Month: February 2013

PetersonPyramid.org

The Center for Media and Democracy (CMD), creator of the indispensible wiki, SourceWatch, recently launched a new wiki resource allowing users to explore the funding, leadership, partner groups and lobbyists that make up the Campaign to Fix the Debt. This resource reveals Fix the Debt for what it really is: another coordinated push by large corporations and billionaire Pete Peterson to force Congress to pass large and unneeded cuts to Social Security and Medicare.

We’d be remiss if we failed to also mention Fix the Debt’s naked duplicity in pushing for massive cuts to critical programs while simultaneously pushing for additional tax breaks for its many corporate backers.  Using data from Citizens for Tax Justice (CTJ), CMD exposes the audacity of some of 151 corporate backers of Fix the Debt by showing that many of them, such as Boeing, General Electric and Verizon, are already paying less than nothing in taxes.

Biz Vizz

371 Productions, the creator of the PBS documentary, “As Goes Janesville,” has launched a corporate transparency website and iPhone app called BizVizz, which provides consumers with easy access to financial information about America’s largest corporations. BizVizz uses CTJ’s corporate tax data to reveal that our broken corporate tax system allows the makers of many of our everyday products to get away with paying little – or sometimes nothing – in income taxes. One especially cool feature of the app allows the user to snap a picture of a product logo and get instant information on how much the company paid in federal taxes.

BizVizz includes other data, too. It shows how major corporations obtain their low tax rates because it includes data from the Sunlight Foundation on how much each corporation gave to politicians in campaign contributions. The other category of data BizzVizz includes is from Good Jobs First, listing subsidies corporations get from state and local governments – subsidies that come straight out of the tax dollars the rest of us pay in.

Lawmakers looking for an excuse to cut their personal income taxes regularly claim that doing so will trigger an economic boom.  To support this claim, many cite an analysis by supply-side economist Arthur Laffer that our partner organization, the Institute on Taxation and Economic Policy (ITEP), exposes as deeply flawed.

In States with “High Rate” Income Taxes are Still Outperforming No-Tax States, ITEP explains that Laffer uses cherry-picked data and simplistic comparisons to claim that the nine states without income taxes are outperforming states with “high rate” income taxes.  He goes on to suggest that the alleged success of those no-tax states can be easily replicated in any state that simply repeals its own personal income tax.

But ITEP shows that residents living in states with income taxes—including those in states with the highest top tax rates—are experiencing economic conditions as good, if not better, than in the no-tax states.  In fact, the states with the highest top income tax rates have seen more economic growth per capita and less decline in their median income level than the nine states that do not tax income.  Unemployment rates have been nearly identical across states with and without income taxes. 

As ITEP explains, Laffer’s supply-side claims rely on blunt, aggregate measures of economic growth that are closely linked to population changes, and the unsupported assertion that tax policy is a leading force behind those changes. Laffer chooses to omit measures like median income growth and state unemployment rates in his comparisons of states with and without income taxes, even as he cites these very same measures in his other studies, when the story they tell fits his preferred narrative.

Even more fundamentally, Laffer’s work falls far short of academic standards in that it completely excludes non-tax factors that impact state growth, including variables like natural resources and federal military spending (variables that Laffer himself has admitted to be important).  In the text of his reports, Laffer concedes that “the drivers of economic growth are many faceted.”  And yet when he constructs analyses designed to show the harm of state income taxes, somehow every non-tax “facet” happens to get left out.  Of course, more careful academic studies often conclude that income tax cuts have little, if any, impact on state economic growth.

Read ITEP’s report.

Front Page Photo of Arthur Laffer and Rick Perry via Texas Governor Creative Commons Attribution License 2.0

A new talking point from tax cut snake oil salesman Arthur Laffer is making the rounds. It’s been seen in the pages of The Wall Street Journal and cited by Indiana Governor Mike Pence, Iowa House Majority Whip Chris Hagenow, and Tim Barfield, Governor Jindal’s point man for income tax elimination in Louisiana.   

As the Journal put it: A new analysis by economist Art Laffer for the American Legislative Exchange Council finds that, from 2002 to 2012, 62% of the three million net new jobs in America were created in the nine states without an income tax, though these states account for only about 20% of the national population.

But as they’ve done with many of Laffer’s previous analyses, the Institute on Taxation and Economic Policy (ITEP) explains why this talking point is all rhetoric and no substance. Laffer’s research is like a house of cards, depending on data selected and placed precisely to help reach the conclusion he wanted, as ITEP details:

1) Most of the states without income taxes contributed just one percent or less to the nation’s job growth over the period Laffer examines.  Laffer’s claim has nothing to do with the “nine states without an income tax,” and everything to do with one of those states: Texas.

2) Texas’ economy differs from that of other states in many significant ways, and comparing its job growth to the rest of the country provides no insight into the economic impact of its tax policies.  This is particularly true of the time period Laffer examines, since it includes the housing crisis that Texas largely avoided for reasons unrelated to tax policy.

3) Looking beyond the specific Recession-dominated time period chosen by Laffer, Texas’ job growth has otherwise generally been in line with its rate of population growth.

The four-page report with graphs and footnotes is here.

A new report from the Center for Law and Social Policy (CLASP) explores the shortcomings and potential reforms of tax breaks that are intended to expand access to postsecondary education. “While delivering student aid through the tax system is a ‘second best’ strategy,” the report argues, “because Congress has chosen to deliver nearly half of non-loan student aid this way, it is essential to make it work better.”

It’s hard to disagree. The report notes that the confusing collection of tax breaks for postsecondary education cost $34.2 billion in 2012, almost as much as the $35.6 billion spent on Pell Grants. But, whereas Pell Grants target lower-income households that could not otherwise afford college, the tax breaks target relatively well-off families who will usually send their children to college with or without any tax incentive to do so.

As the report explains, “…the percentage of high school completers of a given year who enroll in two- or four-year colleges in the fall immediately after completing high school… was 52 percent for low-income families (bottom 20 percent), 67 percent for middle-income families (middle 60 percent) and 82 percent for high-income families (top 20 percent…).” In other words, higher-income families might send their children to college no matter what, while student aid could make the difference between going to college or not going to college for lower-income people. 

Improve and Expand the Best Education Tax Break, Ditch the Others

But not all tax breaks for postsecondary education are the same. Some are more targeted to those who really need them than others, although none are nearly as well-targeted to low-income households as Pell Grants, as illustrated in the bar graph below.

The graph shows that the most regressive of the tax breaks is the deduction for tuition and related fees, followed by the Lifetime Learning Credit (LLC) and the deduction for interest payments on student loans.

One proposal offered in the CLASP report would expand the American Opportunity Tax Credit (AOTC), represented by the blue bar above, which at least reaches low-income families not helped by the other tax breaks. The costs of the expansion would be offset by eliminating the deduction for tuition and fees, the LLC and the deduction for student loan interest.

In addition to better targeting tax breaks for postsecondary education, this reform would also reduce confusion among families as they try to figure out what aid is available for college. A 2012 report from the Government Accountability Office found that over a fourth of taxpayers eligible don’t take advantage of any tax benefits for education, and those who do use them often don’t use the most advantageous tax break for their situation.

Things Will Get Worse if Congress Doesn’t Act

The AOTC, the most progressive of the education tax breaks (or perhaps it’s better described as the least regressive of the education tax breaks) was signed into law by President Obama in 2009 and extended several times, but was never made permanent. The New Year’s Day deal enacted to avoid the so-called “fiscal cliff” extended the AOTC through 2017. If Congress fails to act before then, it will expire and its precursor, the less targeted Hope Credit, will come back into effect.

The biggest reason why the AOTC is better targeted to low-income families than the Hope Credit is the fact that the AOTC is partially refundable. The working families who pay payroll taxes and other types of taxes but earn too little to owe federal income taxes will benefit from an income tax credit only if it is refundable, like the Earned Income Tax Credit.

The proposals described in the CLASP report would expand the refundability of the AOTC, among several other reforms.

In 2011, Michigan lawmakers enacted a huge “tax swap” that cut taxes dramatically for businesses and raised them on individuals – especially lower-income and elderly families. Given that many of these changes went into effect at the beginning of 2012, and that many Michiganders are just now beginning to file their 2012 tax forms, the Associated Press provides a rundown of the ways in which the tax bills of typical Michiganders will look different from previous years. Our partner organization, the Institute on Taxation and Economic Policy (ITEP), estimated (PDF) that changes in the personal income tax would result in tax increases of $100 for a poor family, $300 for a middle income family and $7 from a rich one.

South Carolina is considering jumping onto a bandwagon heading the wrong way: supplementing the state’s transportation revenues by taking money away from schools and other state services. If enacted, the plan under consideration would raid $80 million from the state’s general fund every year and use it for roads instead. ITEP estimated, however, that South Carolina could raise more than $400 million for transportation every year just by updating its stagnant gasoline and diesel taxes to catch up to over two decades of inflation.

There’s some good news on the gas tax issue in Iowa. This week, an ad hoc transportation lobby will rally to support the “It’s Time for a Dime” campaign. These builders, farmers and contractors are urging lawmakers to raise the state’s gas tax to pay for needed infrastructure repairs. The Institute on Taxation and Economic Policy’s (ITEP) Building a Better Gas Tax concludes that Iowa hasn’t raised its gas tax in over two decades and has lost 43 percent of its value since the last increase.

In case you missed it, here’s a great read from the New York Times about how we shouldn’t be so quick to assume that millionaires are ready to pack up their bags and move at the slightest increase in their tax bills. In “The Myth of the Rich Who Flee From Taxes,” the Times cites ITEP’s work on the Maryland millionaire tax: “a study by the Institute on Taxation and Economic Policy, a nonprofit research group in Washington, found that nearly all the decline in millionaires was the result of a drop in incomes largely attributable to the stock market plunge and recession, and not to migration — “down and not out,” as the study put it.”

UPDATE: On April 3, 2013 Governor McDonnell signed the package described below with only minor changes.  Those changes are discussed at the end of this article.

If Governor Bob McDonnell signs the transportation bill just passed by his state’s legislature, as he is expected to do, Virginia will join Wyoming as the second Republican-led state in less than a month to raise taxes to pay for transportation.  Virginia Delegate David Albo, one of Grover Norquist’s no tax pledge signers, explained his vote in favor of the bill by saying, “I looked at every single way to raise money for roads, and it is literally impossible to do without raising revenue.”

But as encouraging as it is to see opposition to taxes waning in some circles, the tax bill passed by Virginia’s legislature is far from perfect. The bill will shift the responsibility for paying for roads away from the drivers who use them most, and its reliance on sales taxes will shift Virginia’s already regressive (PDF) tax system even more heavily toward lower-income families.  Here’s a quick rundown of the bill’s major components:

Gasoline tax:  The 17.5 cent per gallon gasoline tax will be cut, at least in the short-term, by replacing it with a tax based on 3.5 percent of the wholesale price of gasoline.  At the current wholesale price of $3.30 per gallon, the new tax should be about 11.5 cents—the lowest in the country outside of Alaska—but it will rise over time as the price of gas climbs. Virginia will become the 15th state to levy a gas tax that grows automatically over time, which allows the tax to better keep pace with the rising cost of construction.  But wholesale gas prices will have to rise to $5.00 per gallon before the tax returns the 17.5 cent level that Virginians have been paying for the last quarter century.  The bill amounts to a gas tax cut that lets frequent and long-distance drivers off the hook for paying for the transportation enhancements that benefit them the most.

Diesel tax:  Taxes on diesel fuel will increase both in the short- and long-term, as the 17.5 cent per gallon tax is replaced by a 6 percent tax based on the wholesale price of diesel.  Diesel prices are generally higher than gasoline prices, so at a wholesale price of $3.50, for example, the new tax should equal 21 cents per gallon and will grow over time as diesel prices rise. 

Remote sales tax:  The bill assumes that Congress will enact legislation empowering Virginia to require online retailers to collect the sales taxes owed by their customers (PDF), but it also puts in place a stopgap measure in case that doesn’t happen.  If Congress hasn’t acted by 2015, the wholesale gasoline tax rate will rise from 3.5 percent to 5.1 percent.  At current prices, this would bring the gas tax to16.8 cents per gallon.  Virginia should raise its wholesale gas tax rate to at least this level, regardless of the outcome of the federal debates over taxing online purchases.

Sales tax:  The largest single revenue-raiser in the bill is an increase in the state sales tax rate from 5 percent to 5.3 percent in most parts of the state. In the densely populated and congested areas of Northern Virginia and Hampton Roads, residents will see their sales tax rates rise to 6 percent, and will be forced to dedicate the additional revenue to transportation.

General fund raid:  Following the unfortunate precedent set by Michigan, Nebraska, Oklahoma, Utah, Wisconsin and the federal government, the bill also prioritizes roads over other areas of government by shifting $200 million away from the general fund every year.  The Roanoke Times previously blasted a similar proposal from Governor McDonnell by pointing out: “The highway program is starved for money because the gas tax rate has not changed since 1987. Are teachers and their students to blame? No, they are not. Did doctors and mental health workers cause the problem? Absolutely not. Did sheriff’s deputies and police officers? No.”

Motor vehicle sales tax:  The sales tax break on motor vehicle purchases will be reduced, but not eliminated.  The rate will rise from 3 percent to 4.3 percent – still short of the 5.3 percent general sales tax rate.

Hybrid tax:  Hybrid and alternative fuel vehicles will have to pay an additional $100 in registration taxes every year.  So, while drivers of gas-guzzling vehicles are receiving a break in the form of a lower gas tax, fuel-efficient hybrid owners will actually pay more.

Low-income offsets: The state and local sales taxes used to raise the bulk of new road funding under this plan will hit lower- and moderate income families hardest.  And yet, the bill lacks any kind of targeted tax relief for those families.  In-state analysts urged the creation of a sales tax rebate or the enhancement of the state’s Earned Income Tax Credit (EITC), but the final bill did not include either of these measures.

UPDATE: The version of this package that was signed into law is slightly different than the one originally passed by the legislature: the motor vehicle sales tax is raised to 4.15 percent instead of 4.3 percent, the hybrid tax is $64 per year instead of $100, miscellaneous local tax increases in northern Virginia were scaled back, and technical changes were made to local taxes in order to avoid a constitutional challenge.

In his budget address this week, Wisconsin Governor Scott Walker followed through on his promise to provide middle class tax cuts. His proposal reduces the bottom three income tax rates and costs $343 million over two years. The Institute on Taxation and Economic Policy’s (ITEP) analysis of this proposal found that middle-income taxpayers do get some benefit from Governor Walker’s proposal ($43 on average), but many low-income Wisconsinites do not. In fact, those in the bottom twenty percent of the income distribution, many of whom were already dealt a blow in Wisconsin’s last budget, see an average tax cut of a mere $2. The Governor’s proposed tax cuts come on the heels of reductions to the state’s earned income tax credit and property tax homestead credit, both of which effectively raised taxes on low-income working families. A better approach would be to reverse the damage recently inflicted on the poorest Wisconsinites, by increasing the earned income tax credit and homestead credit.  

In his speech last week, the Governor also assured Wisconsinites that the state could afford his tax cuts because of a current budget surplus. That “surplus,” however, is not the result of economic growth in the state and it is not permanent, either. Instead, the Wisconsin Budget Project (WBP) offers the reality check that the surplus was created as “a result of a number of painful cuts and lapses” that were implemented to avert previous shortfalls. This year, “coupled with a rebound in revenue from the low level anticipated a year ago, state lawmakers now find themselves in the very unusual position of carrying a solid balance into the next biennial budget.” WBP also cautions that the budget surplus “isn’t an ongoing revenue stream” and that Governor Walker is wrong to assume that the state can afford his permanent tax cuts.

The Governor may be keeping a narrow political promise with his latest budget, but he is neglecting the state’s poorest residents, jeopardizing its fiscal future and potentially setting up a tax swap that middle income families will pay for in the long run.

We’ve been closely following tax proposals in Nebraska and have been especially concerned that both of Governor Heineman’s plans were of the tax swap variety – reductions in progressive taxes paid for by increases in regressive sales taxes.

This scathing op-ed in the Lincoln Journal-Star points to the tax impact of the Governor’s proposals as one strike against his policy prescription: “Strike one came with release of a study by the OpenSky Policy Institute that said 80 percent of wage earners in the state would pay more in taxes if the bill were implemented. Taxes would go up by an average of $631 a year under LB405 for people earning less than $21,000 a year. Taking the biggest hit were taxpayers earning between $37,000 to $59,999, who would pay an additional $722 a year. Taxes would go down by $4,851 for people earning more than $91,000 a year, the institute said.” CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP), generated those numbers for OpenSky. The editors said the “second strike” against the governor’s plan was business groups’ opposition. (Evidently they want tax rates cut but don’t want to lose their own exemptions to pay for it.)

We learned this week that Nebraska tax policy debates don’t follow the rules of baseball, fortunately, and that two strikes were enough to send the Governor back to the dugout. Now he and legislators seem to be taking a more cautious approach and potentially forming a tax commission to better understand the state’s tax structure and get more expert input on modernizing it.

After a year in which tax issues dominated national policy debates, President Barack Obama has signaled that immigration issues will be at the forefront of his legislative agenda in 2013. With immigration reform evidently gaining momentum, some old tax-related bugaboos are sure to resurface as the debate gets underway: in particular, some have argued that undocumented immigrants pay no taxes to states or to the federal government.

A couple of years ago, the Institute on Taxation and Economic Policy (ITEP) worked with the Immigration Policy Center to assess the truth of this claim. Our finding? Far from being tax avoiders, undocumented families pay many of the same regressive taxes that hit all low-income families at the state and local level. We estimated that nationwide, undocumented families paid about $11 billion in state and local taxes in 2010.

The main reason for this is that the sales and excise taxes that fall most heavily on low-income taxpayers don’t depend on your citizenship status. Anytime you buy a cup of coffee, a pair of jeans or fill up your tank up with gas, you’re paying state and local sales and excise taxes. There are also property taxes, including for renters, who pay them indirectly because landlords frequently pass some of their property tax bills on to their tenants in the form of higher rents. And, many undocumented taxpayers have state income taxes withheld from their paychecks each year.

The bottom line? Even if there were 47 percent of the population paying no taxes (and there isn’t), undocumented immigrants would not be among them. In fact, to find people who don’t pay taxes, take a closer look at the wealthiest among us.

The only thing worse than giving Amazon an unfair advantage over local businesses is creating that advantage by facilitating tax evasion.

And that’s exactly what the Supreme Court did in the early 1990s when it decided that the Commerce Clause of the Constitution barred state and local governments from requiring out-of-state retailers to collect sales taxes from their customers. Essentially, the court decided that a business without a “physical presence” in the state could not be required to collect sales taxes from customers the way that a company with a physical store in your state is required to collect sales taxes on whatever you buy there.

If you live in a state with a sales tax and you buy a product online from a company that has no physical presence in your state, you do owe sales tax on that purchase — but the state cannot make the online retailer collect it from you. You are supposed to pay the tax directly to the state (technically this tax is called a “use tax”). But this rule is obviously unenforceable and as a result most online buyers never pay that tax.

The Solution: The Marketplace Fairness Act of 2013

The Supreme Court’s decision does allow for Congress to explicitly authorize states to require these retailers (retailers with no physical presence in the state) to collect sales taxes, and this is the goal of a bill introduced in the House and Senate last week, the Marketplace Fairness Act (MFA) of 2013.

The MFA would essentially undo the effect of the Supreme Court decision for those states that adopt a minimal set of common rules (which mostly involve harmonizing sales tax rules for taxing jurisdictions within the state’s borders). Twenty-four states have already joined what is called the Streamlined Sales and Use Tax Agreement (SSUTA), which includes a common set of sales tax rules, and would be authorized to require sales tax collection immediately under the MFA. Other states would be authorized if they meet the minimal standards set out in the bill.

Who Can Defend Tax Evasion?

The legislation has Republican and Democratic cosponsors in the House and Senate. This is not as surprising as it seems, given that the bill would not raise taxes but merely allow states to require retailers to collect the sales taxes that are already due.

It is difficult for opponents of the law to defend the current situation, which would basically be a defense of tax evasion. Opponents usually resort to claiming that it’s simply too difficult for online retailers to figure out what taxes would apply in the many different taxing jurisdictions where their customers are located.

But, as the Institute on Taxation and Economic Policy (ITEP) has explained, new technology, combined with the harmonized sales tax rules under SSUTA, would make it relatively easy for internet retailers to determine what sale taxes apply in a customer’s jurisdiction. We know this because major retailers that have a “physical presence” in numerous states, like Best Buy and Barnes and Noble, already collect sales taxes on sales made over the Internet, in addition to those made inside their physical stores. Similarly, Amazon collects sales tax on behalf of certain merchants located all around the country that sell via its website, though it mostly refuses to do so on items it sells directly.

Netflix’s CEO summed up the reality of the alleged tax complexity problem when he said, “We collect and provide to each of the states the correct sales tax. There are vendors that specialize in this… It’s not very hard.”

Increased Chances for Passage

The MFA has been introduced in various forms in previous Congresses, but there is reason to think that its chances of passage are greater than before. One reason is that sponsors have settled on a high exemption level — $1 million. While it seems ridiculous that a retailer could make $950,000 in sales in a year without being required to collect sales taxes from its online customers, this change will placate those concerned about the bill’s effect on “small businesses.”

Another reason the chances for passage are increasing is the changing nature of retail business. As we continue to charge ahead into the digital age, it’s becoming undeniable that a sales tax based only on retailers with a physical presence is simply not adequate for the 21st century.