Fiscal Chutes and Ladders – It’s Funtaxic!

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Chutes and Ladders is more than simply a hilarious visual metaphor for the gargantuan decisions currently being deliberated in Washington. Indeed, CTJ is using this icon of family fun to help educate the American public about the historic and morally consequential political moment we are witnessing as the Beltway budget drama approaches its climax.

Fiscal Chutes and Ladders is educational fun… for the whole country!

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Quick Hits in State News: Hoosiers Choose Revenues, Kentuckers Tackle Reform and More

Late last week, Kentucky’s Blue Ribbon Commission on Tax Reform released their tax reform recommendations. Many of the Commission’s recommendations are bold and forward-looking, like their proposal to expand the sales tax base to services  (PDF) and simultaneously institute an earned income tax credit (PDF). Not only does the Commission deserve kudos for trying to shore up tax revenues over the long term while keeping an eye on tax fairness, the Commission also clearly understood the need to raise more revenue. As one Herald-Leader columnist said,  “task force members had the courage to recommend a plan that would add $690 million in revenue during the first year.”  But the Commission’s recommendations aren’t without their flaws, such as $100 million in cuts to the corporate income tax. Jason Bailey from the Kentucky Center for Economic Policy reminds us, “Business tax cuts are really a race to the bottom between states.”

Nebraska think tank Open-Sky Policy Institute released, “Feeling the Squeeze- The Negative Effects of Eliminating Nebraska’s Inheritance Tax” detailing the impact of eliminating the state’s inheritance tax. The tax generates about $43 million annually for counties. These revenues are an important part of county budgets, and its counties assist with natural disasters, keeping roads safe and administering elections, among other things. Tax cuts don’t happen in a vacuum and that revenue will need to be made up with new revenue or reductions in services. Open Sky found that if “counties replaced all of the lost inheritance tax revenue with an increase in property taxes, the average overall county tax rate would have to increase by 7 percent.”

The majority of Hoosiers are telling Indiana Governor-elect Mike Pence “not so fast” on his tax cutting plan.  A new poll shows that taxpayers would rather see their tax dollars spent on investment priorities rather than tax cuts. Just 31 percent of those surveyed supported Pence’s proposal of slashing taxes by 10 percent across the board versus 64 percent of voters who would rather see tax revenue spent on education and workforce development.

Read this fantastic op-ed from Remy Trupin, executive director of the Washington State Budget & Policy Center, which makes the case for fundamental tax reform. “Washington needs a revenue mix built for the 21st century. That means eliminating wasteful tax breaks, modernizing our state sales tax to include more consumer services and taxing gains on the sale of stocks, bonds and other high-end financial assets held by the wealthiest two percent of Washingtonians.”

New York Times Asks How Obama Plan Really Affects the Top Two Percent

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A story in this week’s New York Times uses CTJ numbers to demonstrate what CTJ has said many times: President Obama’s proposal is not the confiscatory tax plan opponents would have you believe.

We have pointed out that taxpayers earning just over $250,000 really don’t have to worry because the President’s plan would barely affect them.  “A married couple whose income is exactly $250,000 would see no change in their income taxes under Obama’s plan,” we explained.

As the New York Times puts it,  “A close look at the president’s plan shows that a large majority of families making up to $300,000 — as well as hundreds of thousands of families with even larger incomes — would not pay taxes at a higher marginal rate…. [T]hey are the beneficiaries of choices the administration has made to ensure that families earning less than $250,000 do not pay higher rates.”

According to the Times, in crafting the plan, Obama’s team assumed high-income families take $20,000 in deductions, even though most families in this income range take a much larger amount, further driving down their taxable income. The Obama team also indexes the $250,000 and $200,000 thresholds for inflation from 2009, when the proposal was first formally put forward. This means families in 2013 could have considerably more than $250,000 in income without losing any part of the Bush income tax cuts under Obama’s approach.

“They wanted to be able to say that ‘Absolutely nobody making less than $250,000 could possibly pay higher taxes under our plan,’” said Robert S. McIntyre, the director of Citizens for Tax Justice, a liberal advocacy group. “So they had to assume the most ridiculous assumptions, that even if you’re a childless couple with no itemized deductions making $250,001, your taxes still won’t go up. They figured that if this couple existed and their taxes went up, somebody would find them and jump on ’em.”

You can view the graphics here.

In the end, the Times reports that if the President’s plan to allow the Bush tax cuts to expire on the top two percent is implemented, only about 32 percent of families with income from $250,000 to $300,000 would lose part of their income tax cuts. About 77 percent of families with income of $300,000 to $350,000 would lose tax cuts, and almost 99 percent of families with incomes above one million would lose some of theirs.

A related story in the Boston Globe uses other new CTJ numbers to show that, by contrast, one of the Republican plans to cap deductions without raising rates would have the inverse effect; it would “exact a bigger toll on upper- to high-income earners in the professional classes,” as opposed to the Mitt Romneys and Warren Buffetts.

CEOs and Fix-the-Debt Gang Lobby for Terribletorial Corporate Tax System

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While the headlines on the fiscal cliff negotiations are about wrangling over the top individual tax rates, multinational corporations are quietly lobbying for an agreement to move the U.S. international tax rules to a territorial system.

Members of the so-called Fix the Debt Campaign have called for massive cuts to social programs while seeking additional tax breaks for their own companies. A move to a territorial system could give the 63 publicly-held companies in the Fix the Debt campaign an immediate windfall of up to $134 billion and would massively increase their incentives to move even more profits offshore, where they would then be permanently exempted from U.S. taxes. Terrible-torial.

Meanwhile, defense contractors that exhort Congress to find a “reasonable approach” are also lobbying for permanent tax breaks on their offshore earnings. And major corporations complain (perennially) about having to pay U.S. taxes on any foreign cash they decide to bring home.

Moving to a territorial tax system would be a disaster for the U.S. Treasury and an open invitation for multinational companies to intensify their offshore shenanigans. Our fact sheet explains why. For an illustration of why it’s such a bad idea, you only need to look at headlines from the U.K.  Because of their territorial tax system, they are unable to collect corporate income tax from U.S. corporate giants Starbucks, Amazon, and Google who are profiting wildly from sales and business in the U.K.  Recently, these multinational giants were hauled before Parliament to explain their “immoral” tax-dodging behavior.

The U.S. already collects only a fraction of the taxes corporations owe on their profits; why would we move to a system that makes the problem even worse?

Quick Hits in State News: The Perils of Tax Credits, Breaks and Incentives

A Los Angeles Times report out of Hawaii illustrates why all tax breaks need to be subjected to more scrutiny.  The state’s well-intentioned and wildly popular tax “incentive” for solar energy has gotten more than a little out of control, skyrocketing in cost from $34.7 million in 2010 to $173.8 million in revenues this year, and even jeopardizing the reliability of the state’s power grid. Tax authorities have responded by slicing the credit in half for now.  Had Hawaii implemented some of the tax break accountability reforms we’ve recommended before, (first among them establishing measurable outcomes!), they could have prevented some of this chaos.

South Dakota Governor Dennis Daugaard is encouraging Congress to take action on a national Amazon tax policy because he worries about the impact that exempting online sales from his state’s tax base has on tax fairness and revenues. In the wake of a record settling Cyber Monday he points out that the “gift-buying binge also likely broke another record: most purchases made in South Dakota without paying sales tax.” For more on taxing Internet sales see this Institute on Taxation and Economic Policy (ITEP) brief (PDF).

The Illinois Senate deserves kudos for passing legislation that would require publicly traded corporations to disclose their Illinois income tax bill.  Currently about two-thirds of the companies doing business in Illinois aren’t paying state income taxes. If the bill passes the House and is signed into law by Governor Quinn, important, never-before-known information will be available about corporate taxpayers.  House Majority Leader Barbara Flynn Currie said, “Public policymakers can’t make good public policy if they don’t know what’s going on. We don’t know whether those 66 percent of corporations that pay no income tax in fact don’t have any profits.”

In case you missed it — Good Jobs First and the Iowa Policy Project recently collaborated to release this must read report, Selling Snake Oil to the States, which debunks the tax and regulatory recommendations made by the American Legislative Exchange Council (ALEC) for building economic growth in the states. Here’s a sneak peak of the study’s findings: “the states ALEC rates best turn out to have actually done the worst.”

Michigan House members will likely approve a proposal in the next week to repeal the tax businesses pay on industrial and commercial personal property (equipment, furniture and other items used for business purposes). Idaho lawmakers are considering a similar proposal.  An editorial in the Battle Creek (MI) Enquirer, however, urges lawmakers to put the plan on hold until there is a “better understanding of the impact on local units of government, along with a plan to mitigate that impact.”  Indeed, the overwhelming majority of revenue generated by this tax helps to fund  local governments, and it would be difficult for localities to absorb a cut that severe. 

Disturbing Trends in New IRS Data on Income

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While most of the IRS’s various statistical reports tend to inspire little excitement in the public and media, the agency’s latest report,“Individual Income Tax Returns, 2010” is something of a barnburner, in part because it confirms several troubling trends in the federal income tax.  A few stand outs:

1. Our Income Tax Code Stops Being Progressive at $2 Million of Income

According to the new IRS data, the average effective income tax rate actually drops from 25.3 percent for people making (a mere) $1.5 – 2 million to 20.7 percent for taxpayers making $10 million or more in income. (Those are 2010 figures.) In other words, as a taxpayer’s income surpasses $2 million, their effective income tax rate actually goes down, which is the opposite of what should happen under a progressive tax system.

2. Average Effective Income Tax Rates on Taxpayers Making Over $500,000 Dropped In 2010

While taxpayers making between $30,000 and $499,000 saw their average effective income tax rates go up slightly between 2009 and 2010, taxpayers making $500,000 or more actually saw their average effective tax rates go down. In fact, taxpayers making $10 million or more saw their effective tax rate drop almost eight percent from 2009 to 2010. Looking over a decade (2001 to 2010), the picture is even more dramatic: taxpayers making $10 million or more saw their average effective tax rate drop by almost 21 percent.

3. The Special Low Rate on Capital Income is Driving Effective Income Tax Rates Lower for the Wealthiest of the Wealthy

What explains the drop in the average effective tax rate for people making $10 million or more between 2009 and 2010? The IRS data reveals that these taxpayers saw their reported income from capital gains and dividend income increase to 48.5 percent of their total income in 2010, compared to 35.8 percent in 2009.  That change was driven largely by the economic recovery and rebounding stock market. Because income from investments is subject to a lower preferential rate than wages or salary, the more income taxpayers earn from these sources the lower the effective tax rate they will ultimately pay. As Citizens for Tax Justice has explained, ending the tax preference on capital gains and dividends is critical to ensuring that the wealthiest Americans pay their fair share.

In the Spotlight: Indiana, Wisconsin and Wrongheaded Tax Cuts

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Recent reports and opinion pieces in two states caution lawmakers about the affordability and fairness implications of excessive tax cuts.

In Indiana the Associated Press is reporting on “apprehension about [Governor Elect] Pence’s call for a 10 percent cut in the personal income tax … among top Republican lawmakers.”  Recent corporate income tax cuts, the elimination of the state inheritance tax, and declining gambling revenues have created a thick “fiscal fog,” as Republican House Speaker Brian Bosma describes it, which keeps him from committing to an income tax cut, at least for now.  To see how Pence’s plan would affect Indiana residents of different means, read the Institute on Taxation and Economic Policy’s report: Most of Indiana Tax Rate Cut Would Flow to Upper-Income Taxpayers (PDF).

Wisconsin Governor Scott Walker is making tax cutting a major priority in 2013. During a major policy speech at the Ronald Reagan Presidential Library he said, “We are working on massive tax reform…. We are going to continue to lower our property taxes.  We are going to put in place an aggressive income tax reduction reform in the state of Wisconsin.” This analysis from the Capital Times reminds us that the Governor really can’t do that much more for small businesses because the tax package he signed into law in his first budget actually eliminated taxes on many businesses altogether. The article also points out that tax cuts cost money — money the state can ill afford to spend — and the state’s “economy is sputtering.” If Governor Walker succeeds in making his tax cut proposals a reality, it warns, “something will have to give.”