Month: August 2011

A bipartisan group of lawmakers in Congress proposes to help companies that engage in “life sciences” research by combining two terrible tax policies — the research and experimentation (R&E) credit and a tax holiday for repatriated offshore profits — into one monstrosity.

The bill, which has been introduced by Senator Robert Casey (D-PA) in the Senate and Devin Nunes (R-CA) in the House, gives the pharmaceutical and biotech companies, and some companies that make medical devices, two options. They could take a special 40 percent R&E credit (which would be double the value of the existing R&E credit) for up to $150 million in research expenses.

Alternatively, they could repatriate up to $150 million in offshore profits, which would be taxed at just 5.25 percent instead of the normal 35 percent that applies to corporate profits. This would particularly benefit pharmaceutical companies and others who are notorious for using intellectual properties to shift profits to offshore tax havens. The bill would allegedly require the repatriated offshore profits to be used for the research.

A coalition of companies that would benefit is promoting the bill.

Neither of the tax breaks offered under the bill would create jobs.

The R&E Credit Rewards Companies for Research They Would Do Anyway

The R&E credit, introduced during the Reagan administration, has been the subject of many tax scandals as companies have tried, often successfully, to treat activities that are obviously not scientific research — such as developing hamburger recipes or accounting software — as qualified R&E.

The R&E credit has a curious following among politicians who normally style themselves as free-market advocates, but who nevertheless maintain that big business needs to be subsidized to do research. In fact, a 2009 report from the Government Accountability Office found that “a substantial portion of credit dollars is a windfall for taxpayers, earned for spending they would have done anyway, instead of being used to support potentially beneficial new research.”

The Repatriation Holiday that Will Actually Reduce Jobs in the U.S.

A separate coalition of companies has been promoting a repatriation holiday for months, but has lost steam in the face of estimates that their proposal would cost $79 billion, partly because companies would respond by shifting even more of their jobs and profits offshore. Congress tried this type of measure in 2004, and the Congressional Research Service found the benefits went to corporate shareholders and not towards job creation.

The new proposal is different in that it would target the repatriation holiday at companies that engage in “life sciences” research, and couple it with an increased R&E credit. But none of this makes the repatriation holiday any less ill-advised.

The requirement that repatriated funds must be put towards life sciences research simply won’t work because money is fungible. A company can put the money towards research it would have done anyway, which would free up other money to pay larger bonuses or for any other purpose. In fact, Martin Regalia, a senior vice president for the U.S. Chamber of Commerce, said at a panel discussion on March 25 that because money is fungible, you cannot really direct a company to do any particular thing with cash it receives.

It’s Not Enough for Lawmakers to Say They’re Doing “Something” to Create Jobs

Some members of Congress are desperate to appear to be creating jobs while knowing full well that Tea Party-backed lawmakers will block the sort of spending programs that actually can create jobs. Some of them have settled on this proposal, hoping that it includes a large enough tax giveaway to win over the “life sciences” companies (and their lobbyists and campaign contributions).

For these companies, each batch of grim unemployment data must seem like an opportunity. They are increasingly able to request tax breaks in the name of “job creation” that will never happen.

Photo via Wellstone.Action Creative Commons Attribution License 2.0

Levin-Grassley Incorporation Transparency Bill Would Help Identify Mysterious $1 Million Contribution to Romney Campaign

Today, NBC News reports that a Delaware company made a $1 million contribution to a PAC supporting Mitt Romney about six weeks after it was formed, and then dissolved two months later. This ripped-from-the-headlines story of a corporation that was created for the sole purpose of laundering massive political contributions highlights the need for a bill that was just introduced this week in the U.S. Senate.

The company, called W Spann LLC, filed a certificate of formation on March 15 with no information about the owners or the business purpose of the entity. On April 28, the LLC made a $1 million contribution to a political action committee supporting Mitt Romney.

The company then dissolved on July 11, leaving no trail of the real people behind the political mega-donation. Lawrence Noble, former general counsel of the Federal Election Commission, called it a “roadmap for how people can hide their identities” and disguise their political contributions.

This technique would be blocked if Congress enacts a bipartisan bill introduced this week to require states to collect information about who really controls corporations and limited liability companies (LLCs) that are formed in their jurisdictions. Senators Carl Levin (D-MI) and Chuck Grassley (R-IA) introduced the Incorporation Transparency and Law Enforcement Assistance Act (S. 1483) on August 2.

The bill’s provisions are vital to law enforcement who are trying to investigate crimes ranging from arms dealing to money laundering and tax evasion. But it will also help combat another problem – the clandestine funding of politics.

Last year, a Senator from a certain state known for its loose incorporation laws blocked this bill from moving forward. (See Criminals, Inc.: Delaware’s Fight to Keep Opaque Incorporation Rules is Helping Tax Cheats and Terrorists, June 25, 2010.)

The reasons for supporting this law continue to multiply. Lawmakers on both sides of the aisle should be lining up to cosponsor the Incorporation Transparency Act.

Photo via Gage Skidmore Creative Commons Attribution License 2.0

Late last week the Massachusetts legislature passed, and the Governor signed, legislation making Massachusetts the 17th state to offer a back-to-school sales tax holiday.  This is the same Deval Patrick who recently said he supported the legislation “frankly, not because it is particularly fiscally prudent, but because it is popular…. People want it.”

We couldn’t agree more. Sales tax holidays may be politically popular, but they are poor fiscal policy. There’s scant evidence they make a long term difference for retailers, and they fail to target tax relief to those consumers most in need.

The holidays can also be costly to the treasury (Massachusetts expects to lose $20-25 million) and create administrative headaches.

We hope Governor Patrick will take a look at our brief on sales tax holidays between now and next year; it will give him the facts and courage he needs to say no to lousy policy.

Photo via WebN-TV Creative Commons Attribution License 2.0

Being a member of the working poor has never been easy, but these past few years have been particularly tough on working families who must contend with increasing health care costs, high unemployment, food inflation and high gas prices, among other things.  This makes now an ideal time for policymakers to work together to make it a little easier for families to make ends meet.

But Iowa Governor Branstad appears to be moving in the opposite direction. Exhibit A is his veto last week of a minor increase in the state’s Earned Income Tax Credit (EITC). This credit has received bi-partisan support for decades because of its unique ability to lift working families out of poverty. It is smart, targeted policy that everyone can get behind.

But the Governor couldn’t find his way clear to increase Iowa’s EITC credit from seven to ten percent of the federal credit; and with 15 percent being the national average, ten is not even particularly generous.  For now, Branstad says he is most interested in “reducing those taxes that are impeding our state’s ability to compete for new business and jobs.” Yet another governor who’s been drinking the Chris Christie kool aid.

This may be one of the worst cases we’ve seen of kicking them while they’re down.  We share the sentiments of the Iowa Fiscal Partnership when they write the veto “hurts working people and the economy.”

Photo via Gage Skidmore Creative Commons Attribution License 2.0

The so-called “Budget Control Act” that President Obama signed into law this week to increase the federal debt ceiling and reduce the federal budget deficit marks the second time the Obama administration has capitulated on tax policy to the most extreme elements in Congress, those who are least in touch with the American people and most willing to risk economic disaster to get their way.

While our political leaders should be doing all they can to boost consumer demand and create jobs, the administration and Congress have instead agreed to slash public services without guaranteeing any increase in revenue.

To be sure, a revenue increase could result from the process established under this deal, despite Republicans’ claims to the contrary. But anti-tax lawmakers have already demonstrated that they will risk everything — including economic catastrophe — to block any and all revenue increases. As a result, we believe the only hope for a balanced approach depends on President Obama finding the courage (which he has lacked so far) to allow all of the Bush tax cuts to expire at the end of 2012.

Read the full statement.

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 new Briefs that explain how the primary state and local tax sources work:

How State Personal Income Taxes Work

How Sales and Excise Taxes Work

How Property Taxes Work

How State Corporate Income Taxes Work

Kansas Governor Sam Brownback’s budget chief, Steve Anderson, has announced that a new tax study committee will be formed to recommend ways to reduce or even eliminate the state’s income tax, according to an article in the Wichita Eagle. 

Legislation to phase out individual income taxes and lower corporate tax rates died in the legislature this past session, but evidently the Brownback administration isn’t giving up on its regressive agenda. State representative Jim Ward was being generous when he called this proposal “shameful.”

The graduated income tax is Kansas’s only major progressive tax levied; reducing or eliminating the income tax would ensure that regressive property and sales tax rates would have be raised, or services would have to be cut.  If the Brownback administration gets its way, the state’s most vulnerable will suffer the most. Ironically, Brownback came out against an effort to reduce the sales tax just this last November, citing the budget deficit and insisting the state couldn’t afford it.

In a recent speech to a local Republican club, budget chief Anderson fell just short of admitting that corporate leaders are writing the administration’s economic plan.  He told his audience the story of a CEO friend who threatened the state of Oklahoma that he would move his company to Texas because it has no income taxes. Anderson said it “drove home to me how important it is to get [income tax] down to that point that you’re at the lowest rate you can be, hopefully zero.”

States too often fall for, and suffer the consequences of, a race to the bottom with other states over taxes.  Corporations regularly lead states down this path, and unfortunately, the leadership in Kansas is apparently all too willing to follow their corporate pals.

Representative Ward is right to point out that numerous studies have shown taxes are just one of many factors — alongside education and other government services — that corporations consider when making their relocation decisions.  A tax code that adequately funds the communications, transportation, power and public safety that support the state’s economy is good for Kansas – both its businesses and its residents.

Photo via KDOTHQ Creative Commons Attribution License 2.0

In a year when most state leaders across the country embraced an anti-tax, cuts-only approach to addressing short- and long-term budget shortfalls, Connecticut lawmakers agreed to a budget for the current fiscal year that addressed the state’s deficit crisis with a balance between spending cuts and (if you can believe it) significant new taxes.

Not just new taxes that fall heavily on the working poor, which are politically easy but fiscally insignificant (and far more common that you’d think), but new taxes on the rich, which are often political suicide even as they are fiscally smart.

Starting yesterday, August 1, high income taxpayers started seeing more taxes withheld from their paychecks, and Senate Minority Leader John McKinney, (whose party opposed the package) wailed, “It is a sad day when state government decides to reach back in time to garnish the wages of our hard working residents because it can’t get its own fiscal house in order.”

But wait. Middle-income households with taxable incomes (not salaries, but adjusted gross income) under $100,000 ($50,000 if single), will not see any change in their withholding. And, as Connecticut for Children’s Voices points out using ITEP data, even though the tax changes boosted fairness by reducing taxes for low-income residents and increasing them for wealthy ones, the state and local tax system remains highly imbalanced: the wealthiest Connecticut households still only pay on average 5.5 percent of their incomes in state and local taxes while the poorest 20 percent pay 11.4 percent of their incomes.

The other, mostly progressive, tax package features kick in this summer, too, including sales tax changes that took effect in July.

The Connecticut budget is a national model. It introduces a program (Earned Income Tax Credit) repeatedly proven to boost economic activity, and it increases taxes on those in the highest brackets to help restore revenues needed for core services and municipal budgets.  We wish the state well, and will check back as the results begin to take effect.