Month: May 2012

May 16, 2 PM UPDATE: The House has passed SB1302 and it now heads to Gov. O’Malley’s desk, where he is expected to sign it.

Maryland lawmakers are on the verge of bucking a national trend.  While most of the biggest state tax debates in 2012 have focused on proposals that would cut taxes and tilt state tax systems even more heavily in favor of the wealthy, Maryland appears poised to do exactly the opposite.  On Tuesday, the state Senate voted to raise tax rates and limit tax exemptions for single Marylanders earning over $100,000 and for married couples earning over $150,000 per year.  The House is expected to follow suit by passing the same bill (SB1302) as early as Wednesday.

If enacted into law, these changes will allow the state to avoid a variety of cuts to vital public services, as detailed by the Maryland Budget and Tax Policy Institute.  But in addition to improving the adequacy of Maryland’s tax system, a new analysis from our sister-organization, the Institute on Taxation and Economic Policy (ITEP), shows that the income tax changes contained in SB1302 would also lessen the unfairness of a regressive tax system that allows Maryland’s wealthiest residents to pay less of their income in tax than any other group.  Among ITEP’s findings:

• Because the income tax changes are limited to taxpayers earning over $100,000 or $150,000 per year, only 11 percent of Maryland taxpayers would face an income tax increase in 2012 as a result of SB1302.  (It’s worth noting, however, that increases in tobacco taxes, fees, and other provisions would affect additional taxpayers—though these increases make up just 3 percent of the bill’s total revenue.)
• 54 percent of the income tax revenue raised by SB1302 would come from the wealthiest 1 percent of state taxpayers—a group with an average income of nearly $1.6 million per year.  87 percent of the revenue would come from the top 5 percent of taxpayers.
• The changes in families’ income tax bills—even at the top of the income distribution—would be very modest.  After considering the “federal offset” effect, the tax increase faced by the top 1 percent of taxpayers would equal just 0.16 percent of their total household income, and taxpayers outside of the top 1 percent would face an even smaller increase.  Given the small size of these tax changes, Maryland’s tax system would undoubtedly remain regressive overall.
• The progressive nature of SB1302 means that it’s well suited to take advantage of the “federal offset” effect mentioned above, whereby wealthier taxpayers write-off their state tax payments and receive a federal tax cut in return.  17 percent of the revenue raised by SB1032—or $28 million in tax year 2012—would come not from Marylanders, but from the federal government in the form of new federal tax cuts for Maryland taxpayers.

See ITEP’s full analysis here.

• Michigan Governor Rick Snyder is voicing support for federal legislation that would allow states to collect sales taxes owed on purchases made over the Internet, but he has little interest in pursuing a state-level law that would allow Michigan to begin chipping away at the problem.

• The Gazette has an article about the failure of Maryland legislators to raise the gas tax during their recently concluded regular session.  It cites research from the Institute on Taxation and Economic Policy (ITEP) showing that the state’s gas tax rate would need to rise by 15.8 cents just to offset the last two decades of construction cost inflation.  In the article, Governor O’Malley explains the obvious: high gas prices caused lawmakers to delay this overdue reform, again.

• Legislators in New Hampshire were well on the way to eliminating a tax on internet access, until a flap between the House and Senate over other provisions in the legislation derailed it. Still, leadership in both chambers remain committed to eliminating the tax that appears on consumers’ broadband and wireless bills.  But the New Hampshire Fiscal Policy Institute (NHFPI) warns against eliminating the tax in a recent report which explains that $12 million in annual revenues are a stake, and that better, more targeted options for reducing taxes on New Hampshire families are available.

• This week, New Hampshire gubernatorial candidate Bill Kennedy came out with his own proposal to reduce property and businesses taxes and make up for the loss of those revenues by introducing a personal income tax in the state, which is one of nine states that doesn’t levy one. At the same time, the Granite State’s Senate is about to take up a radical and constraining proposal to amend their constitution to make sure no personal income tax can ever be levied. Stay tuned.

Virginia Governor Bob McDonnell wants to make tax reform a top priority during his upcoming (and final) year as Governor, according to the Associated Press (AP).  But while Virginia’s tax code is no doubt in need of reform, it’s hard to tell from the AP article what kind of change Virginians can realistically expect.

Virginia currently foregoes some $12.5 billion in tax revenue every year as a result of special breaks buried in the state tax code—almost as much as the $14.3 billion in annual revenues the Commonwealth takes in.  McDonnell said, “I think it’s time to take a look at all those tax preferences, both in income and sales, and see if there is not some way … we can save some money and put it into transportation.”

While such a development would be a positive one, McDonnell contradicts himself when he says that raising revenue is out of the question, and that the tax reform he has in mind might even reduce revenue overall.  Given that commitment, Virginians might expect the condition of their ailing transportation system to improve, but at a cost to other state services.

Moreover, there’s reason to be skeptical about how committed McDonnell really is to broadening the tax base.  While he’s right to point out that services like car repairs and pedicures should be subject to the state sales tax, his actual track record is not inspiring. Just two months ago, for example, McDonnell signed into law an expansion of a wasteful corporate tax giveaway that narrowed the tax base, despite very good reasons to doubt its effectiveness.

On transportation funding, too, McDonnell’s track record conflicts with his talk of tax reform. He has consistently refused to support tying—or “indexing”—the state’s stagnant gas tax rate to inflation, but now he says that “there may be a way to do that in the overall context of tax reform.”

That’s hardly a ringing endorsement of the idea, but at least it’s a start.  The Institute on Taxation and Economic Policy (ITEP) recently found that only Alaska has gone longer than Virginia without raising its gas tax. And if Virginia lawmakers had indexed the state gas tax to construction costs the last time the tax was raised, annual revenues would be some $578 million higher.

But indexing by itself is not enough to fix the state’s legendary transportation problems.  Indexing helps prevent future construction cost increases from eating into gas tax revenue, but it doesn’t address the cost increases that have already occurred. According to ITEP, Virginia’s gas tax would have to immediately rise by 14.5 cents just to offset the last two and a half decades of transportation cost growth. 

But even if McDonnell believed the state’s gas tax needs to be raised and indexed, his opposition to raising any new revenue overall is almost guaranteed make his reform agenda bad for the state.  That’s because every dollar in new revenue McDonnell might generate for transportation would have to be offset with a dollar in tax cuts elsewhere in the budget—presumably from a tax that funds education, human services, public safety, and other core government functions.  The AP story says McDonnell sees a reformed tax code as his own legacy, but what about the legacy he leaves the Commonwealth?

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

House Ways and Means chair Paul Ryan’s budget proposal drew plaudits from some observers who didn’t notice its fundamental weakness: its utter failure to specify which tax “loopholes” it would close to pay for deficit reduction. As we’ve noted in the past, Ryan has a good reason not to disclose details on the tax side of his plan: they don’t add up. CTJ has shown that the Ryan plan’s promised top income tax rate of 25 percent would be insufficient to pay for federal spending at Reagan-era levels, let alone the current decade. 

Now, as details of Ryan’s plan emerge, it’s becoming clearer that its spending cuts are equally illusory, relying on alleged cost-saving measures that would likely cost more in the long term than they help right now. Case in point: Ryan’s plan to eviscerate the Census Bureau and eliminate its American Community Survey (ACS), an annual survey that provides a rapid-response supplement to the decennial Census.

As Businessweek notes, cuts to Census budgets in the past decade prevented Congress and the Obama administration from being able to quickly diagnose the scope of the financial sector’s collapse in 2007.  One expert observed, “The government saved $8 million, but how many trillions were lost as a result of not being able to see the crisis coming?”

Ironically, as the New York Times explains, the ACS itself was actually created as a sensible cost-cutting strategy, designed to provide more timely data than the decennial Census could.  Even the US Chamber of Commerce has vocally opposed further cuts to Census funding because it helps businesses large and small to inform their planning.  Which is why top conservative policy think tanks support the ACS, too.

An adequately funded Census Bureau is the best vehicle we have for finding a path to sustained economic growth for all of us; there is widespread agreement that without its data, we will be flying blind.

• Rhode Island lawmakers are considering legislation that would help the state better evaluate the nearly $1.6 billion in special tax breaks it hands out every year.  The way the bill couples evaluations of the tax expenditures and sunsets (i.e. expiration dates on tax breaks) is closely in line with what commissions in Massachusetts and Oklahoma have recently proposed.  Testimony from the Economic Progress Institute in support of the bill can be found here.

• Here’s a refreshing piece of news: A Texas judge has ruled that oil and gas companies can’t benefit from a special state sales tax break on equipment designed to aid manufacturers.  Southwest Royalties Inc. apparently tried to argue that removing oil from the ground should count as “manufacturing.”

• Good news in the Sooner State – new polling shows that Oklahomans oppose a regressive cut in the income tax rate, paired with tax credit reductions, by a 42-35 percent margin.  If education cuts are used to pay for the tax cut, the margin of opposition grows to a whopping 81-16 percent.  Oklahoma lawmakers are seriously considering a variety of income tax proposals that would likely require cuts in both tax credits and education spending, so let’s hope that they stop to listen to their constituents first.
• The details of the coming Maryland tax package that we mentioned earlier this week are beginning to take shape.  The Washington Times reports that income taxes will likely be raised on families earning over $100,000 per year, in a manner very similar to what lawmakers almost enacted at the end of the regular session. More as it happens.

• Last Friday, Minnesota Governor Mark Dayton vetoed a tax plan passed by the legislature which would have frozen statewide business property taxes permanently– and cost the state over $2 billion. He called the bill “fiscally irresponsible.” Thursday the Minnesota legislature gave approval to a smaller tax package that, among other things, only froze business property taxes for a single year.  Though the scaled down version is now on its way to the Governor’s desk, the  Minnesota Budget Project  writes that the fate of this bill is up in the air:  “The bill may not receive Governor Dayton’s signature, as it still draws upon the state’s budget reserve and adds to future deficits, two things that he has opposed throughout the legislative session.”

It’s no longer news to most Americans that big, profitable corporations from Apple to General Electric are finding creative ways to zero out their income taxes.  Two widely cited recent reports on federal and state taxes from CTJ and ITEP identified dozens of companies that have achieved this dubious goal.

But the big news out of Illinois this week is that at least in the Land of Lincoln, lawmakers are taking positive steps towards doing something about rampant corporate tax avoidance. A bill introduced Wednesday by Senate President John Cullerton would require publicly traded companies to make available some basic information about the amount of state income taxes they pay, and specify which tax breaks reduced their taxes. The bill would also require companies to disclose their profits generated in Illinois, making it easy for lawmakers and the public to know whether these companies are really paying tax at the legal rate.

While the bill was approved by a Senate committee and sent to the Senate floor on Wednesday, its prospects for passage this year remain murky. And identifying the beneficiaries of unwarranted tax breaks is obviously only a first step towards repealing those tax breaks. But this legislation, along with a similar bill championed by the California Tax Reform Association in the Golden State, likely represents the beginning of a shift toward more transparency in corporate taxation—and that can only lead to improvements in the fairness of our overall corporate tax system.

Right now virtually every state (there are a few signs of hope) fails to disclose even the most basic information about corporate tax breaks. The Center on Budget and Policy Priorities’ Michael Mazerov has the dirt on how your state can move in the right direction, as does the encyclopedic Good Jobs First.

Photo from Senator Cullerton’s legislative website.

The CEOs of 18 large corporations have published an open letter to the Treasury Secretary seeking to extend tax breaks on investment income that overwhelmingly benefit the very wealthy. Barring Congressional intervention, these special breaks for capital gains and dividends will expire at the end of this year, along with all of the 2001 and 2003 Bush tax cuts.

In an era when fiscal austerity is a reality in America, what makes this request even more obscene is that of these 18 CEOs, four of them head corporations which have paid less than zero in federal income taxes in recent years, in spite of consistent profits.  Another two barely paid any, and another five have paid well below the statutory 35 percent corporate tax rate. In fact, among these CEOs is Lowell McAdam of Verizon, one of the most notorious tax dodging companies in the U.S.  

The 11 corporations among the 18 that have paid less than the legal federal income tax rate are:

Gale E. Klappa, Wisconsin Energy Corp. — Average Negative 13.2% tax rate 2008-11
David M. McClanahan, CenterPoint Energy — Average Negative 11.3 tax rate 2008-11
Lowell McAdam, Verizon Communications Inc. — Average Negative 3.8% tax rate 2008-11
James E. Rogers, Duke Energy Corp. — Average Negative 3.5% tax rate 2008-11
Benjamin G.S. Fowke III, Xcel Energy — Average 1.0% tax rate 2008-10
Gerard M. Anderson, DTE Energy Co. — Average 0.2% tax rate 2008-11
Gregory L. Ebel, Spectra Energy Corp. — Average 13.6% tax rate 2008-10
Thomas A. Fanning, Southern Co. — Average 17.4% tax rate 2008-10
Glen F. Post III, CenturyLink Inc. —Average 23.5% tax rate 2008-10
Thomas Farrell II, Dominion Resources Inc. — Average 24% tax rate 2008-10
D. Scott Davis, United Parcel Service — Average 24.1% tax rate 2008-10

To bolster their case, these CEO’s are parroting the common claim that ending special preferences for dividends and capital gains (both of which are predominantly held by the wealthy) will depress economic activity. History shows this is not the case.

The fact is, about 85 percent of the expiring tax breaks for capital gains and dividends go to the richest five percent of Americans; most people won’t even notice if they expire.

The fact is, two thirds of all dividends are not subject to any personal income tax because they go to tax exempt entities rather than individuals.

Why is it that when corporate CEOs speak out on tax issues, they are treated like objective financial experts, as if they had no agenda other than job growth? You only have to think for a moment to realize that CEOs, for starters, typically own substantial amounts of stock in the companies they head, so in asking for reduced taxes on investment income, these 18 CEOs are pushing for substantial personal tax cuts for themselves – on top of the huge tax breaks their companies already receive.  Futher, the corporate boards who hire and fire these CEOs are populated by the super rich who’d benefit from things like capital gains tax breaks, so they are also serving their bosses.

These 18 captains of industry are part of an ongoing and well financed effort to limit taxes on business and on the rich. Why? Because it serves their interest. Our media and lawmakers need to bear that in mind.

Governor Terry Branstad has made “reforming” (cutting) the property taxes paid by Iowa businesses a top priority since taking office. The good news is that his latest proposal to accomplish that goal seems to have fallen short; unfortunately, this one was coupled with an increase in the state’s earned income tax credit (EITC), so it also fell by the wayside.

Last year we explained that Branstad’s first proposal would have allowed businesses to shelter a full 40 percent of their property’s value from the property tax (by assessing commercial property at only 60 percent of its actual value for tax purposes). The plan was estimated to cost as much as $500 million annually, but it ultimately failed.

On Tuesday, a Senate bill which offered a targeted property tax credit aimed at small businesses (and in some cases offering more relief to businesses than the Governor’s original proposal) was also narrowly voted down, 24-23. The Senate refused to even vote on a more costly tax cut proposal that passed the House, which would have assessed commercial property taxes at 90 percent of their actual value for tax purposes, taking effect over five years. Reports point to effective lobbying by cities and towns whose leaders came out against drastic cuts to business property taxes. One county, for example, stood to lose $7.3 million in just one year.

Governor Branstad is not giving up, though, and called on Iowans to vote out any legislator who voted against these business tax cuts. For now, it appears that counties and cities can breathe a sigh of relief. The same is not true, however, for the working poor who rely on the EITC to fill gaps in their household budgets; any increase in their tax credit won’t come around again until next year, either.

Republican leaders in the Senate claim that they agree with the Democrats’ goal of extending a temporary reduction in interest rates on student loans, but oppose the Democrats’ proposal to offset the costs. But this proposal, which would close the “Newt Gingrich/John Edwards Loophole” used by owners of “S corporations” to avoid payroll taxes, is a reason to support the Senate Democrats’ bill, which was filibustered by Senate Republicans on Tuesday.

CTJ’s recent report on revenue-raising options explains the loophole (on pages 17-18) and explains a proposal from Congressman Pete Stark to close it. The Senate Democrats’ proposal to close the loophole is a little weaker (as explained below) but still certainly deserves support.

Income from work, including wages and salaries, is subject to federal payroll taxes (Social Security taxes and Medicare taxes). Some wealthy individuals, including (at one time) former presidential candidates John Edwards and Newt Gingrich, have used a loophole to make their earned income appear to be unearned income, in order to avoid payroll taxes. (This is particularly true of the Medicare tax because there is no cap on the amount of earnings subject to the Medicare tax.)

The scheme involves a type of business called an “S corporation,” which is distinguished from other corporations in that its profits are not subject to the corporate income tax but are simply included in the taxable income of the owners and therefore subject to the personal income tax. These profits should also be subject to payroll taxes when they are income from work, but an odd feature of S corporations allows some “active income” (income a business owner receives as a result of being involved in the operations of the business) to be characterized as income that is not earned and thus not subject to payroll taxes.

This is an invitation for abuse, and John Edwards accepted the invitation when he was a trial lawyer. He claimed that his name was an asset and that this asset (rather than his labor) was generating the income for his firm (which was an S corporation). Newt Gingrich’s recently released tax returns demonstrated that he, too, took advantage of this loophole.

To be sure, the Senate Democrats’ proposal doesn’t go as far as it should. It would apply the Medicare tax to this income only when the S corporation is “a professional service business in which more than 75% of its gross revenues come from the service of 3 or fewer shareholders.” The proposal is more restrictive than Congressman Stark’s bill in that it would apply to S corporation owners only if their adjusted gross income exceeds $250,000. It’s hard to see why anyone at any income level should be allowed to get away with this.

Nonetheless, the Senate Democrats’ proposal certainly sounds like it would, if in effect, have prevented John Edwards and Newt Gingrich from using this loophole to avoid payroll taxes. And that’s a reason to support the legislation, which may come up for a vote again according to Democratic leaders.

Photo of Newt Gingrich and John Edwards via Gage Skidmore and SS Kennel Creative Commons Attribution License 2.0

Maryland Governor Martin O’Malley announced that he will call a special legislative session to start next week.  Lawmakers are widely expected to pass a progressive income tax package in order to avoid massive “doomsday” budget cuts.

Tennessee’s inheritance tax will be eliminated beginning in 2016.  Legislators recently sent Governor Haslam a bill repealing the tax, seduced by bogus claims about the economic benefits of repeal.  Lawmakers also passed two other notable tax cuts: one repealing the gift tax (which The Commercial Appeal says will benefit Gov. Haslam himself, along with other wealthy taxpayers), and another cutting the state sales tax on groceries by a quarter of a percent.

The gubernatorial race in Washington State is heating up and costly tax expenditures are getting long overdue attention from the candidates. But as this piece in the Seattle Times highlights, eliminating spending programs embedded in the tax code is easier said than done.  Read CTJ’s advice for how to do it here.

Finally, check out this timely column describing why Minnesota Governor Mark Dayton should veto a bill passed by the legislature under the guise of job creation. (Hint – it’s really a massive tax cut for business.)