Month: October 2012

It recently came out that one man—billionaire Manuel Moroun—is almost singlehandedly responsible for getting Proposal 5, (dubbed the “two thirds” tax proposal by supporters), onto Michigan’s November ballot.  If enacted, the proposal would require two-thirds approval of each legislative chamber before any tax break or giveaway could be eliminated, or before any tax rate could be raised.  The results of such a “supermajority” restriction would be unambiguously bad for Michigan.

Paying for schools, roads, and police would become much more difficult over time as the costs of these services grow and Michigan’s narrow sales tax, flat income tax, and flat gas tax would struggle to keep up. The risk of a downgrade in Michigan’s credit rating would also increase under a supermajority rule, as the range of options for keeping the state’s finances in order would be drastically reduced.  Tax reform would become much more difficult, as many loophole-closing proposals could suddenly be blocked by a small minority of legislators.  And the ability of Michigan’s government to deal responsibly with unexpected fiscal crises would be greatly reduced.

Unsurprisingly, all of these dangers are of little concern to folks like Stephen Moore at the Wall Street Journal, who’s almost certainly never met a tax cut he didn’t like.  But many stakeholders based in Michigan, who would actually have to deal with these consequences, have concluded that a supermajority requirement would do far more harm than good.

Both of the state’s largest business groups—the Chamber of Commerce and Business Leaders for Michigan—have come out against the measure.  In noting just how restrictive the measure would be Chamber President Rich Studley quipped that “on some days you couldn’t get a two-thirds vote in the Legislature on what time of day it is.”  Even Governor Rick Snyder, whose record on tax policy we’ve criticized a number of times, opposes the supermajority rule on the grounds that it’s “not good public policy” and would have “unintended consequences.”  Other opponents include the Senate Majority Leader, AARP Michigan, the Farm Bureau, and the Michigan Municipal League, among many other groups.

And it appears that Michigan voters are getting the message.  As the Detroit News reports, polling show that “support for Proposal 5 … plunged 17.5 percentage points, from 68 percent a month ago to 50.5 percent” in mid-September. That is not only the most recent poll, but it’s also relevant because ballot measures usually need at least 60 percent support in September to have much chance of passing in November, since support tends to wane closer to the election.

The Michigan League for Human Services has more details on why a supermajority requirement is a super-bad idea (PDF) for Michigan, and the Center on Budget and Policy Priorities has a report on the issue as well. And at CTJ, we’ve been writing for years about how these rules cripple legislatures and hamstring democracy by undermining the power of elected representatives.

Oh, and there’s a chilling, masters-of-the-universe twist to the story, too. The reason this one man went to all that trouble and expense to buy the proposal a spot on the ballot is not because he’s on some ideological crusade. Rather, he wants to make sure Michigan can never afford to invest in a new bridge to Canada – because it would compete with the one he owns. 

Image from Metro Times, Detroit.

While most commentators have focused on the back-and-forth between President Barack Obama and former Governor Mitt Romney over tax rates and deficit reduction during the first presidential debate, we paid extra close attention to what the candidates said about corporate and small business taxes. Unfortunately, we found what both candidates had to say really wanting.

Corporate Tax Reform

Early in the debate, Obama noted that he and Romney have something of a consensus over corporate taxes in that they both believe that “our corporate tax rate is too high.” If there’s such an agreement, it’s based on a fundamental misunderstanding. While the U.S. has a relatively high statutory corporate tax rate of 35 percent, the effective corporate tax rate (the percentage of profits that corporations actually pay in taxes) is far lower because of the loopholes they use to shield their profits from taxes. CTJ has found that large profitable corporations pay about half the statutory rate on average, while some companies like General Electric and Verizon pay nothing at all in corporate taxes.

President Obama proposes to close corporate tax loopholes, but would give the revenue savings right back to corporations as a reduction in the statutory tax rate from 35 percent to 28 percent, resulting in no change in revenue, as outlined in his corporate tax reform framework released earlier this year. (During the debate Obama actually said he’d lower the statutory rate to 25 percent, which seems more likely a misstatement than an intentional policy shift.)

In contrast, 250 non-profits, consumer groups, labor unions and faith-based groups have called for a corporate tax reform that actually raises revenue in order to pay for critical government investments and reduce the budget deficit.

Of course, Governor Romney also proposes a deep cut in the statutory corporate tax rate (to 25 percent) and is far more vague on whether he would bother to offset the costs.

Romney took issue with Obama’s claim during the debate that the tax code currently allows companies to take a deduction for moving plants overseas, saying that he had “no idea” what Obama was talking about and that if such a deduction really exists that he may “need to get a new accountant.” Technically, Obama is right that the tax code currently allows companies to take a deduction for business expenses of moving a plant overseas, but he leaves out the fact that companies are allowed to deduct most business expenses, including those associated with moving facilities. In any case, Romney certainly does not to need to hire a new accountant.

What both candidates missed during this discussion was that our current tax system does in fact encourage corporations to move operations overseas by allowing them to defer taxes on foreign profits. To his credit, Obama proposed, as part of his 2013 budget and in his framework for corporate tax reform, several reforms to the international tax system that would reduce the size of this tax break, although he has not gone as far as to call for an end to deferral entirely. In contrast, Romney wants to blow a giant hole in our corporate tax by moving the US to territorial tax system, under which US companies would pay nothing on offshore profits.

Small Business Taxes

During the debate Romney revived a classic tax myth by claiming that allowing the Bush tax cuts to expire for income over $250,000 will harm small businesses because a lot of businesses “are taxed not at the corporate tax rate, but at the individual rate.” Obama pushed back noting that he had “lowered taxes for small businesses 18 times” and that under his plan “97 percent of small businesses would not see their income taxes go up.”

A Citizens for Tax Justice (CTJ) analysis found that only the 3 to 5 percent richest business owners would be lose any their tax breaks under Obama’s plan. The CTJ report also points out that if you’re a business owner, tax breaks affect how much of your profits you can take home, but not whether or not you have profits. A business owner will make investments that create jobs if, and only if, such investments will lead to profits, regardless of what tax rates apply.

In an attempt to push his small business claim even further, Romney cited a study by the National Federation of Independent Businesses (NFIB) claiming that Obama’s plan will force small business to cut 700,000 jobs. When the NFIB report came out during the summer, the White House did a fine job of pointing out the many, many outrageous distortions in the report. Just to take one, the NFIB report makes assumptions about the relationship between taxes and investment that are far out of line with those of the non-partisan Congressional Budget Office and even the Treasury Department during the Bush administration.

President Obama stated that the oil industry receives “$4 billion a year in corporate welfare” and added that he didn’t think anyone believes that a corporation like ExxonMobil really needs extra money coming from the government. Romney hit back saying that the tax break for oil companies is only $2.8 billion a year and that Obama had enacted $90 billion worth of tax breaks in one year for green energy, which he said dwarfed the oil tax breaks 50 times over.

On the oil company tax break claims, Obama’s figure is much closer to the truth. The President’s 2013 budget has a package of provisions that would eliminate or reduce special tax breaks for the fossil fuel industry and the Treasury estimates this would raise $39 billion over a decade. (See page 80 of this budget document.) A CTJ report explains the arguments for these provisions. Ironically, the oil industry itself puts this number much higher, claiming that the Obama administration’s proposal would eliminate about $8.5 billion in tax breaks it receives annually.

In addition, FactCheck.org points out that Romney’s claims on Obama’s clean energy tax breaks were largely bogus. Just to list some of the problems with Romney’s $90 billion claim, FactCheck.org notes that these breaks were spent over two years not one, that the figure includes loan guarantees not just actual spending, and that many of these “breaks” were spent on infrastructure projects.

During the first presidential debate of this election season, President Barack Obama and former Governor Mitt Romney’s discussion focused primarily on what is arguably the most important issue of this election: tax policy. Over half of the debate was spent on the intricacies of tax policy, from the treatment of small businesses to the precise revenue cost of trillions of dollars in proposed tax cuts.  Here we offer some criticism and context.

Size of the Candidates’ Tax Cut Plans

Early in the debate Obama explained that Romney’s “central economic plan calls for a $5 trillion tax cut – on top of the extension of the Bush tax cuts.” Romney denied this, saying “I don’t have a $5 trillion cut. I don’t have a tax cut of the scale that you’re talking about.” Romney added that his plan would not “reduce the share of taxes paid by high-income people” and that it would “provide tax relief to people in the middle class.”

The truth is that Romney isn’t proposing a $5 trillion tax cut, he’s proposing to cut taxes by over $10 trillion over ten years. Romney proposes new tax cuts costing around $500 billion a year (according to the Tax Policy Center) on top of making permanent all the Bush tax cuts, which by themselves would cost $5.3 trillion over a decade.

Romney is proposing to make up some of the $5 trillion in additional tax cuts by closing loopholes, eliminating deductions and other tax expenditures, but he has kept his plan secret so far and has refused to name even a single tax expenditure he would eliminate or loophole he’d close.

An analysis by Citizens for Tax Justice found that even if millionaires were forced to give up all the tax expenditures that Romney has put on the table, his tax plan would still give a tax break of at least $250,000 on average for individuals making over $1 million. That is, he simply cannot back up his assertion that he is “not going to reduce the share of taxes paid by high- income people.” And if he really is going to make up the revenues we’ll lose to his rate cuts, taxes would have to go up for other taxpayers.

Throughout the debate, Romney referred to several studies showing that his plan is mathematically possible (a low standard to meet to be sure), but the reality is that the studies he’s referring to aren’t all actual studies, nor do they fully support his plan.

It’s important to note that while Romney’s tax plan is the height of fiscal irresponsibility, Obama himself is proposing to extend most of the Bush tax cuts, at a cost of $4.2 trillion over the next ten years. The President assured the audience that he wants to “continue the tax rates – the tax cuts that we put into place for small businesses and families.  But,” he continued, “for incomes over $250,000 a year that we should go back to the rates that we had when Bill Clinton was president,” that is, the pre-Bush tax cuts rate.

CTJ has analyzed Obama’s plan and found that extending 78 percent of the Bush tax cuts will lose far too much revenue in the long run. The President’s plan would extend the tax cuts for the first $250,000 a married couple makes. We also found that married couples making between $250,000 and $300,000 would still continue to enjoy, on average, 98 percent of the Bush tax cuts. Fewer than two percent of taxpayers would lose any part of the Bush tax cuts under Obama’s plan, so it’s hardly a bold proposal for reducing the deficit and restoring urgently needed revenues.

In other words, neither presidential candidate showed on Wednesday night that they have fully come to terms with the fact that the United States cannot afford continuing to hand out trillions of dollars in tax cuts.

Long Term Deficit Reduction Plans

At a Republican presidential debate over a year ago, Romney joined with all the other candidates in saying that they would reject any deal that raised tax revenues, even one that would include $10 in spending cuts for every $1 in additional tax revenue – ten times more in crippling spending cuts than tax increases. When pushed by the moderator during Wednesday’s presidential debate, Romney stood firm, saying that he had “absolutely” ruled out the possibility of raising additional revenue to reduce the deficit.

The Simpson-Bowles Commission plan to balance the budget, which Romney praised last night, however, requires a ratio of $1 in spending cuts to $1 in revenue increases (compared to the budget baseline that Obama and many members of Congress use). Ironically, by seemingly embracing Simpson-Bowles, Romney put himself to the left of Obama, whose own long term deficit reduction plan actually cuts fewer taxes and less spending than Simpson-Bowles. As Obama explained in the debate: “the way we do it is $2.50 for every cut, we ask for a dollar of additional revenue.”  (And he repeatedly points out, of course, that his health care legislation will slow the deficit’s growth by reducing Medicare costs.)

Neither candidate is acknowledging the elephant in the room. In the long-run, what they really have to do to fix the budget deficit is just to stop extending most or all of the Bush tax cuts, or find a way to pay for those parts they do extend.

The difficulty of enacting real tax reform is on display in Louisiana, where a commission studying the state’s tax breaks just heard from some of the industries and interests seeking to protect their special breaks and loopholes.  For example, a retail group claimed that a sales tax exemption for international tourists doesn’t actually cost the state because it raises $1.80 in revenue for every $1.00 foregone. In the end, though, it did cost the state $1.1 million in sales taxes last year.

Transportation officials in Kansas and Tennessee are in an increasingly common situation: looking for new revenues as their states’ gas taxes dwindle because of rising construction costs and improving vehicle fuel-efficiency.  Officials in both states seem to recognize that a gas tax hike is needed, but in Tennessee at least, the state’s anti-tax governor has reportedly ruled that out.

In November, voters in Kansas will be asked to decide whether their state constitution should be changed to lower taxes on boats and other watercraft. Changing a state’s constitution to reward boat purchases? Seriously? The experts who wrote the ITEP Guide warn that “tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources or, worse, to schemes whose sole aim is to exploit such preferential tax treatment.”  Let’s hope Kansas voters don’t start down this slippery slope.

The Savannah Morning News editorial board is urging the state legislature to fix a tax break in the Georgia Tourism Development Act which was intended to encourage development but “apparently is indecipherable” and can’t be implemented. The bureaucratic quagmire the legislation created highlights one of many problems with trying to micromanage economic development through the tax code.

Read the PDF version of this document.

As President Barack Obama and former Massachusetts Governor Mitt Romney face off in their first debate, a number of big-picture questions about tax policy remain unanswered by either candidate.
 

Given the budget deficit, why should we extend all of the Bush tax cuts (as Romney proposes) or most of the Bush tax cuts (as Obama proposes)?

■ The Congressional Budget Office estimates that a full extension of the Bush tax cuts, which Governor Romney supports, would cost about $5.2 trillion over ten years, including interest, while President Obama’s proposal to extend most, but not all, of those tax cuts will cost about $4.3 trillion over ten years, including interest.

■ That means if Congress enacts one of these approaches, we lose either $5.2 trillion or $4.3 trillion, compared to current law (compared to what would happen if Congress does nothing).

Given that the Bush tax cuts, taken together, disproportionately benefit the rich, why should we extend all or most of them?

■ Citizens for Tax Justice estimates that the richest one percent of Americans would receive 32 percent of the benefits of a full extension of the Bush tax cuts, which Governor Romney supports.

■ CTJ finds that the richest one percent would receive 11 percent of the benefits from Obama’s proposal to extend most, but not all, of the Bush tax cuts (and the other tax cuts Obama wants to extend).

■ By way of comparison, the poorest fifth of Americans would get just one percent of the benefits from the Republican approach and just 3 percent of the benefits from Obama’s approach.

Why have neither Obama nor Romney proposed to end the tax loophole that is targeted to the richest one percent of taxpayers — the special, low tax rate for capital gains?

■ Romney proposes to enact new tax cuts (on top of extending the Bush tax cuts) but claims that he can offset the costs by limiting tax expenditures (tax deductions, exclusions, credits and other special breaks). But Romney pledges to retain the most unfair tax expenditure of all, the lower rate for capital gains, which allows wealthy investors like himself and Warren Buffett to pay a lower effective tax rate than many working people.

■ Meanwhile, Obama proposes to limit the value of each dollar of deductions and exclusions for the rich to 28 cents, and he would impose a minimum tax on people making more than $1 million. Both measures are relatively complicated and neither would entirely eliminate situations in which wealthy investors pay a lower effective tax rate than wage-earners.

■ The most straightforward reform would be to eliminate the most unfair tax expenditure by repealing the special rate for capital gains and simply taxing all personal income under the same tax rates. CTJ estimates this would raise at least $533 billion over a decade.

Why does neither candidate propose to raise needed revenue from corporate tax reform?

■ President Obama has proposed to close corporate tax loopholes, while Governor Romney has been unclear on this point. But any revenue saved from corporate loophole-closing under either candidate would be given back to corporations in the form of a reduction in their tax rate. Both candidates have proposed to reduce the official 35 percent corporate income tax rate (to 28 percent in the case of Obama and 25 percent in the case of Romney).

■ Corporations claim that they are burdened by the statutory tax rate of 35 percent, but their effective tax rate (the percentage of profits they actually pay in taxes) is usually far lower than that because they use loopholes to shield much of their profits from taxes.

■ Each of the reasons used by corporate lobbyists to argue for lower taxes is easily refuted. For example, they claim that the corporate tax is ultimately borne by the workers, but if that was true, then corporations wouldn’t bother lobbying Congress to lower it.

■ An obvious way to address our fiscal problems is to close corporate tax loopholes and use the revenue to reduce the deficit or pay for education, infrastructure or other investments.

To make watching the debates just a little more fun, we created a Bingo card with all the tax and budget related terms we expect the two candidates to trot out time and again over the coming debates. (If you want to make the debates even more fun you could have a drink everytime they use one of these words as well, but you didn’t hear this from us.)

Missouri might just be the poster child for why it’s so important to ramp up the amount of scrutiny given to special tax breaks.  From 2005 to 2009, the state accidentally spent over $1.1 billion more on tax credits than lawmakers expected.  More recently, despite its budget being squeezed by a poor economy, Missouri’s tax credit spending continued on auto-pilot, actually rising by some 15 percent, while education and health spending fell well short of Missourians’ needs (PDF).  Making matters worse, the only tax credit “reform” to come close to passage in recent years was an unsuccessful effort to scrounge up some tax credit savings and blow them on a massive giveaway designed to turn the St. Louis airport into a futuristic hub for freight between China and the Midwest.

What Missouri and other states need is a way to carefully evaluate all of their tax breaks on an ongoing basis, and an incentive to get lawmakers to act when a tax break is proven to not be worth the cost.  To that end, the Institute on Taxation and Economic Policy (ITEP) just published a new resource outlining five steps that states can take to make this basic standard of good governance a reality, and showing that over a dozen states have already taken at least one of these steps.

In brief, those steps are:

1. Require tax breaks to include specific goals and measurable objectives.
2. Require rigorous analyses of the success (or lack thereof) of tax breaks by trained, non-partisan analysts.
3. Use “sunsets” (or expiration dates) to spur lawmakers to debate and vote on tax breaks after they’ve been analyzed.
4. Require the Governor’s budget proposal to include recommendations on tax breaks after they’ve been analyzed.
5. Require the legislature to hold hearings on tax breaks after they’ve been analyzed.

Every state has significant room for improvement when it comes to the level of scrutiny it applies to special tax breaks.  To learn more, read ITEP’s report: Five Steps Toward a Better Tax Expenditure Debate.

CTJ Analysis Shows That Millionaires Would Get Average Tax Cut of $250,000 Even If Deductions and Exclusions Are Limited to Zero

Today, presidential candidate and former Massachusetts Governor Mitt Romney suggested that one way to offset the cost of his proposed tax cuts would be to limit deductions to $17,000.

“As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others – your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way,” he said on a local Denver news show. “And higher income people might have a lower number.”

In September, Romney argued that he would eliminate enough deductions, exclusions and other special breaks to offset the costs of the new tax cuts he proposes, and that the net result would not be a tax increase for the middle-class or a tax cut for the rich.

But an August analysis from Citizens for Tax Justice demonstrated that even if itemized deductions and exclusions were eliminated entirely, people who make over $1 million would still see an average net tax break of $250,000 in 2013 under Romney’s plan.

That’s partly because the new tax breaks that Romney proposes are so generous to the rich that they would outweigh the loss of any deductions or exclusions. In addition to making permanent all the Bush tax cuts, Romney would reduce income tax rates by a fifth and eliminate the AMT and the estate tax.

Another reason is that Romney pledges to keep the special breaks that benefit the wealthy most of all — breaks for investment and savings like the special low rate for capital gains.

As a result, there is simply no way to Romney could fill in the details of his tax plan in a way that will not result in huge tax cuts for the very rich.

For low- and middle-income people, the loss of tax expenditures (tax deductions, exclusions, credits and other breaks) under Romney’s plan could outweigh any gains from the tax rate reductions and other new tax cuts, resulting in a net tax increase. In fact, this result is inevitable if Romney is to accomplish his goal of not further increasing the deficit while at the same time cutting taxes for millionaires by at least $250,000 on average.

Let’s start with the good news.  There’s a growing recognition among even the most virulently anti-tax lawmakers that one core area of government is actually underfunded and needs revenues: transportation maintenance and construction.

Unfortunately, there’s some bad news, too. Rather than fixing the gas tax shortcomings that have led to transportation coffers (quite predictably) running dry, many of those same lawmakers want to divert money away from education, health care, and other services, and spend it on roads and bridges instead.

One lawmaker touting this approach is Iowa Governor Terry Branstad.  While Branstad should be praised for realizing that the gas tax should be raised next year, his broader plan to couple that increase with big cuts in income taxes and local property taxes completely misses the mark.  If enacted, everything from schools to police departments will have to be scaled back just so that Branstad can avoid the “tax raiser” label some political operatives might pin on him for favoring a long-overdue and much-needed gas tax hike.

Governor Branstad’s approach echoes one outlined earlier this year by his counterpart in Virginia, Governor Bob McDonnell.  During a conversation with the Associated Press (AP), McDonnell hinted that he might reverse his opposition to raising the gas tax if it’s done as part of a broader, revenue-neutral tax “reform” package.  As we explained then, however:

“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.”

These proposals to actually increase the gas tax might seem remarkable at first, coming from governors who are as opposed to taxes as Branstad and McDonnell.  But when you peel away the layers, the logic behind the proposals is nothing new.  In the face of lagging gas tax revenues, politicians have frequently raided other revenue streams in order to avoid raising taxes but still keep their transportation systems afloat. Nebraska, Utah, and Wisconsin did it in 2011, and Michigan, Oklahoma and the federal government did it in 2012.  At their core, Branstad and McDonnell’s approaches are just accomplishing the same outcome but in a more roundabout way: shifting money around in a way that benefits roads at the expense of everything else.

For a smarter approach, see the recommendations made in Building a Better Gas Tax, from the Institute on Taxation and Economic Policy (ITEP).