Month: July 2012

Many residents of Washington, D.C. have found a good restaurant or shopping deal through an online facilitator like LivingSocial. These websites work by putting consumers in touch with local retailers looking to entice new customers with appealing discounts. But recent action from the D.C. Council could reverse the script, leaving the city’s citizens on the hook for a misguided and revenue-draining attempt at capturing high-tech businesses. After passing a sweet tax deal for one company, the Council is now considering slashing income taxes for just about anyone affiliated with a high-tech company at the expense of the working taxpayers of D.C.

The first tech-tax action taken by the D.C. Council was ensuring that LivingSocial, a high-tech company founded in D.C., remained within the city limits. While the leadership of LivingSocial have long trumpeted their D.C. roots—the chief executive, Tim O’Shaunghnessy, is the son-in-law of Washington Post Co. Chairman Donald E. Graham—they have also made no secret about the organization’s consideration (or threat) of leaving the city for a less “expensive” location. “We’ll make a commitment to the District if the District will make a commitment to us,” O’Shaunghnessy told the Washington Post.

This past week the city government solidified that commitment with LivingSocial in a deal that is far sweeter than anything LivingSocial offers its members. On July 10, the D.C. Council unanimously approved an agreement that keeps the fledgling company’s headquarters (and at least half of its new hires place of residence) within the District’s lines in exchange for a $32.5 million tax break. The deal provides LivingSocial with corporate and property tax abatements over a five-year period beginning in 2015.

What’s more troubling for the city and its residents, however, is a separate proposal to give away tax dollars to investors in online companies. The Technology Sector Enhancement Act of 2012 would allow so-called “angel investors” (qualified employees or stockholders in a qualifying tech company) to only pay a 3 percent tax rate when selling their stake in the company for a profit. Both new and preexisting investments would be covered by the new rate. Additionally, the bill exempts qualified companies from business franchise taxes for five years after the date the company first has taxable income.

Under D.C.’s current tax system, capital gains are taxed like any other income, with the maximum marginal tax rate at 8.95 percent. In fact, the special tax rate (3 percent) for tech investors would be even lower than the lowest income tax rate (4 percent) paid by working D.C. residents. As the D.C. Fiscal Policy Institute has explained, the city would be creating a “Warren Buffett problem” by taxing high-income tech investors at far lower rates than all working D.C. residents. 

Moreover, as the Institute on Taxation and Economic Policy (ITEP) has previously noted (PDF), capital gains are among “the most unequally distributed sources of personal income.” By giving special treatment to such income, governments shift the responsibility for funding government services more heavily onto lower- and middle-income taxpayers.

In addition, the tax giveaway to high-income taxpayers could also be a huge drain on the city’s already stretched-thin budget. A financial impact statement from the city’s Chief Financial Officer notes that such tax cuts will reduce both corporate franchise and capital gains tax collections and that the negative impact “could be substantial.” Unfortunately, the cost of this legislation has not been projected in any detail. The financial impact study merely states that the revenue losses “cannot be reliably estimated at this time.” But the report does explicitly note that if a company were to have a successful IPO “the revenue losses could be significant.”

Such substantial revenue reductions have dire consequences for public investments. And as is often explained (though frequently forgotten), it is those public investments—an educated workforce, first-rate transportation infrastructure and quality health care—that are far more likely than tax incentives to attract high-value-added industries to cities and states.

The D.C. Council was set to vote on the tech tax cut the same day as the LivingSocial deal, but lobbying from anti-poverty groups in opposition to the legislation resulted in the vote being tabled until September. Let’s hope that in the meantime the Council puts some more thought into whether tax breaks for some of the District’s most fortunate residents should really be a top budgetary priority.

As the nation’s governors gather in Williamsburg, Virginia this week, their focus is on their Chairman’s initiative, Growing State Economies.  Too often, however, a governor’s knee-jerk response to a lagging economy is to start cutting taxes, even though state tax cuts offer very little economic bang-for-the-buck.  But while tax cuts aren’t the economic panacea that is often claimed, there are ways in which governors can reform their states’ tax codes to pave the way for improved economic success.

A new report from the Institute on Taxation and Economic Policy (ITEP) identifies governors who get it right and governors who get it wrong, and outlines four commonsense options designed to create infrastructure jobs, boost consumer demand, improve business efficiency, and offer local retailers a more level playing field.

 Read the report.

The National Governors Association is meeting this week and our clickable yearbook of 22 governors is assigning honors to some and detention to others for the tax policies they pushed in 2011 and 2012.

(Single Infographic Version)

	Jan Brewer (R-AZ)	Jerry Brown (D-CA)	Sam Brownback (R-KS)
	Most Likely to Side with Wealthy Investors	Best at Playing a Bad Political Hand	Most Likely to Bankrupt His State
	Lincoln Chafee (I-RI)	Chris Christie (R-NJ)	Andrew Cuomo (D-NY)
	A+ For Effort at Sales Tax Reform	Fiscal Drama Queen	Best Reversal on Millionaires Tax
	Mark Dayton (D-MN)	Mary Fallin (R-OK)	John Kasich (R-OH)
	Most Willing to Stand Up to Legislature	Biggest Loser at Cutting Income Taxes	Fracking Tax Squanderer
	Paul LePage (R-ME)	John Lynch (D-NH)	Dan Malloy (D-CT)
	Reverse Robin Hood Award	Smartest Veto of the Year	Most Likely to Make Rich to Pay Fair Share
	Martin O’Malley (D-MD)	Butch Otter (R-ID)	Deval Patrick (D-MA)
	Defender of Public Services	Champion of the “1%”	Mr. Popular Gimmickry
	Beverly Perdue (D-NC)	Rick Perry (R-TX)	Pat Quinn (D-IL)
	Most Likely to Gamble with State’s Future	Grover Copy Cat Award	Least Likely to Prioritize Seniors
	Brian Sandoval (R-NV)	Rick Scott (R-FL)	Rick Snyder (R-MI)
	Most Likely to Defy Grover’s Tax Pledge	Corporate Tax Giveaway King	Biggest Tax Hiker on the Poor and Elderly
	Scott Walker (R-WI)
	Biggest Bully

 Recent evidence has lead Citizens for Tax Justice to wonder: do the “experts” over at Grover Norquist’s Americans for Tax Reform intentionally lie, or are they just sloppy?

Here’s what we’re looking at:

In their recent policy brief, Americans for Tax Reform links to one of our reports and writes:

“…[E]ven the left-wing Center for Tax Justice admits that “in some parts of the country, $250,000 is really not very much to raise a family on and it’s unclear whether families in such a position can afford to pay higher taxes.”

The problem is that the quote they attribute as the position of Center for Tax Justice (who’s that?) is actually us here at Citizens for Tax Justice (thank you very much) reporting something from the New York Times, and it’s something that we clearly oppose. Here’s the full quote from CTJ’s report:

“Recent articles in the New York Times and the Fiscal Times quote observers and analyses questioning President Obama’s proposal to allow the Bush income tax cuts to expire for adjusted gross income (AGI) in excess of $250,000. One theme of these articles is that in some parts of the country, $250,000 is really not very much to raise a family on and it’s unclear whether families in such a position can afford to pay higher taxes. The idea that Obama’s income tax plan will result in unaffordable tax increases for people who make $250,000 a year is wrong on several levels”

On the one hand, supporting the theory that this misquote results from pure sloppiness is their error of accidently calling us Center for Tax Justice – something busy journalists do all the time.

On the other hand, supporting the theory that Grover’s Americans for Tax Reform is intentionally misrepresenting the position of Citizens for Tax Justice is that our report was a laundry list of reasons why families who make $250,000 can afford to pay higher taxes, making it almost impossible for any semi-literate person to have missed that point. (Plus it’s no secret CTJ supports tax increases for this group.)

Which theory sounds right to you?

Photo of Grover Norquist via Gage Skidmore Creative Commons Attribution License 2.0

The Orlando Sentinel’s editorial board explains the “slow-motion disaster” that is Florida’s tax system, cataloging the lack of sales taxes on services (PDF) and online shopping taxes (PDF), and gasoline tax shortfalls (PDF), among others.

Special tax breaks for businesses frequently reward behavior that would have occurred anyway.  The most recent examples come from Florida, where Publix, CSX, TECO Energy, NextEra Energy, and Mosaic Co. are seeking millions in tax breaks for capital spending they were already planning to undertake.

Online shopping in the DC-Metro area is about to become more expensive, according to this Washington Post article.  Here’s why that’s a good thing for tax fairness, the Marketplace Fairness Act and state coffers.

Advocates for increasing the Arkansas severance tax rate on natural gas from 5 to 7 percent and eliminating exemptions turned in nearly 70,000 signatures on Friday. If the Secretary of State verifies enough signatures, the long overdue rate increase worth $250 million in annual revenues will be put on the November ballot. 

Check out New Jersey Governor’s Chris Christie talk at the Brookings Institution today on “Restoring Fiscal Integrity and Accountability”.  Christie used the first several minutes to give his view on the current tax cut standoff in the Garden State, claiming Democrats were playing politics by holding up his tax cut proposal (when in fact what they’re doing is the right thing).

Every year the Organization for Economic Co-Operation and Development (OECD) produces reports about each of its 34 member countries’ economic prospects. The one they just published about the United States points out the “disproportionate income growth for top earners over the past two decades,” that our tax system is a global underperformer when it comes to ameliorating poverty, and recommends that progressive tax reforms should play in a key role in tackling our increasing income inequality.
 
According the OECD, income inequality has grown continuously over the last four decades. In fact, of the 34 countries in the OECD, the U.S. has the fourth highest level of income inequality as measured by each country’s Gini coefficient. Reinforcing this trend, our current tax-and-transfer system is 30 percent less effective in reducing income inequality than it was in 1980.

One approach that the OECD proposes to counteract U.S. income inequality through the federal tax code is to limit the tax savings from each dollar of certain deductions and exclusions in the federal income tax code. This approach was recently proposed as part of President Barack Obama’s American Jobs Act. Such proposals would increase the progressivity of the tax code and reduce the economic distortions created by tax breaks.

Bad Ideas

While many of the report’s recommendations are progressive and smart, it also some recommendations that would please the most conservative policymakers (leaving us scratching our heads as to how AP could label it “left-leaning”). For example, it calls for a significant reduction in corporate tax rates and the continuation of the special low tax rates for capital income. Of course, what the U.S. needs to do is enact revenue-positive corporate tax reform and treat capital income as ordinary income because these moves would afford us the revenue to implement the OECD’s other more reasonable recommendations, such as increasing government spending on education and job training, to reduce income inequality.

Good news: Wisconsin appears to be  gearing up for serious income tax reform. Bad news: the legislator heading up the effort is a flat tax proponent.

Illinois Governor Quinn began the legislative session in February proposing a variety of loopholes be closed, but the budget he signed on June 30 didn’t close those loopholes.

Think state budgets don’t have an impact on what services localities can provide? Read this article about eight South Carolina school districts facing cuts.

Millionaires don’t flee taxes. With help from ITEP, the millionaire migration myth takes a hit in this Baltimore Sun letter to the editor.

Illinois’ pension system is in crisis.  This insightful column by the Center for Tax and Budget Accountability’s Ralph Martire argues that the state’s tax policy is at least partially to blame:  “For decades, Illinois’ antiquated, poorly designed tax policy created an ongoing structural deficit.”