Month: February 2012

House Republicans passed a bill earlier this month to force Congress’s non-partisan tax analysts to assume that tax cuts cause less revenue loss (or even increase revenue) because they improve the economy so much.

The Pro-Growth Budgeting Act of 2011 would require Congress’s Joint Committee on Taxation (JCT), the non-partisan organization that estimates the revenue impacts of tax proposals, to include the economic feedback effect of tax cuts into their revenue estimates. Republicans call this “dynamic scoring” and often call the estimating process in use now “static scoring.” The truth is that JCT currently does take into account the behavioral effects of tax changes, but not any effects on the overall size of the economy, which usually would be small and nearly impossible to predict accurately.

The real point of the bill is to give some sort of respectability to an idea that no mainstream economists believes in — that tax cuts can partially pay for themselves or can even increase revenue. For example, Senate Minority Leader Mitch Connell is fond of claiming that the Bush tax cuts did not lead to any decrease in revenue.

As Citizens for Tax Justice’s Bob McIntyre points out, even the Bush Administration Treasury, which was packed with “appointees who profess a deep affection for Bush’s tax-cutting policies,” found in 2006 that extending the Bush’s tax cuts would have essentially no beneficial effect on the economy over the long term, and would certainly not pay for themselves.

In addition to being wrong, the House’s rewrite of the revenue estimating process is also wildly unfair. It explicitly exempts appropriations bills from dynamic scoring, which means that any positive economic impact of increased spending or negative impact of cutting spending would be ignored while tax cuts are assumed to benefit the economy.

Based on this, Bruce Bartlett, a former Republican Treasury official, worries that the bill is another step toward creating “a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting.”

Photo of House Republicans via Republican Conference  and Creative Commons Attribution License 2.0

In his State of the State speech, Ohio Governor John Kasichboasted, “in six months we eliminated an eight billion dollar budget shortfall without a tax increase—eliminated it. We are now balanced. In fact, we cut taxes by $300 million.”  What the governor failed to mention is that these cuts have had enormous consequences. For example, these cuts are making it harder for senior citizens centers to stay open, forcing public libraries to go begging for local tax dollars and raising college tuition.

It doesn’t have to be this way.

Ohio lawmakers concerned with the state’s ability to meet the needs of its citizens should be looking into ways to both restore these harmful spending cuts and reverse an earlier round of regressive across the board income tax cuts passed in 2005. One step toward these ends is to follow the prescription laid out by Policy Matters Ohio (PMO) to ask the wealthiest one percent of Ohioans, whose income averages $981,000 a year, to pay 1.2 percent more in personal income tax.  In their report (which uses ITEP data), PMO says the “proposal would not change the amount of taxes paid by nearly 99 percent of Ohio taxpayers. It would affect only the most affluent, who can most afford to pay, and the increases for them would be relatively small. Yet it would allow the state to make up nearly half the cuts made to public schools and local governments in the current two-year budget.”

It’s a basic matter of fairness that state sales taxes should be applied to things we buy, regardless of whether a purchase is made online or in a brick-and-mortar store.  Back in 1992, however, before online shopping even existed, the Supreme Court handed down a ruling that made this a lot more difficult by telling out-of-state retailers (mostly catalogues back then) they didn’t have to collect sales tax – at least until the federal government says otherwise.  In recent years, the explosion in online shopping has made the issue more urgent, and we expect that in 2012 the push for a more rational online sales tax policy could reach critical mass as more states seek to restore lost revenues.

Federal legislation. Sales taxes owed on Internet purchases can’t be collected comprehensively until the federal government empowers states to require that online retailers collect the tax.  Until then, the best states can do is make use of the partial fixes discussed below.  Fortunately, a federal solution might not be as far off as it once seemed.  Multiple bills have been introduced in Congress that would allow for a comprehensive solution, and an increasingly influential coalition of state lawmakers and traditional retailers are pushing for a national law.

State legislation.  Even though federal legislation is needed to fix the online sales tax problem in its entirety, states do have tools at their disposal for chipping away at it right now.  Specifically, states can require that out-of-state online retailers collect sales taxes if they are partnered with in-state affiliate businesses, or if they have in-state subsidiaries or sister companies.  Discussion of enacting a law of this type is currently underway in Arizona, Florida, Indiana, Maryland, and Virginia, and we expect that other states will join this list soon.

State-level deals with Amazon.com.  Amazon.com has a long history of shirking its responsibility to collect sales taxes, but to its credit the company seems to have realized that it won’t be able to continue this dodge forever.  In just the last year, Amazon has struck deals with South Carolina, California, Tennessee, and Indiana to begin collecting sales taxes at a specific future date.  Recent reports say that Florida might join this list soon, as Amazon is eyeing building a distribution center in the Sunshine State – if it can convince lawmakers to let it off the tax-collecting hook for just a few more years.  We’re sympathetic to traditional retailers who point out that Amazon can and should begin collecting sales taxes sooner rather than later, and hope that this unwieldy patchwork of agreements helps build the case for a national solution.

Oklahoma’s Governor Mary Fallin finally unveiled her plan for eliminating the state income tax.  Full elimination would take a number of years, but low-income families are likely to be hit hard right away when various refundable credits are repealed.  The Institute on Taxation and Economic Policy (ITEP) plans to conduct a full analysis as soon as sufficient details are made available.

One Michigan lawmaker wants to take money away from Medicaid, education, and other programs to cover the cost of maintaining the state’s roads – costs that the state’s long stagnant gas tax can’t keep up with.  This is not the only such proposal to redirect money to cover up for lawmakers who lack the political courage to raise their state’s gas tax. Nebraska, Utah, Wisconsin, Virginia, and Oklahoma have proposed or enacted similar raids that ITEP warned of in its recent report, Building a Better Gas Tax.

The Colorado legislature is debating a boondoggle of a bill which would create a sales tax holiday the first weekend in August.  The facts are getting out that these events are expensive and don’t benefit the people who need them most.

The Virginia-Pilot has an excellent editorial on the efforts of some lawmakers to ramp up the level of scrutiny applied to billions of dollars in special interest tax breaks.  As the Pilot points out, Richmond is increasingly forcing cities and counties to pick up costs the state can’t cover, yet lawmakers threw away $12.5 billion in corporate tax breaks without any evidence they are helping Virginians.

Two tax increase initiatives appear headed for California’s November ballot that Governor Jerry Brown fears will undermine support for his own initiative to temporarily raise the sales tax and income taxes on wealthier Californians.  The competing measures are both permanent and superior in terms of fairness: a “millionaire’s tax” backed by labor groups who say it will raise $6 to $10 billion for education; and a $10 billion personal income tax hike on all Californians except for low-income families, backed by a wealthy civil rights attorney. But with three tax increasing options on the ballot, there’s a good chance the measures will cancel each other out, leaving California still in a fiscal wreck.

Photo of Jerry Brown via Randy Bayne  and Creative Commons Attribution License 2.0

A new Washington Post-ABC News poll shows that only nine percent of Americans believe the tax system works for the middle class, with 68 percent saying it actually favors the wealthy. The survey shows a public overwhelmingly convinced that our tax system is unfair and that taxes should be raised on wealthy Americans.

The belief that the tax system is unfair has surely been fueled by the recent revelation of presidential candidate Mitt Romney’s super low 14% tax rate on his $21 million income. In fact, the same poll found that 66 percent of the public generally – and even a near majority of Republicans! – believe that Romney is not paying his fair share in taxes.

Not surprisingly, then, Americans overwhelmingly support increasing taxes on the wealthy, according to this poll, with 72 percent saying that taxes should be increased on millionaires. Of course, time and time again polls have shown the public’s robust support for progressive taxation.

A Growing Gap Between Small and Big Business

In related news, a nationwide survey released by the American Sustainable Business Council, Main Street Alliance and Small Business Majority shows that small business owners are fed up with how our corporate tax system favors big corporations at the expense of small businesses.

Indeed, 9 out of 10 small business owners said that big corporations use loopholes to avoid taxes that small businesses have to pay, with three quarters of the small business owners noting that their business is harmed by such loopholes. The same survey found that 67 percent of small business owners believe big corporations pay less than their fair share.

Even when small and large busineses agree that they want more tax handouts from Congress, they’re talking about very different things, according to a new Bloomberg (subscription only) poll.  Asked what tax changes would help them most, advisors to smaller businesses prioritize things like reducing payroll taxes on employers and making permanent the deduction for self-employment. Big business priorities included 100 percent expensing (a.k.a. bonus depreciation) of equipment and complete overhaul of the corporate tax code – including a reduced tax rate.

These studies are more reason corporate lobbyists and their patrons in Congress should stop pretending they’re all about small business. They’re not.

New Jersey Governor Chris Christie made a bold and reckless promise in his January State of the State address: a personal income tax cut for all.  His plan is to gradually reduce income tax rates by 10 percent across the board, at a cost of $1 billion a year once fully implemented.

Democratic lawmakers and public interest advocates were quick to point out one very big problem with Christie’s plan: the state simply cannot afford it.  The Governor has yet to say how he would pay for it, yet the likely scenario is more cuts to education spending and local aid which would, in turn, force local governments to increase property taxes to make up the difference.  As Senate President Stephen Sweeny said, “it’s taking money out of one pocket and putting it in another.”

And, now thanks to an analysis by the nonpartisan NJ Office of Legislative Services (OLS), we know exactly which pockets will be fuller as a result of Christie’s grand plan.  It’s no surprise given Christie’s past allegiance to millionaires that the wealthiest New Jerseyans stand to gain the most from a billion dollar cut in one tax (personal income) that will likely force an increase in another (property). 

Even if property taxes are not increased as a result of Christie’s proposals, New Jersey families are already paying more in property taxes in recent years thanks to Christie’s reductions in property tax credits and rebates (all of which could be restored for a smaller price tag than the proposed personal income tax cut).

OLS’s findings are consistent with the Institute on Taxation and Economic Policy’s (ITEP) research on the share of income New Jerseyans pay in state and local taxes.  Both OLS and ITEP agree – low and middle-income families spend a greater share of their income on property taxes than on income taxes.  The reverse is true for New Jersey’s wealthiest families, which is why a cut in income taxes, accompanied by an increase in property taxes, will make an unfair situation even worse.

Rather than a “tax cut,” Christie’s plan is more accurately characterized as a “tax swap.”  New Jersey Policy Perspective’s Deborah Howlett called the plan “a gimmick.”  Indeed. The plan is based on projected revenues which may or may not materialize. The Governor said that if they do, however, this tax cut will be at the top of his list of ways to spend whatever extra money trickles in. There are more important things at the top of a lot of his constituents’ lists, however, including restoring those property tax credits.

Photo of Governor Chris Christie via Bob Jagendorf Creative Commons Attribution License 2.0

Citizens for Tax Justice Director, Bob McIntyre, writes in The the Hill’s Congress Blog today:

….Just as Ronald Reagan and a bipartisan Congress did in the Tax Reform Act of 1986, we should crack down on wasteful, often harmful corporate tax subsidies. The 1986 reforms curbed useless tax breaks for oil companies, public utilities, defense contractors and a wide array of corporate special interests. It rewrote the way we tax multinational corporations to make it harder for them to avoid their U.S. tax responsibilities by moving their U.S. profits to foreign tax havens. And by doing so, it made our economy more productive and increased corporate tax payments by more than a third.

Indeed, if just the 280 corporations that CTJ analyzed in our 2011 study had paid the full 35 percent corporate tax rate on their U.S. profits over the 2008-10 period (instead of only half that much), they would have paid an additional $223 billion in corporate income taxes.

Read the full essay here.

• Kudos first to Washington State Representative Marko Liias who introduced a bill that requires the wealthiest Washingtonians to pay a two percent income tax to help fund education. This is big news because Washington doesn’t currently levy ANY income tax.
• Washington Post Columnist Robert McCartney rightly applauds Maryland Governor O’Malley’s “courage on taxes.” McCartney is right when he says that in terms of tax hikes, “What’s scary in the short term might pay off down the road — not only for politicians, but also for the state.”
• This week, Jeff McLynch from the New Hampshire Fiscal Policy Institute presented testimony to the Commission to Study Business Taxes.  His group opposes the Commission’s draft recommendations first and foremost on the grounds that it would cut state revenues dramatically, leading to program cuts.  He also points out that the Commission’s proposed change to a “Single Sales Factor” corporate income tax apportionment formula could well have the unintended consequence of deterring many types of companies from making the Granite State their home.
• Interested in an inspiring, principled op-ed about what real tax reform means? Read this, from Kentucky.

(See CTJ director’s full explanation of Facebook’s use of the stock option deduction here.)

Facebook, Inc.’s upcoming initial public stock offering (IPO) paperwork reveals that it plans to wipe out all of the company’s federal and state income tax obligations for 2012 and actually generate a half billion dollar tax refund. As part of the plan, Facebook co-founder and controlling stockholder, Mark Zuckerberg can expect a $2.8 billion after tax cash windfall.

According to Facebook’s SEC filing, the company has issued stock options to favored employees, including Zuckerberg, that will allow them to purchase 187 million Facebook shares for little or nothing in 2012. Options for 120 million shares (worth $4.8 billion) are owned by Zuckerberg. The company indicates that it expects all of the 187 million in stock options to be exercised in 2012.

The tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.

When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.

Senator Carl Levin, who has proposed to limit the stock option loophole, told the New York Times, “Facebook may not pay any corporate income taxes on its profits for a generation. When profitable corporations can use the stock option tax deduction to pay zero corporate income taxes for years on end, average taxpayers are forced to pick up the tax burden. It isn’t right, and we can’t afford it.”

To be sure, Zuckerberg will have to pay federal and state income taxes (at ordinary tax rates) when he exercises his $4.8 billion worth of stock options in 2012. That’s only fair, since that $4.8 billion obviously represents income to him. But even after paying taxes, he’ll still end up with $2.8 billion.

The problem isn’t Zuckerberg’s personal taxes but Facebook’s. Why should companies get a tax deduction for something that cost them nothing?  If an airline allows its workers to fly free or at a discounted price on flights that aren’t full (for vacations, etc.) airlines don’t get a tax deduction (beyond actual cost) for that, even though the workers get taxed on the benefit, because it costs the airline nothing.

In the case of stock options, there is also a zero cost to the employer. So it’s more reasonable to conclude that while employees should be taxed on stock option benefits (“all income from whatever source derived” as the tax code states), employers should only be able to deduct their cost of providing those benefits, which, in the case of Facebook and Zuckerberg, is zero.

The bottom line is that there’s something obviously wrong with a tax loophole that lets highly profitable companies like Facebook make more money after tax than before tax. What’s about to happen at Facebook is a perfect illustration of why non-cash “expenses” for stock options should not be tax deductible.

See page 12 of our Corporate Taxpayers and Corporate Tax Dodgers report for more about the 185 other companies we found exploiting the stock option loophole.

Photo of Facebook Logo via Dull Hunk and photo Mark Zuckerberg via KK+ Creative Commons Attribution License 2.0