Month: April 2013

Democratic Senator Max Baucus of Montana, chairman of the Senate Finance Committee which oversees tax legislation, announced today that he is retiring when his term closes at the end of 2014. Many people are asking how this will affect the tax reform that he hopes to shepherd through his committee. Last week, CTJ published an op-ed criticizing Baucus’s approach to tax reform.

Democratic and Republican tax-writers are holding bipartisan talks to craft a tax reform bill, even though there is no agreement between the parties on what the basic goals of such reform ought to be. One party recognizes a need for more revenue while another has pledged to not raise more revenue. This would be like holding bipartisan talks on immigration reform — if one party supported a path to citizenship while the other party pledged to round up all undocumented immigrants and deport them without exceptions…

A recent profile of Baucus’s efforts informs us that “Baucus declined say whether he views tax reform as a way to raise revenue, although he did not rule it out. Instead, he said, that divisive question should be left unanswered until committee members have a chance to study areas of reform where they are more likely to agree.”

Read the op-ed.

Read CTJ’s response to the Tax Foundation’s claim that the U.S. has a high corporate tax rate.

Senator Bernie Sanders of Vermont recently appeared on Real Time with Bill Maher and disputed the claim by the Tax Foundation that the U.S. has the highest corporate tax in the world. Senator Sanders is right, the Tax Foundation is wrong.

CTJ explains that the effective corporate tax rate (the share of profits that corporations pay in taxes) is what matters, and the effective tax rate for U.S. corporations is quite low. The Tax Foundation relies on flawed studies to argue otherwise. For example, one study cited by the Tax Foundation excludes corporations paying a negative tax rate — in other words, excludes corporate tax dodgers. Obviously this will result in a higher estimated effective tax rate.

Read CTJ’s full response.

A revealing new report from the Government Accountability Office (GAO) found that in 2011, the US government spent as much on corporate tax expenditures as it collected in corporate taxes. According to the report, 80 tax expenditures (exceptions, deductions, credits, preferential rates, etc.), cost the Treasury $181 billion in corporate tax revenue, which is the same as the total amount the Treasury collected in corporate taxes in 2011.

While the study looked at 80 corporate tax expenditures, over three-quarters of the revenue loses ($136 billion) were attributed to the four largest expenditures: accelerated depreciation, deferral of foreign income, the research credit, and the domestic production activities deduction. (CTJ has explained before that repealing these provisions would raise massive amounts of revenue.)

Making matters worse, 56 of the 80 tax expenditures that GAO looked at were used by individuals as well as corporations, resulting in an additional loss of $125 billion in revenue from the individual income tax. This happens because many corporate tax breaks can be used by businesses taxed under the individual income tax (the personal income tax), such as partnerships, S-corporations and other “pass-through” entities.

The report also revealed that more is spent on corporate tax expenditures in the budget areas of Commerce and Housing, International Affairs, and General Purpose Fiscal Assistance than is spent in direct federal outlays. For example, GAO found that the government spends only $45.7 billion in direct federal outlays for International Affairs, while spending $50.8 billion on corporate tax expenditures on this same budget function. Similarly, GAO concluded that one-third of the corporate only tax expenditures “appear to share a similar purpose with at least one federal spending program.”

These expenditures account for major U.S. corporations paying an average effective tax rate of half the 35 percent statutory rate, and often even zero in federal income taxes; elimination of these tax breaks should be the top priority for lawmakers looking to replace the sequester or reduce the deficit. In fact, a coalition of 515 groups recently called on Congress to repeal or reduce corporate tax expenditures as a way to raise revenue (as opposed to enacting corporate tax reform that is “revenue-neutral”). As Representative Lloyd Doggett (R-TX), who requested the GAO study, explained, “Corporate America did not contribute a nickel to the fiscal cliff deal that meant higher taxes for many Americans [and] it is reasonable to ask corporate America to contribute a little more toward closing the budget gap and to the cost of our national security.”

These corporate tax expenditures get nothing like the public scrutiny that direct spending is subject to. But tax expenditures for corporations are just like subsidies provided to corporations in the form of direct spending because Americans have to make up the costs somehow. That’s true whether it’s that bundle of earmark-like tax extenders that gets quietly renewed every year or two, or the rule allowing corporations to indefinitely defer taxes on foreign profits, or the massive breaks for depreciating equipment. All this is the spending of ordinary taxpayers’ dollars – and it merits the same critical attention.

In a stark departure from the last few years, one of the most debated state tax policy issues in 2013 has been the gasoline tax (PDF).  Until this February, it had been almost three years since any state’s lawmakers approved an increase or reform of their gasoline tax.  That changed when Wyoming Governor Matt Mead signed into law a 10 cent gas tax hike passed by his state’s legislature.  Since then, Virginia has reformed its gas tax to grow over time alongside gas prices, and Maryland has both increased and reformed its gas tax.  By the time states’ 2013 legislative sessions come to a close, the list of states having improved their gas taxes is likely to be even longer.

Massachusetts appears to be the most likely candidate for gas tax reform.  Both the House and Senate have passed bills immediately raising the state gas tax by 3 cents per gallon, and reforming the tax so that its flat per-gallon amount keeps pace with inflation in the future (see chart here).  In late 2011, the Institute on Taxation and Economic Policy (ITEP) found that Massachusetts is among the states where inflation has been most damaging to the state transportation budget—costing some $451 million in revenue per year relative to where the gas tax stood in 1991 when it was last raised.  Governor Deval Patrick has expressed frustration that legislators passed plans lacking more revenue for education—in sharp contrast to his own plan to increase the income tax—but he has also signaled that there may be room for compromise.

Vermont lawmakers are also giving very serious consideration to gas tax reform.  At the Governor’s urging, the House passed a bill increasing the portion of Vermont’s gas tax that already grows alongside gas prices.  The bill also reforms the flat-rate portion of Vermont’s gas tax to grow with inflation.  The Senate is now debating the idea, and early reports indicate that the package may be tweaked to rely slightly more on diesel taxes in order to reduce the size of the increase on gasoline.

Pennsylvania Governor Tom Corbett has also proposed raising and reforming his state’s gasoline tax.  While Pennsylvania’s tax is technically supposed to grow alongside gas prices, an obsolete tax cap limits the rate from rising when gas prices exceed $1.25 per gallon.  Corbett would like to remove that cap in order to improve the sustainability of the state’s revenues, and members of his administration have been traveling the state to explain how doing so would benefit Pennsylvanians.  While the legislature has yet to act on his plan, the fact that it has the backing of the state’s Chamber of Business and Industry is likely to help its chances.

In New Hampshire, the Governor has said she is open to raising the state gas tax and the House has passed a bill doing exactly that.  But there are indications that lawmakers in the state Senate might continue procrastinating on raising the tax, as the state has done for over two decades.

Nevada lawmakers are discussing a gas tax increase following the release of a report showing that the state’s outdated transportation system is costing drivers $1,500 per year.  ITEP analyzed a gas tax proposal receiving consideration in the Nevada House and found that even with the increase, the state’s gas tax rate (adjusted for inflation) would still remain low relative to its levels in years past.

Iowa lawmakers have been debating a gas tax increase for a number of years, and there may be enough support in the legislature to finally see one enacted into law.  The major stumbling block is that Governor Branstad will only agree to raise the gas tax if it’s part of a larger package that cuts revenue overall—particularly revenues from the property tax.  As we’ve explained in the past, such a move would effectively benefit the state’s roads at the expense of its schools.

Earlier this year, Washington State House lawmakers unveiled a plan raising the state’s gas tax by 10 cents per gallon and increasing vehicle registration fees.  Senate leaders are reportedly less excited about the idea of a gasoline tax hike, though there are indications they would consider such an increase if it were to pass the House.  While talk of a 10 cent increase has since quieted down, there are rumors that a smaller increase could be enacted.

Unfortunately, some states where the chances of gas tax reform once appeared promising have since begun to move away from the idea.  In Michigan, while the Governor and the state Chamber of Commerce have voiced strong support for generating additional revenue through the gas tax, neither the House nor the Senate appears likely to vote in favor of such a reform this year.  Meanwhile, the chances for a gas tax increase in Minnesota seem to have faded after the Governor came out against an increase and the House subsequently unveiled a tax plan that leaves the gas tax untouched.

Overall, 2013 has already been a significant year for state gas tax reform.  Both Maryland and Virginia have abandoned their unsustainable flat gas taxes in favor of a better gas tax that grows over time, just like construction costs inevitably will.  Hopefully, within the next few months, more states will have followed their lead.

Last week we brought you news that Louisiana Governor Bobby Jindal was abandoning his plan to eliminate the state personal and corporate income taxes and replace the revenue with an expanded sales tax. Instead, the Governor asked the legislature to “Send me a plan to get rid of our state income tax.” But now the legislature is denying the Governor’s request.

House Ways and Means Committee Chair Representative Robideaux has asked his colleagues to “defer” the bills they already had in the works to repeal the state income tax, and he’s said that he won’t allow hearings on any income tax repeal bill, closing the door on any attempt to eliminate the state’s income tax. Robideaux said, “I think it’s probably dead for the session, right now, there’s probably income tax fatigue.”  Importantly, he also asks, “Is there a constituent base out there demanding repeal of the income tax?” The answer is that two thirds of Louisianans actually opposed the Governor’s plan for this tax swap, which happens to be about the same percentage of Louisianans who stand to lose the most if any such tax plan gets implemented.

Jindal’s failure is a victory for tax justice advocates and a may serve as a lesson for lawmakers in other states entertaining similarly radical tax ideas.

The St. Louis Post Dispatch, for instance, editorialized, “Louisiana’s lawmakers realize what Missouri’s don’t: Income tax cuts are suicidal.” Missouri lawmakers are debating their own draconian tax plan that would roll back income taxes. The Post Dispatch continues, “What Louisiana has recognized is that the supposed benefits of cutting state income taxes are vastly overstated. The impact of service cuts is vastly understated. The effect is that rich people and corporations get richer. Everyone else gets poorer.”  

In another state, Georgia, income tax elimination has been debated for years, but this columnist with the Atlanta Journal Constitution is hopeful that the tax justice victory in Louisiana will lead to Georgia lawmakers reconsidering their own proposal, which eliminates the personal and corporate income tax for no good reason.

Tax plans similar to Jindal’s have hit road blocks in Nebraska and Ohio this year. Among the many reasons these plans fail, it seems, is that when people realize that they amount to unwarranted tax cuts for the rich that raise taxes for everyone else and probably bust the budget, too, common sense prevails and these ideas are defeated. 

We know that Louisianans dodged a bullet when the Governor’s plan fell apart.  And while it’s good news that a big reason was widespread concern over its fundamental unfairness, the fact is Bobby Jindal is not the only supply-sider committed to eliminating the income tax. So we savor the victory, yes, but also prepare for the next battle as similar plans are winding their ways through other state capitals.

The Indiana Senate recently passed a budget that speeds up the phase-out of the state’s inheritance tax (PDF), cuts taxes for the politically well-connected financial industry, and reduces the state’s flat personal income tax rate from 3.4 to 3.3 percent.  

The income tax cut in the plan, though a scaled-back version of a plan that Governor Pence originally proposed on the campaign trail, is similarly regressive. A new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), shows that while the Senate income tax cut is significantly smaller than the Governor’s, the two plans are equally lopsided—distributing the lion’s share of the benefits to the state’s most affluent residents.

ITEP finds that over half (55 percent) of the income tax cuts under either plan would go to the best-off 20 percent of Indiana residents. Out of this group, the top 1 percent would fare best of all—receiving an outsized 14 percent share of the benefits.  Their average tax cut would range from $694 under the Senate’s plan to $2,361 per tax filer under the Governor’s preferred approach.

Middle- and lower-income taxpayers would not fare nearly as well. The entire bottom 60 percent of households would be divvying up just 23 percent of the tax cuts enacted under either plan, while the poorest 20 percent of Indiana residents in particular would see a tiny 2 percent share.  Under the Senate plan, this group would see an average tax cut of just $6, while the $20 cut they’d see under the Governor’s proposal is only marginally more generous.

This lopsided tax cut comes on top of a state tax system that is already, according to ITEP’s ranking, the ninth most regressive in the country.

But even putting fairness considerations aside, a recent letter from House Speaker Brian Bosma referenced by ITEP points out that Indiana’s last round of tax cuts wrecked the state’s budget. Even with late news of a boost in revenue projections, Indiana lawmakers would be wise to avoid a repeat of that fiscal history for the sake of tax giveaways that serve no greater economic good.

For more detail, see ITEP’s new report: Indiana Senate’s Income Tax Cut: Just as Lopsided as the Governor’s.

On April 15, the majority of Americans file their income taxes, federal and state. As CTJ and ITEP demonstrate in their annual Who Pays Taxes in America, state tax systems are overwhelmingly regressive and the federal system just barely makes up for that. Today we highlight some great, creative efforts in a few states promoting the importance of state tax fairness.

Michigan: The Michigan League for Public Policy organized a social media campaign and video called “Pay it Forward Michigan.” The League explains that “its aim is to remind us about the good things our tax dollars create or protect — clean water, parks, good schools, safe streets, good roads, protection for children, great universities, the arts, bike paths, pristine beaches and more.”

North Carolina: Russell the Public Investment Hound was back and starring in a new film, The Great Tax Shift.  Also, check out this tax day Fair Fight Luchadora (Mexican wrestling) showdown that was staged across the street from the North Carolina General Assembly building. From the press advisory: “Tax Day is a reminder that wealthy and powerful special interests aren’t made to pay their fair share because too few lawmakers in Raleigh and in D.C. care about being champions of the People who elected them. This year, working people will get to settle the score!” Spoiler alert: the people’s champ won!

Ohio: Amy Hanauer of Policy Matters Ohio writes in the Cleveland Plain-Dealer about why income tax cuts won’t help the state’s economy, and highlights research from ITEP to make her case.  She also shares a personal experience with a fire in the basement of her home just days before Tax Day in 2001. “The firefighters arrived in minutes and put out the still-tiny fire … and I suddenly had a more vivid picture of what my un-mailed taxes would pay for. Twelve years later, I can thank countless teachers, crossing guards, snowplow drivers, police officers, water inspectors and others for helping keep my kids educated, protected, safe and happy in our community.”

Wisconsin: Ever wonder what Wisconsin income taxes help fund? Read all about it here and check out the gorgeous infographic showing how tax revenues are an economic investment.

Photo courtesy of FairFight North Carolina.

Citizens for Tax Justice has been publishing studies of what major U.S. corporations pay in federal income taxes for years. Not just the effective tax rate, but also what they actually pay in federal (and state) taxes on their profits each year. From time to time, however, we hear the critique that there is no way to figure out what corporations actually pay in federal income taxes, based on corporate 10-K annual reports that we use.
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Most recently, in the Washington Post of April 12, 2013, Allan Sloan levels this mistaken charge. According to Sloan:

 “There are more than a dozen tax metrics disclosed in a 10-K — but not the federal income tax incurred for a given year. . . . The stories you read about disgracefully low corporate taxes are based on the “current portion” of taxes due, disclosed in 10-K footnotes. Many people —­ including me, years ago, before I learned better — use that number as a proxy for the federal income tax that a company pays. But that’s a mistake. . . . The current-portion number . . . has no connection whatsoever with what a company actually forks over to the IRS for a given year.”

As we pointed out in our November 2011 study, Corporate Taxpayers & Corporate Tax Dodgers 2008-10, the “current” federal income taxes that corporations disclose in their annual reports, adjusted for stock-option tax benefits that are reported separately, are the best (and only) measure of what corporations really pay (or don’t pay) in federal income taxes.

To read our full explanation of why this is true, click here.

We wholeheartedly endorse the call, made by Sloan and others, for more transparent disclosure of tax information in corporate annual reports. But the disclosure we already get, if one knows how to understand it, is quite fine. The journalists, lawmakers, policy advocates and the general public who rely on our research can be confident in our findings about corporate taxes.