FACT: Online Sales Tax Does Not Violate Grover’s “No Tax Pledge”

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There’s been some confusion in recent days about whether the 258 members of Congress who have signed Grover Norquist’s “Taxpayer Protection Pledge” are allowed to vote in favor a bill that lets states collect sales taxes owed on purchases made over the Internet.  There is no reason for any confusion on this point.  Anybody with 15 seconds of free time and the ability to read the one sentence promise contained in the national pledge can see it’s completely irrelevant to the debate over online sales taxes:

I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Since federal income tax rates, deductions, and credits are altered exactly zero times in the online sales tax legislation set to be voted on by the Senate, Grover’s federal affairs manager is being less than truthful when she says that “there’s really not any way an elected official [who signed the pledge] can vote for this.”

There’s no doubt that Grover would be tickled pink to have gotten 258 of our elected officials to pledge opposition to improving states’ ability to limit sales tax evasion over the Internet.  For that matter, he would probably be even more excited to have gotten those officials to promise to vote against any increase in the estate tax, gasoline tax, or cigarette tax, as well as the creation of a carbon tax or a VAT.  But none of these things fall within the scope of the pledge, either, and it’s a shame that Grover and his spokespeople have shown no interest in being truthful on this point.

State-by-State Figures on Obama’s Proposal to Limit Tax Expenditures

April 29, 2013 11:45 PM | | Bookmark and Share

Read this report in PDF.

Updated Figures Show 3.6% of U.S. Taxpayers would Face a Tax Increase

President Obama has proposed to limit the tax savings for high-income taxpayers from itemized deductions and certain other deductions and exclusions to 28 cents for each dollar deducted or excluded. This proposal would raise more than half a trillion dollars in revenue over the up­coming decade.[1] Despite this large revenue gain, only 3.6 percent of Americans would receive a tax increase under the plan in 2014, and their average tax increase would equal just less than one percent of their income.

As illustrated in the table below, the deduction for state and local taxes would make up over a third of the total tax expenditures limited by the proposal. In combination, the deduction for state and local taxes and the deduction for charitable giving would make up just over half of the tax expenditures limited.

Previously published estimates from Citizens for Tax Justice of this proposal assumed that it would only affect taxpayers with adjusted gross income (AGI) above $250,000 for married couples and above $200,000 for singles.[2] Such an income threshold was included in the version of the proposal that appeared in the President’s jobs bill in 2011, the only actual legislative language for the proposal. However, documents recently released by the administration make clear that there is no longer such an income threshold. This change raises the share of U.S. taxpayers affected by the proposal by about one percentage point.

How the President’s “28 Percent Rule” Would Work

The President’s proposal is a way of limiting tax expenditures for the wealthy. The term “tax expenditures” refers to provisions that are considered to be government subsidies provided through the tax code. As such, these tax expenditures have the same effect as direct spending subsidies, because the Treasury ends up with less revenue and some individual or group receives money. But these tax subsidies are sometimes not recognized as spending programs because they are implemented through the tax code.

Under current law, there are three income tax brackets with rates higher than 28 percent (the 33, 35, and 39.6 percent brackets). People in these tax brackets (and people who would be in these tax brackets if not for their deductions and exclusions) could therefore lose some tax breaks under the proposal.[3]

Currently, a high-income person in the 39.6 percent income tax bracket saves almost 40 cents for each dollar of deductions or exclusions. An individual in the 35 percent income tax bracket saves 35 cents for each dollar of deductions or exclusions, and a person in the 33 percent bracket saves 33 cents. The lower tax rates are 28 percent or less. Many middle-income people are in the 15 percent tax bracket and therefore save only 15 cents for each dollar of deductions or exclusions.

This is an odd way to subsidize activities that Congress favors. If Congress provided such subsidies through direct spending, there would likely be a public outcry over the fact that rich people are subsidized at higher rates than low- and middle-income people. But because these subsidies are provided through the tax code, this fact has largely escaped the public’s attention.

President Obama initially presented his proposal to limit certain tax expenditures in his first budget plan in 2009, and included it in subsequent budget and deficit-reduction plans each year after that. The original proposal applied only to itemized deductions. The President later expanded the proposal to limit the value of certain “above-the-line” deductions (which can be claimed by taxpayers who do not itemize), such as the deduction for health insurance for the self-employed and the deduction for contributions to individual retirement accounts (IRA). [4]

Most recently, the proposal was also expanded to include certain tax exclusions, such as the exclusion for interest on state and local bonds and the exclusion for employer-provided health care. Exclusions provide the same sort of benefit as deductions, the only difference being that they are not counted as part of a taxpayer’s income in the first place (and therefore do not need to be deducted).

Exempting the Charitable Deduction from the 28% Limit
Would Reduce the Revenue Gain by 19 Percent

Any proposal to limit tax expenditures gives rise to a debate about which tax expenditures should be subject to such a limit and which should be exempt. For example, some charities have objected to the limit applying to the deduction for charitable giving, on the mistaken view that limiting this deduction would significantly reduce charitable giving.[5]

Excluding a tax expenditure from the proposed limit may reduce the revenue impact of the proposal slightly more than or less than the corresponding percentage in the table on the second page. For example, while the table on the second page illustrates that the charitable deduction makes up 15 percent of the tax breaks that would be limited under the President’s proposal, exempting the charitable deduction from the limit would actually reduce the revenue impact by 19 percent. While the table on the second page illustrates that the deduction for state and local taxes makes up 36 percent of the total tax breaks limited by the proposal, exempting this deduction from the limit would reduce the revenue impact of the proposal by 34 percent. The reason for these slight differences reflects interactions among various tax provisions.

Exempting the Charitable Deduction from the Proposed Limit would Largely Turn the
Remaining Proposal into a Limit on the Value of Deductions for State and Local Taxes

Some tax-exempt organizations, particularly universities and museums, have expressed fear that the limitation on the value of the charitable deduction will result in less charitable giving. Research suggests this fear is unfounded.[6] But another point that has received little attention is that amending the President’s proposal to “carve out” the charitable deduction would concentrate the effects of the proposal even more on the deduction for state and local taxes — which is the most justifiable of all the tax breaks the President proposes to limit.

The deduction for state and local taxes paid is sometimes seen as a subsidy for state and local governments because it effectively transfers the cost of some state and local taxes away from the residents who directly pay them and onto the federal government. For example, if a state imposes a higher income tax rate on residents who are in the 39.6 percent federal income tax bracket, that means that each dollar of additional state income taxes could reduce federal income taxes on these high-income residents by almost 40 cents. The state government may thus be more willing to enact the tax increase because its high-income residents will really only pay 60 percent of the tax increase, while the federal government will effectively pay the remaining 39.6 percent.

But viewed a different way, the deduction for state and local taxes is not a tax expenditure at all, but instead is a way to define the amount of income a taxpayer has available to pay federal income taxes. State and local taxes are an expense that reduces one’s ability to pay federal income taxes in a way that is generally out of the control of the taxpayer. A taxpayer in a high-tax state has less income to pay federal income taxes than a taxpayer with the same pre-tax income but residing in a low-tax state.

Another argument in favor of the itemized deduction for state and local taxes paid is that the public investments funded by state and local taxes produce benefits for the entire nation. This can be seen as a justification for the deduction for state and local taxes paid because it encourages state and local governments to raise the tax revenue to fund these public investments that the jurisdictions might otherwise not make. 

For example, state and local governments provide roads that, in addition to serving local residents, facilitate interstate commerce. State and local governments also provide education to those who may leave the jurisdiction and boost the skill level of the nation as a whole, boosting the productivity of the national economy. State and local governments may have an incentive to provide less of these public investments than is optimal for the nation because the benefits partly go to those outside the jurisdiction. The deduction for state and local taxes may counter this inclination of state and local governments to under-invest in these areas.

[1] Citizens for Tax Justice, “President Obama’s Tax Proposals in his Fiscal 2014 Budget Plan,” April 11, 2013. http://ctj.org/ctjreports/2013/04/president_obamas_tax_proposals_in_his_fiscal_2014_budget_plan.php   

[2] This report replaces the report with those previous estimates, titled “Who Loses Which Tax Breaks Under President Obama’s Proposed Limit on Tax Expenditures?” which was published on March 29, 2013.

[3] Many of the wealthy taxpayers whose deductions and exclusions are targeted by the proposal would also experience a change in their alternative minimum tax (AMT). The AMT is a backstop tax, meaning it forces well-off people who effectively reduce their taxable income with various deductions and exclusions to pay some minimal tax. If a tax change only increases the regular income tax and not the AMT, some taxpayers who currently pay AMT will not be affected at all. Very generally, one of the AMT changes in the proposal essentially ensures that the increase in a taxpayer’s regular income tax would also be applied to the AMT to ensure that the tax increase shows up on the final income tax bill. The other AMT change would limit the savings for each dollar of deductions or exclusions to 28 cents for those whose income is within the “phase-out range” for the exemption that prevents most people from being affected by the AMT. The impacts of these changes are included in the estimates shown here.

[4] The most recent description of the proposal provided by the Obama administration can be found in Department of the Treasury, “General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals,” April 2013, page 134. http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2014.pdf  

[5] For example, see Joseph Cordes, “Effects of Limiting Charitable Deductions on Nonprofit Finances,” presentation given February 28, 2013 at the Urban Institute. Cordes finds that the President’s proposal to limit the tax savings of each dollars of deductions and exclusions to just 28 cents would reduce charitable giving by individuals by between 2.2 percent and 4.1 percent, and the actual loss of total charitable giving would be smaller because some charitable contributions are made by foundations, corporations and other entities rather than individuals affected by this proposal.  http://www.urban.org/taxandcharities/upload/cordesv5.pdf  

[6] Id.

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New from ITEP: Indiana Tax Cut Deal Stacked in Favor of the Wealthy

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When Indiana Governor Mike Pence was campaigning last year, a centerpiece of his campaign was a regressive 10 percent cut in the state’s already low personal income tax rate  It now appears that the Governor has convinced legislative leaders to agree to a tax cut about half that size, though it won’t be fully implemented until the end of his current term as Governor in 2017.

A new analysis from the Institute on Taxation and Economic Policy (ITEP) shows that while this new agreement is more modest than Governor Pence’s original proposal, its impact on the distribution of Indiana taxes is similar. Namely, most of its benefits will flow to the state’s wealthiest households. ITEP analyzed the effect that this agreement would have had on Indiana residents’ tax bills if it were in effect for 2012—the year for which most households just finished filing their tax returns. When this plan takes full effect in 2017, the size of the tax cuts will be slightly larger, but their distribution will be roughly the same. Among other things, ITEP found that for 2012:

– Cutting Indiana’s personal income tax rate to 3.23 percent would reduce the tax bill of the richest 1 percent of Indiana households by an average of $1,181.

– That same cut in the state’s income tax rate would reduce the average tax bill of middle-income households by just $56. 

– Low income households fare worst of all. The recently announced agreement would amount to a tax cut for the poorest 20 percent of Indiana households of just $10 on average in 2012, and roughly one in three members of this group would receive no tax cut at all.

Read the report here.

Seriously, How Does OpenTable Get the Manufacturing Tax Break?

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When Congressional tax writers signaled their intention to enact a new tax break for domestic manufacturing income in 2004, lobbyists began a feeding frenzy to define both “domestic” and “manufacturing” as expansively as possible.  As a result, current beneficiaries of the tax break include mining and oil, coffee roasting (a special favor to Starbucks, which lobbied heavily for inclusion) and even Hollywood film production. The Walt Disney corporation has disclosed receiving $526 million in tax breaks from this provision over the past three years, presumably from its film production work, and even World Wrestling Entertainment has disclosed receiving tax breaks for its “domestic manufacturing” of wrestling-related films.

But CTJ has now discovered, after poring over corporate financial reports, an example that may trump them all.

Silicon Valley-based OpenTable, Inc. provides online restaurant reservations and reviews for restaurants in all fifty states and around the world, connecting customers and restaurants via the Internet and mobile apps.  While members of Congress may enjoy how OpenTable can “manufacture” a last minute seating at their favorite Beltway watering hole, it’s hard to believe the company engages in any activity that most Americans would think of as manufacturing.

And yet OpenTable discloses in its SEC filing that the domestic manufacturing tax break reduced the company’s effective corporate income tax rate substantially recently, saving it about $3 million over the last three years.  Even as a small portion of the company’s overall tax bill, that $3 million is emblematic of the scores of absurd loopholes carved out of the corporate tax code.

President Obama has repeatedly proposed scaling back the domestic manufacturing deduction to prevent big oil and gas companies from claiming it, but we have argued that the manufacturing tax break should be entirely repealed. At a minimum, Congress and the Obama Administration should take steps to ensure that the companies claiming this misguided giveaway are engaged in something that can at least plausibly be described as manufacturing.

Do the Math: Sequester Cuts to IRS Increase the Deficit

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Let’s start with the facts. Every dollar invested in the IRS’s enforcement, modernization and management system reduces the federal budget deficit by $200. Here’s another metric. Every dollar the IRS “spends for audits, liens and seizing property from tax cheats” garners ten dollars back.

Can you say “return on investment?”

Here’s another fact. The IRS’s budget has been reduced by 17 percent since 2002 (per capita and adjusted for inflation), and that includes this year’s sequester cuts. To adapt to the $594.5 million in budget cuts required by the sequester, the IRS has announced it will be forced to furlough each of its more than 89,000 employees for at least five days this year. While deficit reduction is supposed to be the goal of the sequester, cuts to the IRS will probably increase the deficit because it’s the IRS, after all, that collects tax revenue.  In fact, one expert estimated recently that furloughing 1,800 IRS “policeman” positions could cost the Treasury – that is, all of us – some $4.5 billion in lost revenue.

Denied adequate resources over the years, the IRS has not been able to keep up with its current workload, let alone expand its work. For example, a new report on IRS enforcement found that the agency actually audited 4.7 percent fewer returns in 2012 than it did in 2011. Considering that the IRS typically recovers about 14 percent of the $450 billion of unpaid taxes in a single year with its current resources, by increasing IRS resources we stand to reap billions in additional revenue from noncompliant taxpayers.

The Obama Administration proposed in its fiscal year 2014 budget to increase the IRS’s budget to $12.9 billion, about $1 billion more than its 2012 budget, with about $5.7 billion of that going to enforcement.  This increase doesn’t go nearly far enough considering the substantial decline in its budget during the past decade, but it’s a small investment we’d be smart to make.


State News Quick Hits: Ohio and Minnesota On Opposite Income Tax Tracks, and More

Tuesday, the Ohio House of Representatives approved their budget bill which included an across the board 7 percent reduction in income tax rates. Though the House tax plan is less costly than the Governor’s original proposal, Policy Matters Ohio, using Institute on Taxation and Economic Policy (ITEP) data, makes the point that this reduction will still benefit the wealthiest Ohioans. “For the top 1 percent, the tax plan would cut $2,717 in taxes on average. For the middle 20 percent, it would amount to a $51 cut on average. For the bottom 20 percent, it would result in $3 on average.”

This week the Minnesota Senate unveiled their tax plan which, (unlike Governor Dayton’s plan and the House plan wouldn’t create a new top income tax bracket,) would raise the current top rate from 7.85 to 9.4 percent. About 6 percent of taxpayers would see their taxes go up under the Senate plan. Both houses of the legislature and the Governor are committed to tax increases and doing the hard work necessary to raise taxes in a progressive way. Senator Majority Leader Tom Bakk recently said, “Some people are probably going to lose elections because we are going to raise some taxes, but sometimes leading is not a popularity contest.”

We’d be remiss if we didn’t draw your attention to this study (PDF) by Ernst and Young for the Council on State Taxation which cautions state lawmakers about expanding their sales tax bases to include services purchased by businesses. Louisiana Governor Bobby Jindal’s failed attempt at income tax elimination included broadening the sales tax base to include a variety of services, including business-to-business services. Ironically, Ernst and Young was hired by the Governor to consult about his plan. Toward the end of the tax debate there, the AP pointed out the disparity between the Governor’s consultants’ stance on taxing business-to-business services and what the Governor himself was proposing.

Rhode Island analysts are urging lawmakers to take a closer look at the $1.7 billion the state doles out in special tax breaks each year.  A new report from the Economic Progress Institute recommends rigorous evaluations of tax breaks to find out if they’re working. It then recommends attaching expiration dates to those breaks so that lawmakers are voting whether to renew them based on solid evidence about their effectiveness. These goals are also reflected in a bill (PDF) under consideration in the Rhode Island House — Representative Tanzi’s “Tax Expenditure Evaluation Act.”

We’ve criticized Virginia’s new transportation package for letting drivers off the hook when it comes to paying for the roads they use, and now the Commonwealth Institute has crunched some new numbers that make this very point: “Currently, nearly 70 percent of the state’s transportation revenue comes from driving-related sources … But under the new funding package, that share drops to around 60 percent … In the process the gas tax drops from the leading revenue source for transportation to third place; and sales tax moves into first.”

Oklahoma Governor & Leadership Reach Regressive Tax Deal

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Oklahoma Governor Mary Fallin and legislative leaders recently announced their intention to repeal the state’s top personal income tax bracket, bringing the top rate down from 5.25 to 5.0 percent in 2015. The rate could be dropped even more by 2016 if a revenue growth target is hit. The Institute on Taxation and Economic Policy (ITEP), analyzed the initial cut down to 5.0 percent when it was proposed earlier this year, and found that its benefits would be heavily tilted in favor of the state’s wealthiest taxpayers. This is despite the fact that Oklahoma’s high-income taxpayers already pay far less (PDF) of their income in state and local taxes than any other group.

ITEP found that almost two-thirds of the tax cuts distributed under this plan would flow to the wealthiest 20 percent of Oklahomans, while the vast majority of the state’s poorest residents would receive no tax cut at all.  Moreover, while a family in the middle of the income distribution could expect about $39 in tax cuts per year, Oklahoma’s most affluent taxpayers would receive tax cuts averaging $1,870 every year.

A new statement from the Oklahoma Policy Institute provides some important context for understanding the budgetary impact of this proposal (excerpt below).

Since 2008, Oklahoma public schools have endured the third largest budget cuts in the nation. Out of control tax breaks contributed to a collapse in revenue from oil and gas drilling. We still don’t know what will be the full cost of State Question 766 or what impact federal budget cuts will have on Oklahoma’s core services.

In this situation, it’s not the time for more tax cuts that would do little to help average Oklahomans, take $237 million from schools and other core services, and make Oklahoma more vulnerable to an energy bust or economic downturn. … Yet the proposal announced today would commit us to tax cuts two years from now, when we have no way of knowing what Oklahoma’s needs or economic situation will look like.




Online Sales Tax: Norquist vs. Laffer and Other Bedfellow Battles

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By now you’ve probably heard that the U.S. Senate is close to approving a bill that would allow the states to collect the sales taxes already owed by shoppers who make purchases over the Internet.  Currently, sales tax enforcement as it relates to online shopping is a messy patchwork, with retailers only collecting the tax when they have a store, warehouse, headquarters, or other “physical presence” located in the same state as the shopper.  In all other cases, shoppers are required to pay the tax directly to the state, but few do so in practice.  The result of this arrangement is both unfair (since the same item is taxed differently depending on the type of merchant selling it) and inefficient (since shoppers are given an incentive to shop online rather than locally).

Unsurprisingly, two of the strongest proponents of a federal solution to this problem have been traditional “brick and mortar” retailers that compete with online merchants and state lawmakers struggling to balance their states’ budgets even as sales tax revenues are eroded by online shopping.  But this issue has also turned anti-tax advocates, states without sales taxes, and even online retailers against one another in surprising ways, for reasons of ideology and self interest. 

Ideological Frenemies, Norquist and Laffer

Supply-side economist Arthur Laffer recently argued in the pages of the Wall Street Journal that states should be allowed to enforce their sales taxes on online shopping as a basic matter of fairness, so that “all retailers would be treated equally under state law.”  We completely agree with this point, but Laffer makes clear that his larger aim is to shore up state sales taxes in order to make cuts to his least favorite tax—the personal income tax. It’s no secret that Laffer wants states to shift toward a tax system that leans heavily on regressive sales taxes, but it’s harder to advocate for such a shift if the tax can be easily avoided by shopping online.

Grover Norquist of Americans for Tax Reform stands in direct opposition to Laffer on this issue.  Norquist has been “making the case on the House side of either seriously amending it or even stopping” federal efforts to allow for online sales tax enforcement.  But Norquist reveals his fundamental misunderstanding of the issue when he argues that out-of-state retailers should be free from having to collect sales taxes because “you should only be taxing people who can vote for you or against you.”  In reality, retailers aren’t being taxed at all—they’re simply being required to do their part in making sure their customers are paying the sales taxes already owed on their purchases.

Delaware vs. The Other No-Sales-Tax States

Four states levy no broad-based sales tax at either the state or local level: Delaware, Montana, New Hampshire, and Oregon and Senators from these last three states are generally not interested to helping other states enforce their sales tax laws. After all, why vote for a “new tax” if there’s no direct benefit to their own states’ coffers?

But Delaware’s senators see the issue differently, as both Sen. Carper and Sen. Coons voted in favor of the bill.  In fact, Carper introduced his own bill for collecting tax on e-purchases years ago, explaining it this way: “The Internet is undermining Delaware’s unique status” because “part of Delaware’s attraction to tourists is that people can come and shop until they drop and never have to pay a dime of sales tax.”

Amazon vs. Other Internet Retailers

It shouldn’t come as a surprise that online retailers as a group have opposed legal requirements that their customers pay sales taxes on their purchases since it means these e-retailers would have to charge and collect that tax.  Some companies, however, like Netflix, have long collected (PDF) those sales taxes, even without a legal requirement to do so. But most have clung to online sales tax evasion as a way to undercut traditional retailers by up to 10 percent (or more, depending on the sales tax rate levied where the buyer is located).

One recent exception is eBay, which appears to have seen the writing on the wall and has pivoted from opposing the bill to watering it down – and it’s deploying its 40 million users as an army of online lobbyists to that end.

But it is Amazon that stands apart from other online retailers in fully supporting a federal solution to the patchwork of state laws and the growing number of deals it has finally had to strike with states. The company’s reason is likely two-fold.

First, Amazon has a “physical presence” in a growing number of states and plans to continue its expansion in order to make next-day-delivery a reality for more of its customers. As a result, Amazon will be legally required to remit sales taxes in more states in the future and will find itself at a competitive disadvantage if other online retailers remain free from sales tax collection requirements.  Second, Amazon processes a large number of sales for other merchants through its website and collects sales taxes on behalf of some of them – for a fee.  Amazon’s sales tax collection services could become much more lucrative in the future if more of the merchants it partners with are required to collect sales taxes.


Executive-Pay Tax Break Saved Fortune 500 Corporations $27 Billion Over the Past Three Years

April 23, 2013 11:45 PM | | Bookmark and Share

Read this fact sheet in PDF.

Apple & Facebook Biggest Beneficiaries of Stock Option Loophole

Earlier this year, Citizens for Tax Justice reported that Facebook Inc. had used a single tax break, for executive stock options, to avoid paying even a dime of federal and state income taxes in 2012. Since then, CTJ has investigated the extent to which other large companies are using the same tax break. This short report presents data for 280 Fortune 500 corporations that, like Facebook, disclose a portion of the tax benefits they receive from this tax break.

  • These 280 corporations reduced their federal and state corporate income taxes by a total of $27.3 billion over the last three years, by using the so-called “excess stock option” tax break.
  • In 2012 alone, the tax break cut Fortune 500 income taxes by $11.2 billion.
  • Just 25 companies received more than half of the total excess stock option tax benefits accruing to Fortune 500 corporations over the past three years.
  • Apple alone received 12 percent of the total excess stock option tax benefits during this period, enjoying $3.2 billion in stock option tax breaks during the past three years. JP Morgan, Goldman Sachs and ExxonMobil collectively enjoyed 10 percent of the total.
  • In 2012, Facebook wiped out its entire U.S. income tax liability by using excess stock option tax breaks.
  • Over the past three years, Apple slashed its federal and state income taxes by 20 percent using this single tax break.

How It Works: Companies Deduct Executive Compensation Costs They Never Actually Paid

Most big corporations give their executives (and sometimes other employees) options to buy the company’s stock at a favorable price in the future. When those options are exercised, corporations can take a tax deduction for the difference between what the employees pay for the stock and what it’s worth (while employees report this difference as taxable wages).

Before 2006, companies could deduct the “cost” of the stock options on their tax returns, reducing their taxable profits as reported to the IRS, but didn’t have to reduce the profits they reported to their shareholders in the same way, creating a big gap between “book” and “tax” income. Some observers, including CTJ, argued that the most sensible way to resolve this would be to deny companies any tax deduction for an alleged “cost” that doesn’t require an actual cash outlay, and to require the same treatment for shareholder reporting purposes.

But instead, rules in place since 2006 maintained the tax write-off, but now require companies to lower their “book” profits somewhat to take account of options. But the book write-offs are still usually considerably less than what the companies take as tax deductions. That’s because the oddly-designed rules require the value of the stock options for book purposes to be calculated — or guessed at — when the options are issued, while the tax deductions reflect the actual value when the options are exercised. Because companies typically low-ball the estimated values, they usually end up with much bigger tax write-offs than the amounts they deduct in computing the profits they report to shareholders.

Reforming the Excess Stock Option Tax Break

Despite the changes that took effect in 2006, the stock option tax break is still clearly reducing the effectiveness of the corporate income tax. A November 2011 CTJ report assessing the taxes paid by the Fortune 500 corporations that were consistently profitable from 2008 through 2010 identified the excess stock option tax break as a major factor explaining the low effective tax rates paid by many of the biggest Fortune 500 companies.1

In recent years, some members of Congress have taken aim at this tax break. In February of 2013, Senator Carl Levin (D-MI) introduced the “Cut Unjustified Loopholes Act,” which includes a provision requiring companies to treat stock options the same for both book and tax purposes, as well as making stock option compensation subject to the $1 million cap on corporate tax deductions for top executives’ pay.

The PDF version of this report includes the full list of 280 corporations and the size of their reported federal and state tax break for excess stock options in the three year period between 2010 and 2012.

1 Citizens for Tax Justice, Corporate Taxpayers & Corporate Tax Dodgers, 2008-2010, November 3, 2011, page 10. http://ctj.org/corporatetaxdodgers/

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State News Quick Hits: Kansas Named Worst in the Nation for Taxes, and More

This week Missouri is offering a sales tax holiday on energy efficient appliances. Not only are these holidays costly for state budgets, they are poorly targeted. That is, it’s generally wealthier folks who have the cash flow flexibility to time their purchases to take advantage of these holidays, when it’s poorer residents who feel the brunt of sales taxes in the first place. To learn more about why these holidays aren’t worth celebrating, check out The Institute on Taxation and Economic Policy’s (ITEP) policy brief here (PDF).

Here’s a great investigative piece from the Columbus Post Dispatch about the nearly $8 billion in tax code entitlements (aka tax expenditures) Ohio currently offers. The state needs to closely study these tax expenditures and determine if they are actually producing the economic benefits promised. Before debating extreme income tax rate reductions, Ohio lawmakers should also take a look at this ITEP primer on what a thoughtful, productive discussion of state tax expenditures looks like.

In this Kansas City Star article, ITEP’s Executive Director, Matt Gardner, talks about the fate of many radical tax plans this year in the states. “The speed with which these plans have fallen apart is as remarkable a trend as the speed with which they emerged,” he says. Kansas and its budget crisis have become a cautionary tale for other states considering tax cuts, but even the latest plans passed by the Kansas House and Senate are radical and could eventually lead to the complete elimination of the personal income tax.

Criticism of the tax cuts enacted in Kansas last year continues to mount.  We already wrote about Indiana House Speaker Brian Bosma’s caution that his state might become another Kansas, but now a number of media outlets have picked up on the fact that both the Center on Budget and Policy Priorities and the Tax Foundation called that Kansas tax cuts the “worst” (ouch!) state tax changes enacted in 2012.

Watch out, North Carolinians! It appears that Americans for Prosperity (AFP) is coming to town to the tune of $500,000 to pay for town hall meetings, “grassroots” advocacy and advertising all to support the dismantling of the state’s tax structure. Let’s hope the facts can defeat AFP’s cash.