Month: March 2012

Nevada Governor Brian Sandoval campaigned on a promise of no-new-taxes but is breaking that promise (for a second time!) with his plan to balance the Silver State budget.  In an effort to avoid deep cuts in education, Sandoval is once again supporting an extension of temporary sales, payroll, and car taxes originally enacted in 2009.  Grover Norquist calls Sandoval the poster boy for why candidates can’t just promise no-new-taxes, they have to sign his pledge; in fact, Sandoval is a good example of why they shouldn’t.

We’ve already written that Arthur Laffer’s claims about economic growth and income tax repeal are fundamentally flawed and that in fact “high rate” income tax states are outperforming no-tax states. Now, three respected Oklahoma economists have come out in agreement, and are offering their own critique of Laffer’s findings. This is great news given that Laffer’s work has been so central to lawmakers’ efforts to eliminate the state income tax – the most progressive feature of any state’s tax system.

This week the Maryland Senate voted to raise personal income taxes in order to offset the anticipated “doomsday cuts” in public services that would otherwise have to occur.  An analysis from the Institute on Taxation and Economic Policy (ITEP) showed that the bill would be generally progressive.  And in yet another bit of good news, a late amendment to the bill would enhance its progressivity even more, as Marylanders earning more than a half-a-million dollars will no longer be able to take advantage of the state’s lower marginal rate brackets.

The Wichita Eagle editorial board is watching the Kansas House and Senate take up tax reform, and they are worried. While they’re glad some lawmakers are dubious about “the suspect advice of Reagan economist Arthur Laffer,” the governor’s advisor, they don’t like a House plan that “makes permanent the punishing budget cuts of the past few years to education, social services and other programs.” They opine that “tax reform needs to make fiscal sense and broadly benefit Kansans,” and conclude that with the various and competing proposals right now, it’s anybody’s guess if that will be the outcome.

One of the greatest sources of unfairness in our tax system is the preference for investment income. Specifically, the profits investors enjoy when they sell an asset for more than they paid to acquire it (capital gains) are usually taxed at lower rates than other types of income. One argument used to justify this policy is the claim that investors will stop buying and selling assets if the profits from these sales are taxed like other types of income. CTJ’s recent report on revenue options explains that this is untrue.

Most capital gains go to the richest one percent of taxpayers, leading people like Warren Buffett to criticize this tax preference for allowing some millionaires to pay lower effective tax rates than many taxpayers much further down the economic ladder.

So what’s stopping Congress from ending the tax preference for capital gains and simply taxing this income at the same rates as all other income? After all, President Ronald Reagan singed into law a tax reform that did exactly this. Is it such a radical proposal to bring back Reagan’s policy of taxing all income at the same rates?

One obstacle to ending the tax preference is misinformation about how revenue would be affected. The Wall Street Journal and other sources of anti-tax ideology claim that increasing tax rates on capital gains would not raise any revenue because investors would respond by selling fewer assets, meaning there would be fewer capital gains to tax.

Even the people who provide official revenue estimates for Congress — the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) — assume that this behavioral response exists, to a lesser but still significant degree.

Another non-partisan research institution that serves Congress, the Congressional Research Service (CRS), concluded in 2010 that JCT overestimates these behavioral responses and consequently underestimates how much revenue can be saved by allowing President Bush’s expansion of the capital gains preference to expire for the rich.

The recent report from CTJ on options to raise revenue explains why CRS is right and JCT is wrong. And why the Wall Street Journal is really, really wrong.

We don’t simply propose to allow Bush’s expansion of the capital gains preference to expire. We propose repealing the entire capital gains preference. We estimate that even if some behavioral responses do affect the revenue impact (meaning some investors do hold onto assets longer in response to the tax change) our proposal would still raise more than half a trillion dollars over a decade.

As our report explains, most of the ways in which investors respond to such a tax change are short-term responses. JCT seems to rely on research that confuses short-term responses for long-term responses. CRS points out that some studies from the last several years corrected for this mistake and found much smaller long-term behavioral responses.

See the CTJ report for more detail. As wonky and arcane as all this sounds, you can bet that the debate over capital gains tax changes and revenue will receive more attention as Congress starts talking about tax reform and about ways to get wealthy investors to pay their share.

The latest monthly statement by the Treasury Department contains a startling revelation: the amount that Treasury expects to collect in corporate taxes in 2012 has been slashed by more than 28 percent, from $333 down to $237 billion.

With such a dramatic revision, one might expect that lagging corporate profits or a sudden economic disruption is to blame. In reality however, corporate tax revenue continues to limp in spite of the fact that corporate profits have rebounded to record highs.

If corporate profits are not behind this $96 billion drop in expected corporate tax revenue, then what is?

The Wall Street Journal’s David Reilly suspects that there are two critical drivers: the offshoring of more profits through overseas entities by multi-national corporations; and the continuation of extravagant corporate tax breaks for accelerated depreciation of assets like equipment. Last month, the Congressional Budget Office (CBO) came to the same basic conclusion, explaining that corporate tax breaks and loopholes played an important role in driving the corporate tax rate to a 40 year low in 2011.

In order to prevent the continued decline of the corporate tax, Congress and the President should enact revenue-positive corporate tax reform, rather than their current revenue-neutral approach. Right now, political leaders of all stripes are proposing merely to eliminate some tax breaks but continue or even expand others and possibly reduce the statutory rate. With the federal deficit growing every day, asking profitable U.S. companies to pay something closer to the statutory tax rate is a reasonable (not to mention popular) approach.

Chart from is from the Wall Street article “U.S. Tax Haul Trails Profit Surge“

North Carolina’s two major newspapers, the Raleigh News and Observer and Charlotte Observer, published editorials in support of the state’s estate tax in the wake of a hearing last week called to eliminate it.  From the News and Observer: “The estate tax is hardly a burden on those few inheritors who have to pay it. It is a modest but valuable asset to government revenue, and there is nothing unfair about [it].”  And, from the Charlotte Observer: “Some Republicans support abolishing the federal estate tax. They should explain why the extremely wealthy should be able to avoid paying any taxes on unrealized capital gains.”

Washington State’s special legislative session started yesterday. The media is reporting that the session will be a contentious battle over how the state should close its $1 billion budget gap. (Hint: the answer’s in the Washington State Budget and Policy Center’s proposal to tax capital gains income. )

An article from The Miami Herald reveals some ugly details surrounding the $2.5 billion in business tax cuts just passed by the Florida legislature.  As the Herald points out, “those benefiting had plenty of lobbyists … AT&T, which has 74 Florida lobbyists, spent $1.68 million on lobbying last year, more than any other company.”  Not coincidentally, AT&T and Verizon – both champion tax dodgers – were among the biggest winners.  A last-minute amendment to the legislation could give the telecommunications industry a tax break as large as $300 million.

A great op-ed in the Kansas City Star asks why Governor Brownback wants taxes in Kansas to be like Texas, reminding Kansans that Texas ranks low in everything that really matters, from high school graduation rates to household income to crime.

Dolly Parton’s Dollywood Co. and Gaylord Entertainment Co. have struck a deal with Nashville, Tennessee Mayor Karl Dean that, if approved, would result in an estimated $5.4 million in property tax breaks for their planned water and snow park.  Ben Cunningham of the Nashville Tea Party was right to point out that the plan amounts to a “giveaway” to companies that plan to move to the city anyway and that it’s time to stop “giving in to this kind of corporate extortion.”

Photo of Dolly Parton via Eva Rinaldi Creative Commons Attribution License 2.0

Acknowledging he will likely “face accusations of engaging in class warfare,” Rhode Island Representative Scott Guthrie called on wealthy Ocean Staters to pay more in taxes this week to help close the state’s budget gap.

From the Representative’s press release:

“As the state budget deficit continues to loom large, for yet another year, one phrase continues to remain popular from elected officials – shared sacrifice,” said Representative Guthrie. “Well, I see municipalities sacrificing, as well as many of the residents of those communities. I see sacrifices from the poorest and neediest in Rhode Island, the results of continued trimming in the social services funding. What I don’t see is sacrifice from the wealthiest members of our society who could most easily afford to give a little more to help their many neighbors and fellow citizens who are suffering.

““Trickle down doesn’t work. We’ve tried it for years and all the benefits continue to trickle up.  We need a shift back to a more fair tax policy.”

Representative Guthrie filed four different bills offering four different scenarios for raising revenue. Each of them would add a fourth, temporary bracket to the state’s personal income tax and introduce a different marginal rate on income above different thresholds.  That is, the new one or two percent tax bracket would not apply to all income, only that income above either $250,000 or $500,000, depending on the proposal.

The Institute on Taxation and Economic Policy (ITEP) analyzed the representative’s proposals at the request of the Economic Progress Institute.  The two bills that increase the top marginal rate for taxpayers with taxable income greater than $250,000 would impact less than 2 percent of taxpayers.  The bills that increase the top marginal rate for taxpayers with taxable income greater than $500,000 would impact less than 1 percent of taxpayers. 

Representative Guthrie says that his proposals could bring in anywhere between $37.9 and $144 million in revenues for the two year period they are in effect, depending on which is implemented, or $20 to $70 million per year. His plans are outlined here.

• Rising gas prices are making some politicians in Maryland, Michigan, and Iowa back away from courageous proposals to raise their states’ long stagnant gas tax rates.  Rather than lose momentum, lawmakers can enact legislation now that will implement a gas tax rate increase when prices begin to come down.
• The Institute on Taxation and Economic Policy (ITEP) testified this week in front of Alaska’s Senate State Affairs Committee Regarding the Alaska Tax Break Transparency Act. The bill would mandate the state develop a tax expenditure report which would detail the tax breaks the state provides, along with the cost of each to taxpayers. Forty-five other states currently produce these reports which can ultimately help the public have a say in government spending.
• Following up on our earlier post about New Mexico Governor Susana Martinez’s opportunity to sign legislation instituting combined reporting, the Governor vetoed SB9. Supporters of the bill designed it as a first step in reforming the state’s corporate tax laws and leveling the playing field for small, in-state business.
• An Illinois Senate committee recently approved a new tax on strip clubs to help fund sexual assault prevention programs. This is the same state considering taxing ammunition to pay for medical trauma centers. Illinois has a history of bad budget gimmicks that are largely responsible for its current $9 billion deficit.

New Mexico Governor Susana Martinez has to decide Wednesday how to respond to mounting public pressure (including 5,000 signatures) to support a new corporate fair tax bill.  Supported by small business, it enacts combined reporting, which requires out-of-state companies to pay taxes on in-state profits, along with a slight drop in the corporate income tax for most profitable companies.  In the meantime, proponents remain committed and organized, check out http://ohsusana.org/.

The details of South Carolina House Republican tax proposals read like a How-Not-To guide for making the state’s tax structure more fair and equitable. Lawmakers there are proposing to eliminate the state’s corporate income tax, provide targeted tax breaks to manufacturers, lower taxes on business owners, and more.  But when is a plan crafted behind closed doors ever in the public’s interest?

Income tax cuts paid for by a new tax on fracking for natural gas may be on the horizon in Ohio. Governor Kasich took the notorious no-new-tax pledge and will likely have to defend his new fracking tax against the anti-tax crowd, while progressives would probably support a new tax on a lucrative (if controversial) industry but not the personal income tax cut. Kasich’s plan is a political hybrid and worth watching as fracking for gas becomes an issue in more states.

Our crystal ball predicts a refreshing battle in Maryland over tax increases in the coming weeks. Governor O’Malley, Senate leadership, and House leadership all recently unveiled their own proposals to raise taxes. The Governor proposed raising taxes on better-off taxpayers by reducing deductions and exemptions, and by increasing the gas tax.  The competing Senate plan would increase income taxes on nearly every Marylander, while the House plan would raise taxes on only the wealthiest taxpayers. Lawmakers in the Old Line State should be applauded for confronting these important issues and putting tax increases on the table rather than taking a cuts-only approach to the state’s $1 billion deficit.

Because legislators said it went too far, Nebraska’s Governor Heineman is revising his initial tax plan in cooperation with a the chair of the senate’s revenue committee. The compromise being developed by the Governor and Senator Abbie Cornett changes the governor’s original proposal in two positive ways: it preserves the state’s inheritance tax and it holds steady the corporate income tax rate.  The compromise plan, set for debate this week, still leaves in place income tax cuts that barely help those who need them most.

Photos of Governor Susana Martinwz and Governor Martin O’Malley via Albuquerque Public Schools and Third Way Creative Commons Attribution License 2.0

Recently, the Louisiana Legislative Auditor issued a report that found the cost of the corporate income and franchise tax credits for the state was a staggering $3 billion between 2005 and 2010. The total tax liability during that same time was just $5.4 billion, which means the state lost over half of its potential revenues because of these credits, but no one can show how the state benefitted.  In 2009, in fact, those credits were worth $685 million, which is about 78 percent of all taxes owed by businesses that year.  When 14 separate agencies are giving away three quarters of the state’s business tax revenue in a year and no one can say why, it’s a problem.

Not surprisingly, the Auditor recommends better monitoring of these costly incentives to determine if they are effective. Here’s a primer on why and how to measure business tax breaks’ impact. Because, when states do bother to track the economic effects of so-called incentives, they find the business lobby’s promise may not be fulfilled.

The Louisiana report goes on: “If the legislature is interested in the return on investment for the state’s tax credits and other exemptions, the legislature may wish to consider adding this [monitoring] requirement to state law and requiring the appropriate state entities to formally track and report this information.”

We suggest that the legislature do more than just consider increased monitoring and tracking and instead put those mechanisms in place immediately. Taxpayers have a right to know if their tax dollars are being spent effectively. As the Legislative Auditor Daryl Purpera said of the current system, “It is not good business practice. You’d think we’d be monitoring those funds as best we can.”

You’d think. In fact, Louisiana is one of the states in our Corporate Tax Dodging in the Fifty States report that has failed to enact a single one of six basic business tax reforms and is failing on key transparency measures that would make it easier for ordinary taxpayers to know the ways in which they are subsidizing corporations.