Month: July 2011

President’s and GOP’s Positions Both Include Greater Tax Cuts than Spending Cuts

It’s hard to say what will happen with the necessary increase in the federal debt ceiling. But one thing is clear: Almost anything that the President and the Congress can possibly agree upon will not reduce projected budget deficits. Instead, it will increase them.

A new fact sheet from Citizens for Tax Justice explains the problem that both sides want to extend all or most of the expiring Bush tax cuts. And neither side has proposed spending cuts or tax increases large enough to offset the tremendous cost of such an extension.

Read the fact sheet.

Photos via Rusty Darbonne and Talk Radio News Creative Commons Attribution License 2.0

New Jersey Governor Chris Christie used his line-item veto power to rip the legislature-approved budget to shreds earlier this month.  New Jersey Policy Perspective put it best when stating that Christie’s numerous vetoes “did serious damage to virtually every constituency imaginable in this state – except for corporations and the super-rich.”

As expected, he shot down a proposed tax on New Jersey millionaires who make up only .2 percent of all taxpayers in the state.  At the same time, he refused to restore the state’s Earned Income Tax Credit to previous levels, which, at a cost of only $50 million, was no-brainer strategy to provide much needed assistance to struggling low-income working families.

He also stripped away hundreds of millions of dollars for schools, aid to local governments, health care for working families, legal assistance for low-income individuals, and other critical programs. 

New Jersey Senate Democrats are meeting this week to attempt to override Christie’s spending cuts, however, they have been unsuccessful in gaining enough Republicans to join them and so far the vetoes stand.  They have yet to tackle the millionaires’ tax and Earned Income Tax Credit, but given that members are sticking to party lines, there is no realistic chance of restoring either of them.

The New Jersey Assembly Democrats are taking a different approach.  They first announced a plan to hold a series of hearings over the summer on Christie’s vetoes and wait to schedule override votes until the fall, hoping to gain some Republican support along the way.  But, by law, if an override vote fails in the Senate, the Assembly cannot take up a vote on that same issue.   

Despite the fact they are essentially powerless now in overturning Christie’s vetoes, Assembly Democrats are still planning to hold hearings starting next week on the impact of the cuts on children’s programs.  In a statement announcing the hearings, Assembly Budget Chair Lou Greenwald said, “The impact of these cuts demand immediate attention, and we’re committed to trying to find a way to make sure these programs continue to serve children suffering through horrific cases of abuse, illness and poverty.”

Company Accused of Dodging $2 Billion in US Taxes After Calling for Exemption for Tax Haven Profits and Attacking Illinois Tax Hike

A former global tax strategy manager of Caterpillar is suing the company for demoting him after he complained that it was using “tax and financial statement fraud” to avoid $2 billion in U.S. taxes.

Daniel J. Schlicksup’s specific claim is that the company improperly attributed at least $5.6 billion of profits from the sale of spare parts from a plant in Illinois to another unit in Geneva. He alleges that after telling his superiors that he believed the tax avoidance was illegal, they retaliated by transferring him to the company’s information technology division, which is entirely out of his area of expertise.

For their part, Caterpillar representatives have said that the company complies with all laws and regulations, but have not as of yet addressed the specific charges in the lawsuit.

Based on the details released so far, it is unclear how this case against Caterpillar will ultimately pan out. The problem, according to Harvard Professor Stephen Shay, is that a company does not need “much substance” to be considered legal in these circumstances under U.S. law. In other words, even if Caterpillar is using a Swiss subsidiary primarily to avoid billions in taxes, it’s possible that the maneuver could actually be legal depending on the specific details of the subsidiary’s operation.

Caterpillar has long been an especially outspoken critic of corporate income taxes. In May, the company’s CEO called for the US to adopt a territorial tax system, which would be a boon to multinational corporations and a disaster for everyone else.

On the state level, Caterpillar was the first company to protest the recent corporate tax increases in Illinois, where the company is headquartered. They led the opposition to the state increase, despite the fact that their total (all states including Illinois) state and local tax liability represented only a tiny fraction of their costs; a mere 0.7 percent of their global earnings in 2010. In addition, if the accusations prove to have any truth, Caterpillar may have been fraudulently avoiding Illinois taxes as well.

Photo via Cyrillicus Creative Commons Attribution License 2.0

A group of Iowa business leaders recently voiced their support for an increase in the state fuel tax to pay for much needed road repairs. Speaking in front of Governor Terry Branstad’s Transportation 2020 Citizen Advisory Commission, a wide array of business (subscription required to view link) interest groups called for the fuel tax hike, including the Associated General Contractors of Iowa, Iowa Farm Bureau, Iowa Bankers Association, Iowa Motor Truck Association, and the Iowa Good Roads Association.

The Commission is tasked with assessing the condition of Iowa’s roads and the revenue sources used to pay for those roads.  More specifically, the Commission is seeking to address what the state’s Department of Transportation estimates is a $215 million shortfall in transportation spending, relative to the amount of money needed to complete certain high-priority projects. 

Most of those who spoke at the July 7th hearing agreed that the best way to address this shortfall would be through an increase in the fuel tax.  One virtue of the tax is that it functions like a “user fee” in that those who drive more (and wear down state roads more) pay more to have them maintained and repaired.  Advocates for progressive taxes, on the other hand, point out that the gas tax impacts low-income taxpayers most heavily.  If the regressivity of the gas tax is mitigated through an expansion of the state’s EITC, however, an increased gas tax could be a very responsible and equitable way of fixing Iowa’s – or any state’s – deteriorating roadways.

Ultimately, it’s refreshing to see these business leaders – a group that too often exhibits a knee-jerk opposition to all tax increases – recognize that new tax revenues will be absolutely essential in bettering the state of Iowa and its roadways.  Iowa business leaders are well aware that working roads are the kind of infrastructure that allows them to succeed economically and transport their goods and services around the state. It’s also worth noting that the path being urged by Iowa business leaders is preferable to the one taken just next door in Nebraska, where chronic transportation funding shortfalls have been “addressed” by simply taking money away from education and other public services.

Photo via Will Merydith Creative Commons Attribution License 2.0

Republican Senate Leader McConnell’s Plan Would Avoid Forcing the Spending Cuts that He Knows Are Highly Unpopular

On Tuesday, Senator Mitch McConnell (R-KY) offered a convoluted proposal in which a bill to raise the debt ceiling would be passed by Congress — requiring Republican and Democratic votes — followed by subsequent meaningless votes that would allow many lawmakers, even a majority of lawmakers, to pretend that they disapprove of the increase in the debt ceiling and lay the blame on President Obama.

McConnell’s proposal is for the Congress to enact a bill allowing the President to increase the debt ceiling in incremental steps and giving Congress a chance to pass subsequent bills blocking each of those incremental increases. Of course, the President would veto any of these subsequent bills preventing an increase in the debt ceiling.

In fact, subsequent bills to prevent the President from raising the debt ceiling may not even pass the Senate, which is controlled by Democrats. Of course, Senators of either party could hypocritically shift from approving the first bill to give the President this power to supporting a subsequent bill to take this power away from the President. Such shiftiness is to be expected in Congress today.

After the initial bill is passed to give the President the power to increase the debt limit, it’s possible that no one will pay any attention to subsequent votes on bills related to the debt ceiling. Votes on bills that don’t pass usually do not generate much of a buzz. For example, it’s not obvious that the public remembers when Senate Republicans and a few Democrats filibustered a full extension of the Bush tax cuts for 98 percent of taxpayers last year. 

The Retreat

Earlier this year GOP leaders threatened to block any increase in the debt ceiling unless it came with spending cuts equal at least to the amount by which the debt ceiling would be increased, $2.4 trillion. Of course, failure to raise the debt ceiling would cause an unprecedented default by the U.S. on its debt obligations and send the financial markets into a tailspin.

Last week, the President proclaimed his desire to agree on a larger decrease in the deficit, of $4 trillion over ten years, including savings from Social Security and Medicare.

As talks proceeded the White House pushed for an agreement that would achieve just one fourth of the $4 trillion in deficit reduction from revenue increases and the other three fourths from spending cuts. This offer seemed wildly tilted to the anti-tax lawmakers, especially given that the U.S. is one of the least taxed countries in the industrialized world.

Over the weekend, Republican House Speaker John Boehner gave up on such an ambitious deal even though it would have been so skewed towards his priorities. Boehner said he wanted to find agreement on a smaller deficit reduction deal and a short-term increase in the debt ceiling, which the President opposes. That prompted Senator McConnell to make his offer, which essentially gives up any attempt to force cuts in spending in return for an increase in the debt ceiling. 

See related article: The Real Reason GOP Leaders Want to Give Up the Debt Ceiling Fight: The Public Opposes Deficit-Reduction by Cutting Spending Alone

Photo via Gage Skidmore Creative Commons Attribution License 2.0

Government functions in Minnesota shut down July 1 and that shutdown continues, nearly two weeks later, as a result of a stand off between Governor Mark Dayton and conservatives in the state’s legislature.

The Governor is using this week to talk directly with Minnesotans and share his message of taking a balanced approach to the crisis. He says, “I’m asking the wealthiest Minnesotans to pay a little more in taxes so that children with special needs don’t have to be denied services … and that’s a Minnesota value.”

The Governor has recently offered an olive branch to conservative lawmakers saying he’d be willing to compromise. He’s even offered  to make his proposed tax on millionaires temporary, increase cigarette taxes, increase surcharges on hospitals and health plans and even delay payments to schools.  Yet legislators rejected these ideas and have yet to offer any alternative budget proposal of their own.

Dayton is clearly willing to negotiate (though we question the wisdom of a cigarette tax), but the uncompromising negotiation technique of the legislature leaves Minnesotans to deal with the consequences of this avoidable standoff.

Make no mistake, each day that the shutdown is allowed to continue Minnesotans and their state’s economy are harmed. Paul Anton in a recent MinnPost piece notes that “Layoffs of state workers drain about $23 million a week in purchasing power from the state’s economy. Estimates are that the state loses $1 million a week in revenue while the state parks are closed and another $1.25 million a week while the state lottery is not operating.” Of course there are tremendous incalculable impacts too.  Background checks and license renewals for health care professionals simply aren’t happening. Let’s not forgot the impact to local governments, schools districts may actually end up having to pay higher interest costs because they may need to borrow more money to balance their own budgets because of delays in state payments.

The St. Cloud Times recently opined, “We don’t support Gov. Mark Dayton traveling the state to talk about his efforts to solve the state’s budget problem. History shows these efforts tend to preach to the choir, no matter the political faith. Then again, we can’t really blame Dayton because the people he needs to talk with — Republican legislative leaders — are clearly not willing to do anything remotely constructive to end this shutdown.”

Dayton has shown he’s willing to negotiate and he’s got the right idea to raise taxes in a progressive way to ensure vital services aren’t cut. Let’s hope for the sake of Minnesota that it doesn’t take the Legislature too much longer to come to a similar conclusion.

Photo via Governor Dayton Creative Commons Attribution License 2.0

Senator McConnell’s convoluted proposal for lawmakers to raise the debt ceiling while avoiding the blame (see related article) shows that GOP leaders are trying desperately to escape a trap. On one side are anti-tax ideologues like Grover Norquist and his group, so-called Americans for Tax Reform, who have organized a “no new tax pledge” signed by many lawmakers.

On the other side is the American public, which has made clear that it prefers any reduction in the budget deficit to include a mix of spending cuts and revenue increases.

Bruce Bartlett, a Republican who worked for President Reagan and the first President Bush, presents a long list of polls showing support among Americans for raising taxes to deal with the deficit. Here’s just a sample of the polls he cites:

A June 9 Washington Post/ABC News poll found that 61 percent of people believe higher taxes will be necessary to reduce the deficit.

A May 13 Bloomberg poll found that only one third of people believe it is possible to substantially reduce the budget deficit without higher taxes; two thirds do not.

A May 12 Ipsos/Reuters poll found that three-fifths of people would support higher taxes to reduce the deficit.

An April 29 Gallup poll found that only 20 percent of people believe the budget deficit should be reduced only by cutting spending; 76 percent say that higher taxes must play a role.

An April 22 New York Times/CBS News poll found that 72 percent of people favor raising taxes on the rich to reduce the deficit. It also found that 66 percent of people believe tax increases will be necessary to reduce the deficit versus 19 percent who believe spending cuts alone are sufficient.

An April 20 Washington Post/ABC News poll found that by a 2-to-1 margin people favor a combination of higher taxes and spending cuts over spending cuts alone to reduce the deficit. It also found that 72 percent of people favor raising taxes on the rich to reduce the deficit and it is far and away the most popular deficit reduction measure.

A March 15 ABC News/Washington Post poll found that only 31 percent of voters support the Republican policy of only cutting spending to reduce the deficit; 64 percent believe higher taxes will also be necessary.

See the rest of the polling that Bartlett cites on his blog.

Photo via Talk Radio News Creative Commons Attribution License 2.0

Jeffrey Immelt, CEO of the company famous for making profits of $26 billion from 2006 through 2010 and receiving tax benefits from the IRS of $4.1 billion over that period, has endorsed the recently proposed amnesty for corporate tax dodgers, called a “repatriation holiday” by its proponents.

Immelt was selected by President Barack Obama in February of 2009 to chair his Council on Jobs and Competitiveness, which is to advise the White House on economic policy. He has been CEO of General Electric since 2000.

In March, the New York Times reported GE’s federal corporate income tax bill of negative $4.1 billion over the five-year period in which it earned $26 billion in profits, which is an effective tax rate of negative 15.8 percent. A recent report from CTJ focuses on the three-year period 2008-2010 and finds that GE earned $7.7 billion in profits during this period and had a federal corporate income tax bill of negative $4.7 billion over this period.

Following the New York Times revelations, progressive activists spearheaded a call for Immelt’s resignation from the President’s Council on Jobs and Competitiveness.

His call for an amnesty for offshore tax dodgers will surely give more ammunition to those demanding that he step down from the Council.

What Does an Infrastructure Bank Have to Do with an Amnesty for Corporate Tax Dodgers? Nothing.

A repatriation holiday is essentially a break from U.S. corporate income taxes on offshore profits that U.S. corporations bring back (repatriate) from foreign countries, particularly from tax havens.

The non-partisan Joint Committee on Taxation (JCT), the official revenue-estimator for Congress, has concluded that a repeat of the repatriation holiday that was enacted in 2004 would reduce revenue by $79 billion over ten years.

Yet Immelt, confusingly, says that a repatriation holiday could be used to fund an infrastructure bank. How can a measure that reduces revenue be used to fund anything?

It’s true that JCT finds that the holiday would raise some revenue initially because corporations would repatriate more profits to the U.S. than they normally would, and they would be taxed, albeit at a very low rate, on those profits. (The 2004 measure taxed repatriated offshore profits of U.S. corporations at a super-low rate of 5.25 percent.)

But in subsequent years the measure would cause much larger reductions in revenue, partly because corporations would be encouraged to shift even more profits and investments offshore.

Anything that costs $79 billion and encourages companies to shift even more profits and investments out of the U.S. has nothing to do with the goals of an infrastructure bank and should not be attached to any bill creating an infrastructure bank.

The infrastructure bank is supposed to create jobs, but the non-partisan Congressional Research Service (CRS) found that the repatriation holiday enacted in 2004 failed to create jobs and that the benefits went instead to corporate shareholders.

Read about how you can call your Senators and Representatives toll-free and urge them to oppose the amnesty for corporate tax dodgers. 

Photo via Steve Wilhelm Creative Commons Attribution License 2.0

After months of negotiations, California Governor Jerry Brown was ultimately unsuccessful in his attempt to balance the state’s massive budget using new tax dollars, specifically, $11 billion in revenues from an extension of temporary increased personal income and sales taxes and vehicle fees.  Rather than including the revenue in his own budget proposal, Brown stuck to a campaign promise to take all tax increases to the voters (this was also necessary because it takes a supermajority to pass tax increases in the legislature).  He was unable to garner the support of enough GOP legislators to put the extension on the ballot this summer or fall, so he gave up to allow the state’s budget to be completed in time for the new fiscal year.

On the eve of the new fiscal year, Governor Brown signed a plan that relies primarily on deep spending cuts and higher than previously forecast revenues to close the state’s budget gap.  Still, deeper cuts in spending will need to be made if revenues do not hit the $4 billion above target projection lawmakers counted on when balancing the budget.

In response to the enacted spending plan, the California Budget Project wrote: “This is a very tough budget for families and communities across California… it is deeply disappointing that the approved budget does not reflect a balanced approach that combines additional revenues with spending reductions to move the budget toward balance.”

One significant tax change did make it into the final budget.  California became the 7th state to adopt an “Amazon law” which will make it more difficult for state residents to evade sales taxes when shopping online.  Under California’s new law (which went into effect July 1), a larger set of online and catalogue retailers (specifically, those partnering with in-state businesses in order to generate sales) are required to collect and remit sales taxes.  Traditional brick and mortar retailers have dutifully fulfilled this responsibility for decades – and indeed, having the retailer collect sales taxes is the only effective method for enforcing existing sales tax laws.

In response to the enactment of this new law in California, Amazon.com and Overstock.com ended their relationships with their California affiliates (a move the retailers also made in North Carolina, Rhode Island and Connecticut).  These large online retailers’ tactics are doing very little to slow the spread of this sensible method for reducing sales tax evasion.  Illinois, Connecticut and Arkansas enacted Amazon laws this year and nearly a dozen more states seriously considered them.  The seven states with Amazon laws include nearly 30 percent of the country’s population.

Photo via Neon Tommy Creative Commons Attribution License 2.0

Republican leaders in the House and Senate have threatened to allow the U.S. to default on its debt obligations unless the President agrees to cut trillions from public services to reduce the budget deficit.

The federal budget deficit is a problem, but the timing and method of the GOP leaders approach are potentially disastrous. Deficit reduction should be timed to occur largely after we have recovered from the recession so that there is enough private spending and investment taking place to partially offset cuts in public spending.

The method of deficit reduction is even more critical. Republican leaders have insisted that we reduce the deficit entirely by cutting spending and not by raising tax revenue. This is illogical because clearly raising a dollar of taxes has the same effect on the deficit as cutting spending by one dollar.

Even more importantly, the U.S. is one of the least taxed countries in the industrial world, as explained in a report released last week by Citizens for Tax Justice. The report finds that all the other OECD nations except Chile and Mexico have higher taxes as a percentage of GDP than the U.S. The U.S. is clearly undertaxed and a revenue increase is the obvious answer to our deficit problem.

Photo via Talk Media News Creative Commons Attribution License 2.0