’s 301 tax breaks include an expiration date.  That’s why Senator Jeanne Kohl-Welles has proposed legislation that would sunset all tax breaks in the state.  The proposal is similar to requirements that already exist in Nevada and Oregon, and to a bill that ITEP recently testified on in Rhode Island.

Using more effective sunset provisions in Washington, and elsewhere around the country, would provide lawmakers with an extremely valuable tool for slowing the proliferation of tax breaks that are too often ineffective, unfair, or both.

Early last week, Governor Mark Dayton vetoed nine budget bills passed by the Republican-led legislature and lawmakers adjourned with no spending plan for the upcoming fiscal year. Since releasing his initial budget plan in February, the Governor has called for a balanced approach to handle the state’s $5 billion shortfall.

Many Republicans in the legislature believe that the only way to fix the state’s books is to cut spending, including tax credits for low-income families.

“I chose a balanced approach to our budget,” Governor Dayton said, “one that included both significant cuts, but asked the top two percent of Minnesotans to pay more to ensure our quality of life and the services millions of Minnesotans depend on.  My approach chooses not to balance the budget on the backs of the other ninety-eight percent of Minnesotans.”

The budget presented to the Governor, by contrast, included proposals that would slash aid to local governments and the state’s renters’ credit, which is an important anti-poverty tool.

Dayton sent a letter, along with his veto, to the Speaker of the House stating, “Your tax proposal would require most Minnesota property owners and renters to pay higher property taxes,” because the massive cuts to local governments “would result in significant property tax increases.” 

Dayton’s veto letter goes on to say, “…your bill then directs over $200 million from those cuts to expanded tax expenditures for corporations and others.”

Since the legislature adjourned without a budget, it will need to meet in a special session. What is not at all clear is how the Governor and legislature will come to some sort of compromise. The Governor has said, “I’m in the middle, and they haven’t moved.” Read more about what to expect from the Minnesota Budget Project.

Last week, New York Governor Andrew Cuomo announced a deal with state lawmakers over pending legislation to enact a property tax cap in the state.

If the deal passes, the cap would be one of the strictest in the nation, capping annual growth in property tax revenues at 2 percent or the inflation rate, whichever is lower. The proposed cap would allow exceptions in limited circumstances, such as public pension shortfalls. Voters in a given locality could also override the cap by a 60 percent vote.

Even with the exceptions, the 2 percent cap is guaranteed to have a deleterious effect on New York local governments’ ability to provide core services.  Funding for schools, which depends heavily on property tax revenues, will bear the brunt of the tax cap.

According to Gov. Cuomo’s own numbers, property taxes have had to rise well above 5 percent each year to keep up with demand for critical services, so the 2 percent cap would inevitably force harsh cuts.

According to Richard C. Iannuzzi, president of New York State United Teachers, the state’s education system will be “devastated” by the cap just as it’s already suffered three years of the “toughest cuts” to education.”

Democratic lawmakers had attempted to stop some of these cuts by extending a popular surcharge on upper-income taxpayers, but Gov. Cuomo favored cuts to education instead and stopped the effort in its tracks.

The New York Times lashed out at Gov. Cuomo, arguing that the “tax cap is nothing more than a political crutch for politicians who don’t have the courage to argue the case for more taxes or for spending cuts.”

The Wall Street Journal, on the other hand, has trotted out its usual misinformation campaign in support of the cap, claiming that high property tax rates are causing New Yorkers to move out of the state.

In the same editorial, the Wall Street Journal also claimed that the tax cap in Massachusetts should be a model for New York, a notion that the Center on Budget and Policy Priorities thoroughly deconstructed a few years ago.

“Tax caps are not a novel or new approach. They are a tired gimmick with a history of failure,” writes Kevin Hart for the National Education Association, pointing to the devastating effect similar caps have had Massachusetts, Illinois, California and Colorado.

None of this is to say that New York’s property tax and education funding mechanisms are not in need of change. In fact, the Institute on Taxation and Economic Policy (ITEP) has documented in detail the ways in which New York should pursue systematic reform to improve the fairness and adequacy of its revenue system.

Even if Gov. Cuomo’s goal was simply to provide New York residents with a property tax break rather than enact fundamental reform, ITEP points out that property tax “circuit breakers”, rather than property tax caps, provide the most effective and well-targeted relief to those most in need, without damaging education funding overall.

Advocates in New York are also making the case for a property tax circuit breaker as a more targeted alternative.  At a press conference this week, school board members, county and local government officials and advocacy organizations joined with some Assembly members to speak out against the tax cap, calling it a “punitive, misguided approach to public concerns about property taxes.”

Public services provided by state governments help some families accumulate great wealth, and Ohio has recognized this for a century by levying an estate tax on well-off residents. This tradition may soon come to an end, as Governor John Kasich has promised to sign legislation repealing Ohio’s estate tax if it’s included in the General Assembly’s final budget.

Last month, Ohio’s House of Representatives voted to repeal the tax, and this week the Senate included the repeal in its revamped budget proposal. 

Since the vast majority of Ohio’s estate tax revenue (80 percent) goes directly to local governments, eliminating this tax would mean a loss of more than $200 million annually for local coffers. 

Opponents of the estate tax repeal have argued that the scope of the revenue loss at the local level will lead to deep cuts in services, local tax increases, and lowered bond ratings.
 
Supporters of the repeal claim that the estate tax harms middle class families, but the numbers tell a different story. 

Each year, less than 10 percent of all decedents’ estates in Ohio are subject to the tax.  In fiscal year 2010, a quarter of the estates taxed had values of more than $1 million and paid more than 75 percent of the total estate tax collected in the state. 

Furthermore, even though Ohio’s estate tax threshold is relatively low compared to other states, the tax rates are also low, particularly for large estates.

In the end, state policymakers are simply passing the buck to local officials who will have to enact spending cuts or tax increases to make up for the lost revenue. 

Those measures will be probably be hugely regressive compared to the estate tax, which is among the most progressive taxes levied in Ohio.