Month: January 2012

CTJ’s Steve Wamhoff contributes a bit of persuasive writing to US News & World Report‘s Debate Club feature this week. The question before the debaters: Should Mitt Romney Pay More Taxes?

Wamhoff writes, “The revelation that Mitt Romney received an income of $21 million in 2010 and paid just 13.9 percent of that in federal income taxes has highlighted an enormous problem in our tax code. Income from investments (or income that is manipulated to appear to come from investments) is taxed at lower rates than income from work. And this is a huge benefit for the rich…. Warren Buffett is right. People like him, and Mitt Romney, should pay more to support the society that made their fabulous fortunes possible.”

Read the whole piece here, and then vote for us and against the tired old supply side arguments the experts from American Enterprise Institute and the Club for Growth are offering.

Photo of Mitt Romney via Gage Skidmore Creative Commons Attribution License 2.0

• A column in the Tulsa World questions the notion touted by conservative lawmakers that Oklahoma’s personal income tax is holding back the state’s economy and therefore should be eliminated.  An ITEP analysis published earlier this month raises other concerns with plans to dismantle this important tax source- over half of Oklahoma households would actually see their tax bills rise if current proposals are enacted.
• More state leaders- and voters- are joining the call to make it easier for states to collect taxes from internet sales.  A majority of Michigan voters recently polled are receptive to paying sales taxes on the goods they purchase online.  And, Idaho Governor Butch Otter told Chamber of Commerce leaders in his state that he supports collecting online sales taxes to “level the playing field” between internet retailers and in-state businesses.
• The Nelson A. Rockefeller Institute of Government reports that while state revenues are on the rise, 36 states are still collecting less tax revenue than they were before the economic downturn.
• The Columbus Dispatch quotes ITEP Executive Director, Matthew Gardner, in a story that started out about the availability of free tax preparation help and turned into one about tax fairness.
• Rhode Island lawmakers, union leaders, and advocacy organizations kick off a “Tax the Rich” campaign.  Based on ITEP data, a bill was filed to introduce a new top bracket for taxpayers with incomes above $500,000.

There are few areas of policy where lawmakers’ shortsightedness is on display as fully as it is with the gasoline tax.  Now, with a series of twenty six new charts from the Institute on Taxation and Economic Policy (ITEP), you can see the impact of that shortsightedness in most states as shareable graphs.

Overall, state gas taxes are at historic lows, adjusted for inflation, and most states can expect further declines in the years ahead if lawmakers do not act.  Some states, including New Jersey, Iowa, Utah, Alabama, and Alaska, are levying their gas taxes at lower rates than at any time in their history.  Other states like Maryland, Oklahoma, Massachusetts, Missouri, Tennessee, Arkansas, and Wyoming will approach or surpass historic lows in the near future if their gas tax rates remain unchanged and inflation continues as expected.

These findings build on a 50-state report from ITEP released last month, called Building a Better Gas Tax.  ITEP found that 36 states levy a “fixed-rate” gas tax totally unprepared for the inevitable impact of inflation, and twenty two of those states have gone fifteen years or more without raising their gas taxes.  All told, the states are losing over $10 billion in transportation revenue each year that would have been collected if lawmakers had simply planned for inflation the last time they raised their state gas tax rates.

View the charts here, and read Building a Better Gas Tax here.

Note for policy wonks: Charts were only made in twenty six states because the other twenty four do not publish sufficient historical data on their gas tax rates.  It’s also worth noting that these charts aren’t perfectly apples-to-apples with the Building a Better Gas Tax report, because that report examined the effect of construction cost inflation, whereas these charts had to rely on the general inflation rate (CPI) because most construction cost data only goes back to the 1970’s.  Even with that caveat in mind, these charts provide an important long-term look at state gas taxes, and yet another way of analyzing the same glaring problem.

Governor Martin O’Malley’s budget has been circulating for a few days, and it seems people are just now turning their attention to one of its smaller tax changes, that is, the Governor’s proposal to end the tax exemption for digital downloads of things like software, songs and magazines.

Maryland’s House Minority Leader had some predictably harsh words for O’Malley after learning of the proposal, but it’s hard to argue that the state should be taxing books and CD’s bought from Maryland retailers, while not taxing digital versions of the exact same products purchased over the Internet.  Viewed in that light, it’s more than a little confusing why the House Minority Leader apparently views this proposal as some kind of revenue grab.  If it’s reasonable for Maryland’s sales tax to apply to all the books, CD’s and other similar products purchased within the state’s borders, the governor’s proposal is also reasonable.  The fact is, this change would simply update the state’s sales tax code to take account of the changing ways in which Marylanders are doing their shopping.

Just as taxing services and online sales is the right response to a changing consumer marketplace, so is a tax on digital downloads.

Photo of of Governor Martin O’Malley via Chesapeake Bay Program Creative Commons Attribution License 2.0

The rapid-fire succession of GOP debates has continued, with four more occurring in just the last couple weeks. Here we deconstruct the most ludicrous or notable quotes from each candidate:

Former House Speaker Newt Gingrich:…when I was speaker, we had four consecutive balanced budgets…

It was exciting to see Ron Paul finally call Gingrich out during the latest debate for repeatedly claiming that he balanced the federal budget four years in a row. Citizens for Tax Justice’s Bob McIntyre thoroughly debunked this claim over 9 months ago when Gingrich first starting making it, yet until now none of the GOP candidates have called him out for it.

Former Governor Mitt Romney: I’m proud of the fact that I pay a lot of taxes.

Romney does not pay “a lot of taxes.” He paid an effective tax rate of less than 14% on his $22 million in 2010, which is actually a lower rate than many individuals making just $60,000 pay.

Former House Speaker Newt Gingrich: I’m prepared to describe my 15 percent flat tax as the Mitt Romney flat tax. I’d like to bring everybody else down to Mitt’s rate, not try to bring him up to some other rate.

Gingrich’s $18 trillion tax plan would not bring everyone down to the rate that Romney pays because it would actually further reduce Romney’s tax rate to almost zero. Even Romney seemed to think that reducing his tax rate to zero would be going too far and went out of his way during a recent Republican debate to point this out to Gingrich.

Former Senator Rick Santorum: I talk about five areas where I allow deductions… one of them would be, be able to deduct losses from the sale of your home. Right now, you can’t do that. You have to pay gains, depending on the amount, but you can’t deduct the losses.

Ever trying to play the role of a blue collar populist, Santorum highlighted his idea to allow taxpayers to deduct losses from the sale of their home. He left out the fact that current law already allows an individual to exclude up to $250,000 of capital gains from the sale of a home. How could it be fair to exclude the gains but deduct the losses? He also ignores the fact that homeowners are already subsidized to the tune of $75 billion through the home mortgage interest deduction. A much more effective approach to helping struggling homeowners (and renters for that matter) would be for state lawmakers to enact strong property tax circuit breakers, which are better targeted to low-income households.

Representative Ron Paul: I would like to see income tax reduced to near zero as possible.

Although he has not laid out a specific long term tax plan, Paul has frequently called for the complete repeal of the 16th amendment (which allows the creation of the income tax) and might seek to replace it with a national sales or flat tax. He does not typically mention that such a plan would be extremely regressive no matter how you structure it.

Citizens for Tax Justice director Bob McIntyre wrote in the American Prospect this week, “With the two leading Republican presidential contenders arguing over whether super-wealthy investors should pay 15 percent or zero percent in federal taxes, it would seem that President Barack Obama has a potent campaign issue against either of them… Sadly, Obama hasn’t yet proposed to let all of the Bush tax cuts for the rich expire.”  

                                                                   Read the article.

Citizens for Tax Justice has calculated that President Obama’s “Buffett Rule” would, if in effect this year, raise $50 billion in a single year and affect only the richest 0.08 percent of taxpayers — that’s just eight percent of the richest one percent of taxpayers.

During his State of the Union address, President Obama proposed that Congress enact his Buffett Rule, inspired by billionaire Warren Buffett’s complaint that he has a lower effective tax rate than his secretary.

CTJ has long argued that the most straightforward way to fix this problem is to end the special low tax rate for capital gains and stock dividends.

A document released from the White House on Wednesday suggests the President would take a different approach. It explains that

the President is now specifically calling for measures to ensure everyone making over a million dollars a year pays a minimum effective tax rate of at least 30%. The Administration will work to ensure that this rule is implemented in a way that is equitable, including not disadvantaging individuals who make large charitable contributions.

The last sentence apparently means that charitable deductions for millionaires would not be affected.

To calculate the $50 billion figure, we assumed that there would be a minimum tax that applies to adjusted gross income (AGI) minus charitable deductions. (We’ll call this modified AGI.)

We assumed that a taxpayer with modified AGI greater than $1 million would face a minimum tax of 30 percent of modified AGI. The taxpayer would pay whichever is greater, their personal income tax under the existing rules or this minimum tax.

Revenue Impact Would Depend on Details

Of course, taxes always have to be a little more complicated than that. We had to assume that this minimum tax is phased in over a certain income range rather than allow it to kick in fully for everyone with exactly $1 million or more in modified AGI. Otherwise, a person with modified AGI of $999,999 might have an effective rate of 15 percent, and if they make $2 more their effective tax rate will shoot up to 30 percent. Congress generally avoids enacting any tax rules that have this sort of “cliff” effect.

So we assumed that the minimum tax would be phased in for taxpayers with income between $1 million and $2 million. That means that only half of the minimum tax applies if you make $1.5 million, and the entire minimum tax applies if you make $2 million or more. This means that the Buffett Rule could raise less revenue or more revenue if Congress chose different rules to phase it in.

CTJ Report Explains Need for Buffett Rule

A report from Citizens for Tax Justice explains how multi-millionaires like Romney and Buffett who live on investment income can pay a lower effective tax rate than working class people.

As the report explains, there are two reasons for this. First, the personal income tax has lower rates for two key types of investment income, capital gains and stock dividends. Second, investment income is exempt from payroll taxes (which will change to a small degree when the health care reform law takes effect).

The report compares two groups of taxpayers, those with income in the $60,000 to $65,000 range (around what Buffett’s famous secretary makes), and those with income exceeding $10 million.

For the first group, about 90 percent have very little investment income (less than a tenth of their income is from investments) and consequently have an average effective tax rate of 21.3 percent. For the second group (the Buffett and Romney group) about a third get the majority of their income from investments and consequently have an average effective tax rate of 15.2 percent. This is the problem that the Buffett Rule would solve.

Photo of Warren Buffett via Track Record Creative Commons Attribution License 2.0

After Mitt Romney conceded that CTJ’s estimate of his effective tax rate of 14 percent was correct, Newt Gingrich said that he believed everyone should pay a similar effective tax rate and that this was an argument for his proposed optional 15 percent “flat tax.” Gingrich fails to mention that his plan would actually lower Romney’s effective tax rate almost to zero percent.

CTJ epxlained to TIME that the optional “flat tax” in Gingrich’s plan actually has two tax rates — 15 percent for the income that most of us earn, and zero percent for the investment income that Romney lives on.

TIME also reported on CTJ’s findings that Romney would save $3.4 million a year under his own plan, but would save $6.4 million under Gingrich’s plan.

Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country.  This article takes a look at efforts to roll back business taxes in states based on the shopworn, erroneous argument that tax cuts are good for the economy.

Robust corporate income taxes ensure that large and profitable corporations that benefit from publicly subsidized services (transit that delivers customers, education that trains workers, electricity that powers industry, etc.) pay their fair share towards the maintenance of those services. But, as ITEP’s recent report, Corporate Tax Dodging in the Fifty States, 2008-2010, found, twenty profitable Fortune 500 companies paid no state corporate income taxes over the last three years, and 68 paid none in at least one of those three years, even as state budgets are stretched to the point of breaking.  

As a new legislative season gets underway, too many political leaders are bashing taxes in general and business taxes in particular.  Here are some states to watch for more bad business tax policy (followed by a few glimmers of hope).

South Carolina – South Carolina Governor Nikki Haley is following through on her misguided campaign promise and recently proposed eliminating the state’s corporate income tax over four years. This despite the fact that South Carolina’s corporate income taxes as a share of tax revenue are among the lowest in the country, at a mere 2.4 percent.

Kentucky – State Representative Bill Farmer has filed legislation that, instead of strengthening the tax, would repeal the state’s corporate income tax entirely. Farmer worked as a “tax consultant” and has been an anti-tax crusader in the Kentucky legislature since 2003.

Nebraska – Governor Dave Heineman recently unveiled his plan to reduce the top corporate income tax rate from 7.81 to 6.7 percent (and eliminate other key state revenue sources, too).

Florida – In his recent State of the State address, Governor Rick Scott said that taxes and regulations were “the great destroyers of capital and time for small businesses.”  And – no surprise here – he also called for lowering business taxes.

Idaho – Governor Butch Otter has called for $45 million in tax cuts but is leaving the details to the legislature.  Of course, when a lobbyist from the Idaho Chamber Alliance of businesses calls the governor’s position “manna from heaven,” there’s a good chance some of those cuts will be given to business.

A few signs of sanity. In Connecticut , the governor is looking to improve the return on tax-break investment for the Nutmeg state. Perhaps he’s learned from states like Ohio, where a recent report issued by the attorney general showed that fewer than half of all companies receiving tax subsidies actually fulfilled their commitments in terms of job creation or economic growth.   We also see combined reporting getting attention in a couple of states.  It’s smart policy that discourages companies from creating multi-state subsidiaries to shelter their profits from taxes. We will report on other positive developments as warranted – so watch this space.

Photo of Rick Scott via Gage Skidmore and Photo of Nikki Haley via Mary Austin Creative Commons Attribution License 2.0

During his State of the Union address, President Obama said that “no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.” We couldn’t agree more. However, a CTJ report explains that his proposed solutions fail to raise revenue, retain and expand the loopholes that allow corporations to avoid taxes, and mark a further retreat from earlier, stronger proposals.

Read the report.