Corporate Tax Breaks & Loopholes in the States: Four New Policy Briefs from ITEP

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The Institute on Taxation and Economic Policy (ITEP) offers a series of Policy Briefs designed to provide a quick introduction to basic tax policy ideas that are important to understanding current debates at the state and federal level. This week, ITEP released four updated briefs that explore issues with state corporate income taxes and tax avoidance. The Briefs offer recommendations for leveling the playing field between small in-state businesses and multi-national corporations and ensuring all corporate profits are subject to state taxation.

Combined Reporting of State Corporate Income Taxes: A Primer

Corporate Income Tax Apportionment and the “Single Sales Factor”

“Nowhere Income” and the Throwback Rule

The “QPAI” Corporate Tax Break: How it Works and How States Can Respond


“Small Business” Tax Break in the House GOP’s “Jobs Agenda” Was Rejected in 2009 — for Good Reason

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Republican House Majority Eric Cantor’s memo to his caucus laying out a new “jobs agenda” includes a tax break that would allow any “small business” to deduct 20 percent of its income for tax purposes. This idea is not new but was actually part of the House GOP’s proposal put forth during the debate over the economic recovery act in early 2009.

Here’s what CTJ said about this part of the House GOP plan in January 2009:

Provisions in the House GOP Plan to Help “Small Business”

The Republican plan proposes to allow a “small business” to take a tax deduction of 20 percent of its pretax income, whether the small business is a corporation or a sole proprietor. The plan defines a “small business” as one with 500 or fewer employees. It makes no distinction based on income. A “small business” making $100 million would get to deduct $20 million of its income right off the top. (Apparently, a company with slightly more than 500 employees would have an incentive to lay off staff to qualify for the tax break!)

The Republican leadership notes that “small businesses can pay up to 35% of their income in taxes to the federal government.” But for a sole proprietor to be in the 35% income tax bracket, she would need taxable income (after deducting all expenses) in excess of $372,950. And because of the graduated tax brackets, her effective rate would be much less. For a corporation to be in a 35% tax bracket, taxable income must exceed $10 million. The architects of this proposal have an expansive definition of the word “small” to say the very least.

The plan description also states that the United States corporate tax rate ranks the 29th highest (out of 30) among the major economies of the world. Corporations currently pay federal income taxes at a statutory rate of 35 percent. But the effective rate paid by corporations (the percentage of income paid in taxes after taking into account the deductions and credits and other breaks that lower their tax liability) is far lower than 35 percent. Comparing corporate taxes as a share of gross domestic product (as a share of the overall economy), the United States actually ranks low compared to other developed nations.

It’s also worth pointing out that a 20% deduction unnecessarily complicates the tax code. Congress could simply amend code sections that are already in the law (like the corporate or individual tax rates). Anti-tax lawmakers may be afraid that a simple corporate income tax rate cut might not go over too well with a public that believes large corporations got us into the current economic downturn.

Last, but not least, a business tax cut is just about the least effective stimulus measure Congress could possibly enact. The tax cuts put more money in the hands of business. But there is very little correlation between a corporation’s cash position and its plans for investment—whether expanding capacity or hiring new employees. Businesses invest in expansion when they believe there will be an increase in the demand for the goods and services they provide. If they don’t anticipate a sales increase, they won’t expand no matter how many tax breaks the federal government gives them.

Read CTJ’s full report on the 2009 House GOP economic plan here.

Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network

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The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits “permanently reinvested” (i.e., parked) overseas as they did at the end of 2005. The figures call into question a recent report from the New Democrat Network (NDN) supporting a second repatriation amnesty.

Read the report

Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network

August 26, 2011 04:29 PM | | Bookmark and Share

The twenty companies that repatriated the most offshore profits under the temporary repatriation amnesty enacted by Congress in 2004 now have almost triple the amount of profits “permanently reinvested” (i.e., parked) overseas as they did at the end of 2005. The figures call into question a recent report from the New Democrat Network (NDN) supporting a second repatriation amnesty.

Read the report

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New York and New Jersey Governors Favor Unpopular Toll Increases, But Oppose Popular Tax Increases

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Last week, Republican New Jersey Governor Chris Christie and Democratic New York Governor Andrew Cuomo together approved a substantial increase in the toll rate paid to cross bridges and tunnels between New York and New Jersey.  The increase of $1.50 on EZ pass users (or $2 for cash payers) will go into effect next month.  This will be followed by four consecutive increases of 75 cents each annually from 2012 through 2015, for a total hike of at least $4.50 over five years.

Both governors supported the toll increases, saying that the dire fiscal situation facing the Port Authority, which is reliant on toll revenue, means that the “increase cannot be avoided.” The governors’ willingness to shore up revenue for the Port Authority through toll increases stands in sharp contrast to their reputations as “anti-tax” governors who have relentlessly refused to increase any taxes to deal with their states’ current fiscal disparities.

As the Institute on Taxation and Economic Policy explains, increases in tolls or other “user fees” are often used by politicians to increase revenue while avoiding having to enact anything that could be called a “tax increase.”

Josh McMahon, writing for the New Jersey News Room, argues that Christie is just playing “a game of semantics” so that he can continue the “charade that he’s not raising any taxes.”

The move by the governors is proving relatively unpopular with New Jersey voters, 54% of whom oppose the increases, according to a recent poll.

In contrast, 72% of New Jersey voters and 64% of New York voters support ‘millionaires tax’ proposals, which would help counterbalance some of the regressive features of both the New Jersey and New York tax systems. Both Cuomo and Christie went out of their way to torpedo these proposals in recent months.

Voters in both states can’t be blamed for wondering whose interests their governors are protecting.

Photos via Gisele 13 Creative Commons Attribution License 2.0

Colorado Voters Can Help State Overcome TABOR-Induced Woes This November

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This week Colorado’s Secretary of State confirmed that Coloradans will be able to vote on a measure (Proposition 103) this November that would temporarily raise the state income and sales tax rates.  While the plan isn’t the most progressive option imaginable, it is a very reasonable and important step forward in helping the state repair its education system, which has been greatly damaged by the infamous Taxpayer Bill of Rights (TABOR).

If approved by voters, Prop 103 would raise the state’s flat income tax rate from 4.63% to 5%, and the state’s sales tax rate from 2.9% to 3%.  In effect, these increases would return the state’s tax system to where it stood in 2000, when the legislature cut both taxes just as the economic boom of the late 1990’s was winding down.  Unfortunately, this time around both changes would expire after five years – at the start of 2017.  But the increases would help protect the state’s education system until Colorado can come up with a more permanent way to remedy its ongoing funding woes.

While Republican opposition to the measure has been entirely predictable, there has also been a surprising amount of reluctance among some of those on the left.  Proposition 103 is less progressive, and would raise less revenue than a previously discussed ballot measure that would have established a graduated rate income tax in Colorado.  And to be sure, establishing a graduated rate income tax would be a much better path forward for Colorado in the long-term.  But with such a solution not on the immediate horizon, Prop 103 is an important second-best option that should not be ignored.

Moreover, worries that Prop 103 would disproportionately affect low-income families are incorrect, as Colorado’s flat rate income tax – the main component of the proposed tax package – is in fact moderately progressive overall.

A list of organizations that have endorsed Prop 103 can be found here.  And for more information on this and other Colorado tax policy issues, be sure to visit the Colorado Fiscal Policy Institute, one of the main architects of this initiative.

Kansas & Missouri: Front Line States in Battle over Tax Fairness

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Anti-tax lawmakers and activists in Kansas and Missouri continue to promote ideas to repeal their state income taxes and replace some of the revenue with a huge consumption tax. As ITEP’s Meg Wiehe explained in a recent Kansas City Star article, “A lot of education needs to happen around this issue. If you move to a consumption-based tax, the vast majority of taxpayers would likely pay more in taxes than they are under the income tax, except for the wealthiest.”

ITEP’s written testimony on one such proposal in Missouri  explains that only the richest 5 percent of Missourians would see a tax cut if the state’s personal income tax was replaced with a broad based sales tax, leaving the other 95 percent to pay higher taxes.

The corporate-controlled, anti-government American Legislative Exchange Council (ALEC) says approvingly that “Kansas and Missouri are at the top of the list” of states considering such proposals. To ALEC, ITEP’s estimates aren’t devastating at all. They recently claimed that “the downside of the tax swap appears to be minimal, if not non-existent.”

As a recent Kansas City Star editorial, warns, “The blessing of the council, known as ALEC, raises a red flag.”

In Kansas, Governor Sam Brownback has long been a proponent of eliminating, or at the very least, drastically reducing the state’s income tax. The Governor’s budget director anticipates that his budget for the new fiscal year will show “some significant (income tax) cuts”.

Missouri lawmakers have tried for the past couple of years to pass legislation that would eliminate the income tax entirely, but the legislation has not successfully passed both houses of the legislature.

Since cooler heads prevailed in the legislature, mega-rich troublemaker Rex Sinquefield has filed 11 ballot initiatives with the Secretary of State’s office that all do basically the same thing — eliminate state income taxes and replace the revenue with a broader sales tax. 

It’s expected that Sinquefield will eventually fund signature-collection for one of these ballot questions. If enough signatures are gathered, Missouri voters would likely be asked to decide about this radical shift in November 2012.

The proposals in Kansas and Missouri threaten those states’ ability to provide core and critical services because they would result in permanently lower revenue, while also tilting each state’s tax system even more heavily in favor of the well-off.

Photos via KDOTHQ Creative Commons Attribution License 2.0

Maine Governor Proposes Regressive Tax Break for Seniors

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Hot off of signing an expensive and unfair $400 million tax cut for Mainers in June, Maine Governor Paul LePage is now promoting a new regressive tax break targeted to older adults. 

He would like for state lawmakers to fully exempt all pension income from the state income tax, a move he thinks will help fixed-income older adults and bring wealthy retirees to the state. While most states with broad-based personal income taxes, including Maine, allow some sort of pension income exclusion, only Illinois, Mississippi and Pennsylvania fully exempt it from taxation. 

Maine currently allows retirees to deduct a maximum of $6,000 per spouse of their pension income less Social Security benefits received.  In other words, older Mainers with annual Social Security income over $6,000 ($12,000 if married) do not currently benefit from the pension deduction.

LePage’s proposal is a poorly-targeted and unnecessarily expensive tax break that will make Maine’s tax system less sustainable and less fair.

As a newly released ITEP brief points out, state income tax breaks for older adults, especially those that exempt all pension income, typically reserve the lion’s share of their benefits for better-off elderly taxpayers. Such poorly targeted tax breaks shift the cost of funding public services towards non-elderly taxpayers, many of whom are less well-off than the seniors benefiting from the tax breaks.

Also, long-term demographic changes threaten to make such a pension income tax break unaffordable in the long run. Older adults are the fastest growing age demographic in the country.  According to the US Census, between 2000 and 2010, the US population of adults 55 and older grew by more than 30 percent while the population of those under 55 grew only by 4 percent.  This change was even starker in Maine where the 55 and older population grew by 32 percent while the population under 55 actually shrank by 4.5 percent.  Over time, this demographic shift will mean that a shrinking pool of workers will be forced to fund tax breaks for an expanding pool of retirees — heightening the need to target these tax breaks appropriately in order to minimize their cost. 

Maine Revenue Services has estimated that this special tax break for older adults would cost the state $93 million.  Given that Maine is still climbing out of a budget hole ripped by the ongoing recession, services would have to be cut or other taxes would have to be increased to pay for LePage’s proposal.

Maine lawmakers would be wise to reject LePage’s proposal and should either stick to their current pension income deduction or consider a break which is better targeted to the state’s neediest older adults.

Photos via Maine Public Broadcasting Creative Commons Attribution License 2.0

Some Minnesota Lawmakers Support Having Fewer Tools Available to Help Them Do Their Job

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Given the recent and unprecedented government shutdown, you’d like to think that lawmakers in Minnesota would want to make it easier, not harder, for the state to balance its budget. But some lawmakers haven’t learned their lesson and are, in fact, proposing to use the state constitution to ban any tax increase that does not receive a supermajority of votes in both chambers. 

Folks at the Minnesota Budget Project (MBP) argue, “The amendment would guarantee gridlock by creating extra hurdles for passing a responsible budget, leading to more budget gimmicks as policymakers seek to fund critical state services.” MBP also points out that surveys show that a majority of Minnesota residents want lawmakers to use both spending cuts and revenue increases to deal with deficits.

In these difficult economic times, lawmakers need more, rather than fewer, tools and options to address budget shortfalls and rising needs. In a state that just survived a horrific budget battle, it should be clear that the more options on the table, the better — for all Minnesotans.

Corporations Are People… Who Should Pay More Taxes

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By now everyone has heard about presidential candidate Mitt Romney’s statement that “corporations are people.” “Everything corporations earn ultimately goes to people,” Romney explained to hecklers in Iowa.

Of course, it’s true that corporate earnings eventually go to people and that taxes on corporate earnings are borne by people. Those people are primarily the shareholders, who receive smaller stock dividends and or capital gains because companies pay corporate income taxes. Corporate executive pay is also affected by corporate taxes because so much of it is in the form of stock options and similar vehicles.

The serious problem is that the shareholders who own these corporations are not paying enough, thanks to the loopholes that allow corporations like GE, Boeing, Verizon and others to avoid taxation entirely.

However, some corporate lobbyists and economists who sympathize with them now argue that the people who ultimately pay corporate income taxes are actually the workers. Up to 80 percent of corporate income taxes, they claim, actually fall on labor, rather than the owners of capital. This happens, they argue, because corporations will respond to U.S. taxes by lowering wages or moving operations and jobs to countries with lower taxes, which will also hurt American workers.

They’re wrong. As we have advocated reforms to raise revenue by closing corporate tax loopholes, some have cited these misguided economic models and asked us whether or not higher corporate taxes would ultimately harm the working people we want to help. The answer is absolutely not. 

Tax expert Lee Sheppard makes the obvious point that we’ve often made (subscription required): “if labor bore 80 percent of the burden of the corporate income tax, corporations wouldn’t care about it at all. They don’t fight high value added taxes in Europe, because the burden is clearly borne by consumers.”

Indeed, corporations lobby Congress furiously for reduced corporate income taxes, and they would not bother if they did not believe their shareholders were the ones affected by them.

Higher Taxes Won’t Drive U.S. Corporations Offshore

American corporations certainly have been moving operations and jobs overseas in the past decades. But low labor costs in many foreign countries appears to the main force driving this trend, not lower foreign income taxes.

A recent article explains that GE has shifted operations offshore, but it actually pays higher taxes in those foreign countries than it does in the U.S. (Of course, one feature of our tax system, “deferral,” probably does encourage companies to move jobs offshore and we have urged Congress to repeal it.)

The Debate among Economists

ITEP and other organizations that provide distributional analyses of tax policies, including the non-partisan Congressional Budget Office, assume that corporate income taxes are ultimately borne by the owners of capital (corporate shareholders and owners of other businesses indirectly affected).  Since capital is disproportionately owned by the wealthy, corporate income taxes are therefore very progressive taxes.

But in recent years some economists have claimed that corporate taxes simply push investment out of the country, meaning workers in the U.S. lose their jobs or settle for lower-paying jobs (meaning labor ultimately bears the burden of the tax). 

But other economists and analysts disagree. For example, a working paper from the Congressional Budget Office suggests that investment cannot move across international borders with perfect ease and that goods produced in one country are not always perfectly substitutable for those produced in another country.

The working paper further suggests a model that takes into account the corporate taxes of other countries, meaning corporations cannot escape taxation so easily because most places where they could reasonably operate will have some level of corporate taxation.

When the economic models take all this into account, they lead to the conclusion that most of the corporate income tax is borne by capital.

The People Who Own Corporations Are Not Paying Enough in Taxes

Once we establish that the owners of capital are ultimately paying the corporate income tax, the next question is whether or not they should be paying more than they do now. Mitt Romney seems to believe they pay more than enough already.

As middle-class Americans are told they must sacrifice some of their public services in order to help balance the federal budget, the obvious question is whether or not the owners of capital, who ultimately pay corporate income taxes, can afford to sacrifice as well. The answer is: absolutely.

Many corporations use loopholes to avoid paying the corporate income tax, as our recent report on 12 corporate tax dodgers demonstrates.

Corporate profits can accumulate tax-free before they are paid out as dividends, and two-thirds of those dividends will go to tax-exempt entities like pension funds or university endowments where they can continue to accumulate tax-free before they reach any individuals. The one-third of corporate stock dividends that do go directly to individuals are currently taxed at a low, top rate of 15 percent. (We have explained before that these are reasons why corporate profits are not double-taxed, as some believe they are.)

So the short answer to Mitt Romney is, yes, corporate taxes are ultimately paid by people, the shareholders, and Congress needs to close the loopholes that currently allow them to avoid these taxes.

Photos via Gage Skidmore and IMF Creative Commons Attribution License 2.0