May 31, 2013 12:57 PM | Permalink |
This presentation was given to the United Church of Christ, Office of Justice & Witness, and the Presbyterian Church (USA), Office of Public Witness.
First it was the ill-advised TV campaign to lure new business to his state by bragging about tax cuts, and now New York Governor Andrew Cuomo has launched his “Tax-Free NY” initiative which would turn many of the state’s public universities, private universities, and community colleges into tax-free havens. Providing a full complement of tax breaks, the Governor’s plan would exempt qualified businesses from paying any sales, property, and corporate taxes for a decade, and would exempt employees of those businesses from the personal income tax.
These no-tax zones include all state university campuses outside of New York City, some private colleges, up to 200,000 square feet in certain campus-adjacent zones, and 20 undisclosed “strategically located” state-owned properties. The Governor’s plan vaguely defines eligible businesses as companies with a relationship to the academic mission of the university and then includes: new businesses, out-of-state businesses that relocate to New York, and existing businesses that expand their New York operations.
Touting the plan as a way to revitalize the upstate economy, the Governor claims the free pass on taxes would “attract start-ups, venture capital, new business, and investments from across the world.” However, economists from across the political spectrum have their doubts (and so do we).
Professor John Yinger of Syracuse University said in response to Cuomo’s plan that: “In New York we have a dizzying array of tax breaks with no evidence they help, and now here’s a new version. You’d do much better improving our schools and infrastructure than giving tax breaks to businesses who would be in the state anyway.”
Others, such as Danny Donohue of the Civil Service Employees Association, argue the plan is another tax giveaway to businesses at the expense of local communities and the middle-class. Donohue says: “The governor doesn’t get the fact that more corporate welfare is no answer to New York’s economic challenges… it’s outrageous that the governor and legislative leaders think we can give away even more to businesses without any guarantee of benefit to taxpayers.”
In addition to creating little if any economic growth, the plan is likely to worsen the state’s already precarious fiscal situation. With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible.
To move the plan forward, the Governor will need legislative approval before the state’s legislative session ends on June 20th. Quick – someone get this policy brief (PDF) up to Albany!
Wednesday, June 5, 2013 Update: The Wisconsin legislature’s Joint Finance Committee approved a budget early this morning that included an income tax cut that reduced income tax rates from 4.6%, 6.15%, 6.5%, 6.75%, and 7.75% to 4.4%, 5.84%, 6.27%, and 7.65%. The legislation also reduced the number of tax brackets from five to four. This plan stops short of Rep. Kooyenga’s plan plan described below, but is more costly than Governor Walker’s $340 million initial proposal. According to the Legislative Fiscal Bureau (PDF) these permanent tax cuts cost $632.5 million over two years and the distribution is again skewed to benefit the wealthiest Wisconsinites. Current reporting suggests this plan will pass the full legislature.
This week Wisconsin Representative Dale Kooyenga, an accountant who’s taking a lead roleon tax policy, released his plan to reform the state’s tax code. In a proposal that would more than double the tax cuts proposed by Gov. Scott Walker, Kooyenga seeks to reduce personal income tax rates and cut the number of income tax brackets from five to three. The latter would, as one report put it, put middle income earners like a secretary at a law firm in the same tax bracket as the high-earning lawyers. Kooyenga touts simplifying the forms taxpayers file and eliminating nearly 20 tax credits.
Earlier this year, Governor Scott Walker proposed his own income tax cut ,which was slammed for mostly benefiting the wealthy (in large part because an Institute on Taxation and Economic Policy (ITEP) analysis showed that it was tilted that way). The Governor’s proposed income tax rate cuts were expected to cost the state $343 million over two years; Representative Kooyenga’s would cost $760 million in the upcoming budget and $914 million in the 2015 budget.
And it’s not just costly, it’s regressive. As the lawmaker himself concedes, “[i]t is nearly impossible to create a tax reform or tax cut that is not going to disproportionately lower taxes for upper-middle-class and rich taxpayers,” and a new ITEP analysis of Kooyenga’s plan shows his is no different. ITEP ran the numbers for the Wisconsin Budget Project (WBP) the impact of the Kooyenga income tax plan was shown to be even more skewed to the wealthy that Governor Walker’s, as WBP writes:
Here is how the tax cut would be distributed among income groups:
– The top 5% of earners alone, a group with an average income of $392,000, would receive more than 1/3 of the benefit of the income tax cuts.
– The top 20% of earners, a group with an average income of $183,000, would receive more than 2/3 of the benefit.
– The bottom 60% of earners – those making $60,000 a year or less – would only receive 11% of the benefit of the income tax cuts.
– The 20% of the Wisconsinites with the lowest incomes would receive just two cents out of every $100 in individual income tax cuts under this proposal.
WBP says that the Kooyenga tax plan’s expansion of Governor Walker’s proposal is a “bad idea made worse,” and they are right.
The Ohio Senate is considering a fiscal 2014-15 budget that includes a $1.4 billion business tax cut. The cut – which would exempt a full $375,000 in business income from the income tax – is similar to a widely-criticized plan enacted by Kansas last year. As Policy Matters Ohio explains, however, none of the tax cuts under consideration (including the Governor’s) will help Ohio’s economy: “They are bad for low- and moderate-income Ohioans, and slash revenue Ohio needs to support our economic success and improve our quality of life.”
On May 23, the Massachusetts Senate approved a fiscal 2014 budget that would generate $430 million in new tax revenues, in part by extending the sales and use tax to some computer-related services, raising the gas tax by 3 cents, and increasing tobacco excise taxes. Differences between the Senate budget and a broadly similar plan passed by the State House will now be worked out by a six-member conference committee.
If he ever decides to leave Hollywood, Nicolas Cage might have a future ahead of him in lobbying. After Cage visited Nevada, the state Senate approved a $20 million tax break for filmmakers. Unfortunately for Nevadans, however, film tax credits have been shown time and time again to be ineffective at spurring economic growth.
The Virginia Commonwealth Institute discusses the problems with lawmakers’ recent decision to cut the state’s gas tax by roughly 6 cents per gallon. As the Institute explains: “gas taxes are not to blame for high and volatile gas prices… [and] Virginia’s gas tax, which has been a steady 17.5 cents per gallon since 1987, was failing to produce enough resources to fuel adequate investment in our infrastructure.” The same is generally true nationwide.
At 2:00am on Monday morning, Minnesota House members passed groundbreaking tax legislation that raises $2.1 billion over two years. The Senate then approved the legislation and Governor Dayton, long a champion of progressive tax reform, signed it yesterday. The bill increases income taxes on the top two percent of earners, raises the cigarette tax to $1.60, closes some corporate tax loopholes, and extends the sales tax to a handful of services primarily used by businesses, including warehouse storage and telecommunications equipment. Wayne Cox, with Minnesota Citizens for Tax Justice expects much from the legislation: “Shifting taxes from the middle class to those with highest incomes will help the economy.”
A helpful summary of the compromise legislation is available here from the Minnesota Budget Project. Revenues from the cigarette tax will be used to help pay for a new Vikings stadium. This is round two for stadium funding because gaming revenues that were supposed to pay the state’s share of the stadium came in below revenue projections (not surprisingly, PDF). Of course, cigarette taxes (PDF) aren’t very stable revenue sources either, and are likely to decline overtime.
Nan Madden, Director of the Minnesota Budget Project, said of the legislature’s work, “In past years, the response to budget shortfalls has been deep cuts to services and use of timing shifts to kick the problem down the road. This year’s tax bill and budget take a better approach, raising the revenues needed to balance the budget and invest in the future; and reforming our tax system so that we share the responsibility for funding public services more equally.”
So, kudos to Minnesota’s elected leaders for making some difficult decisions and finding a way to balance the state’s books and still provide for quality services into the future. It’s a model other states can learn from.
Governor Terry Branstad has made “reforming” (cutting) the property taxes paid by Iowa businesses a top priority since taking office. We described the latest attempts to reduce commercial property taxes here. But Senator Joe Bolkcom (chair of the Ways and Means Committee) has repeatedly demanded that any change to corporate property taxes must be accompanied by an increase in the state’s Earned Income Tax Credit (EITC).
If signed into law by the Governor, here is what that legislation would do: assess commercial and Industrial property at 90 percent of its value (down from 100 percent); introduce a new assessment cap of 3 percent for residential and agricultural property; introduce a new nonrefundable income tax credit if the Taxpayers Trust Fund exceeds $30 million; and double the EITC from 7 to 14 percent.
The Governor would have prefered that commercial and industrial property be assessed lower, at 80 percent of its value, but said this of the compromise: “I’m hopeful maybe we can do more in future years. But I think this is the art of what was possible with this General Assembly. I’m pleased with the compromise bill that we’ve got tentative agreement on.”
Peter Fisher of the Iowa Fiscal Partnership pointed out, however, “It’s Christmas for Walmart and McDonald’s, which will happily receive property-tax breaks that they don’t need, while their low-wage employees receive a better Earned Income Tax Credit. This Christmas tree will grow bigger with each passing year, leaving less room in local budgets to respond to needs.”
Of course we applaud any increase in the EITC, and doubling that credit is a meaningful tax cut for low and middle income workers. But as the Iowa Fiscal Partnership reminds us, “If there is any question as to who benefits, Iowans should note that the EITC boost will be $35 million when fully phased in, compared to about 10 times that for property owners.” The pricetag for these property tax changes is likely to increase in future years, and will become a constant strain on local government budgets.
Kentucky’s Blue Ribbon Commission on Tax Reform released its very useful findings in December, but regrettably little action has resulted from the comprehensive document. Many of the Commission’s recommendations were bold and forward-looking, like the proposal to expand the sales tax base to services (PDF) and simultaneously institute an earned income tax credit (PDF). But Commissioners themselves aren’t confident that anything will come from their hard work developing those recommendations. Commissioner Sheila Schuster recently said, “I haven’t heard anything since the end of the (legislative) session that would suggest that it’s got legs… So it’s pretty discouraging.”
Legislators in many states are putting the cart before the horse when it comes to budgeting for the next fiscal year. This article (subscription required) from the Wall Street Journal tells of states like Maryland and Virginia who have already passed spending bills that assume new revenues from online Internet sales tax collections when Congress passes the Main Street Fairness Act. Of course, the Act has actually only passed the Senate, and by all accounts the bill faces an unclear future in the House.
This November, Colorado voters will vote on raising their state’s income tax to better fund education. The details of that increase have yet to be worked out, but former state representative Don Marostica has taken to the pages of the Denver Post to argue in favor of his preferred alternative: ditching the state’s flat income tax in favor of a more progressive, graduated income tax used by most states. Marostica explains that “businesses and middle-class Coloradans alike would be better off with a two-step income tax to provide the resources for top teachers and great facilities. The No. 1 priority for businesses seeking a new location is a well-educated, fully prepared workforce. … Yet we’re under-investing in education, in part because we’ve prioritized low taxes ahead of everything else.”
Bad tax ideas are in the news in the District of Columbia. Mayor Vincent Gray recently reiterated that he wants to cut taxes for DC investors who do their investing outside of the District. But it’s Councilwoman Anita Bonds’ idea that recently made headlines. Bonds wants to give a super-sized tax break to most people over 80 years old: a full exemption from property taxes, provided their income is below $150,000 per year and they’ve lived in the District for 25 years or more. But property tax relief should be distributed based on income, not age. Rather than cutting taxes for the well-off elderly, DC lawmakers would be wise to follow the advice of the DC Fiscal Policy Institute and expand the city’s low-income property tax credit for DC residents of all ages.
Earlier this spring, Alabama lawmakers approved a bill establishing a state income tax credit (up to $3,500) to reimburse parents for the cost of sending children to private school or transferring them to a better performing public school. The legislation also created a tax credit for corporations and individuals who contribute to scholarship funds. These kinds of credits are often referred to as back-door or neo-vouchers as they divert taxpayer money away from public schools, indirectly via the tax code. Due in part to concern over the unknown cost of the credits and seemingly in part due to public displeasure with the new program, Alabama Governor Robert Bentley (who had been a supporter of the bill) attempted to delay the implementation of the school tax credits last week. He told lawmakers they “had better be listening to the people” who he says are not supportive of using public tax dollars to fund private school education. However, the House decided this week to ignore the Governor’s request; they rejected his suggested amendment and took a vote to show they could override any veto attempts.
What Rand Paul Fails to Understand about Apple’s Tax Dodging
During the May 21 Senate hearing on Apple’s tax practices, Senator Rand Paul (R-KY) said lawmakers should apologize for “bullying” the company and holding a “show trial,” and says he’s “offended by the tone” of the hearing. Senator Paul, who took the opportunity to call for a “repatriation holiday,” claims that the debate over tax reform should not include a discussion of the tax avoidance practices of a corporation like Apple.
As CTJ has explained, the hearing uncovered how Apple is shifting profits out of the U.S. and out of other countries and into Irish subsidiaries that are not taxed by any government. Senator Paul’s response is a non-sequitur: What Apple is doing is legal, therefore Congress should not debate whether or not its practices ought to be legal.
Tax Reform Will Go Nowhere Unless We Know How Specific Companies Like Apple Avoid Taxes
Senators Carl Levin (D-MI) and John McCain (R-AZ), the chairman and ranking Republican of the subcommittee that investigated Apple, understand three basic facts that escape Senator Paul. First, our corporate tax system is failing to do its job of taxing corporate profits. Second, virtually no one in America can understand this until someone explains how individual corporations are dodging their taxes. Third, the corporations themselves will, quite naturally, lobby Congress to defend and even expand the loopholes that facilitate their tax dodging.
Once you understand these three facts, it becomes clear that the only path to tax reform is to explain to the public how certain big, well-known corporations are avoiding taxes.
An abstract debate about corporate tax dodging — a debate that doesn’t mention any specific corporations — is not likely to result in reform. Just look at President Obama’s approach. He first made his proposals to tighten the international corporate tax rules in May of 2009. The proposals made barely a ripple in the media at that time, and no one in Congress even bothered to put them in legislation.
On the other hand, the New York Times expose on GE’s tax dodging in March of 2011 was discussed by everyone from the halls of Congress to the Daily Show. CTJ’s big study of Fortune 500 companies’ taxes — including 30 companies identified as paying nothing over three years — was published in November of that year and is still cited today in debates over our broken tax code.
Senator Levin has legislation to crack down on corporate offshore tax avoidance — which includes several of the President’s proposals. Levin’s bill includes an Obama proposal — reform of the “check-the-box” rules — that Obama himself backed away from under pressure from corporations. (CTJ’s explanation of Levin’s hearing and report on Apple explains how the company took advantage of the current “check-the-box” rules.)
Senator Paul’s Solution: Facilitate More Tax Avoidance with a “Repatriation Holiday”
As CTJ explained last week, Senator Paul proposes a tax amnesty for offshore corporate profits, which proponents like to call a “repatriation holiday.” We explained that Congress tried this in 2004, and the result was simply to enrich shareholders and executives while encouraging corporations to shift even more profits offshore in the hope that Congress will enact more “repatriation holidays” in the future.
Senator Paul’s slight of hand during the hearing was impressive. He argued that instead of targeting Apple, the discussion should be about how to fix the tax system (assuming away the possibility that an explanation of Apple’s practices would facilitate that discussion), and then moved on to argue that the necessary fix is a repatriation holiday. In other words, leave Apple alone because its tax avoidance practices are legal, and instead let’s legalize even more tax avoidance.
This has generally been the position of Apple, which has lobbied for a repatriation holiday. Apple CEO Time Cook argued at the hearing that Apple would like a more permanent change to the tax code, one that would slash taxes (if not eliminate taxes) on offshore profits that are repatriated.
The truth is that corporations like Apple lobby for as many tax loopholes and breaks as they can get. We may see them as morally culpable. Or we may think it’s natural for people to ask for the very best deal they can get — just as children naturally argue for the latest bedtime possible and the largest quantity of ice cream possible. Either way, Senator Paul’s claim that America’s interests can be served by simply giving corporations what they ask for is absurd.
On May 21, top executives of Apple Inc attempted but failed to explain to a Senate committee why Congress should maintain or expand the tax loopholes that allow them to avoid U.S. taxes on billions of dollars in profits.
The Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations (PSI) issued a report on Apple’s tax practices and held a hearing to ask Apple executives and tax experts about the findings. (PSI has the power to subpoena companies to provide information that would otherwise not become public.)
A CTJ report published the day before the hearing explains how Apple’s public documents indicate that its offshore profits are in tax havens. PSI’s report and hearing have uncovered how Apple pulls this off.
Thanks to PSI’s efforts, we now know that Apple shifts U.S. profits to one of its non-taxable Irish subsidiaries through a “cost-sharing agreement” that gives the subsidiary the right to 60 percent of profits from its intellectual property, and that Apple also shifts profits from other foreign countries where it sells its product to its non-taxable Irish subsidiaries.
The Irish subsidiaries have few if any employees and don’t do much of anything, but Apple Inc has a huge incentive to claim that a lot of its profits are generated by these subsidiaries because Ireland is not taxing them. So, Apple uses the “cost-sharing agreement” to convert U.S. profits to non-taxable Irish profits for tax purposes, and likewise manipulates transfer-pricing rules and other tax provisions to turn profits from other countries into untaxed Irish profits.
Avoiding U.S. Corporate Taxes Through “Cost-Sharing Agreement”
Under the cost-sharing agreement, an Irish subsidiary that had no employees until 2012 (it now has about 250) has the rights to the majority of profits from Apple’s intellectual property, even though virtually all of that intellectual property is developed by Apple Inc (the parent company) in the United States. Since almost all of the actual manufacturing of Apple’s physical products is outsourced to other companies, this intellectual property is the real source of Apple’s profits.
It’s absurd to think of the so-called “cost-sharing” as an “agreement,” because the parties are Apple Inc and a subsidiary that it owns and controls — in other words, an agreement between Apple and itself. As the tax experts testifying at the hearing explained, there is no way that Apple would enter into such an “agreement” with an entity that it did not completely control.
Because the Irish subsidiary is controlled and managed by Apple Inc in the United States, Irish tax law treats it as a U.S. corporation not subject to Irish tax. But because the Irish subsidiary is technically incorporated in Ireland, the U.S. treats it as an Irish corporation, on which U.S. taxes are indefinitely “deferred.” Thus, neither nation taxes the profits that Apple has shifted to its Irish subsidiary.
So despite the fact that Apple does virtually all of the work responsible for its global profits in the U.S., it gets to tell the IRS that the majority of its profits are in Ireland, where they are not subject to Irish tax, while indefinitely “deferring” U.S. taxes on those profits.
Avoiding Taxes Outside the Americas by Manipulating Transfer Pricing Rules
The end of PSI’s report informs us that in 2011, Apple’s tax-planning “resulted in 84% of Apple’s non-U.S. operating income being booked in ASI,” which is one of Apple’s Irish subsidiaries. That’s because Apple also shifts potentially taxable profits from other countries into Ireland.
All the Apple products sold outside North and South America are sold by Apple subsidiaries that purchase them, apparently at inflated prices, from the Irish subsidiaries. This aggressive use of “transfer pricing” (on paper) means that Apple’s subsidiaries in these other countries reported only tiny taxable profits to their governments. That explains why Apple reports foreign effective tax rates in the single digits.
Of course, transactions between different Apple subsidiaries are all really transfers within a single company. Transfer pricing rules are supposed to make Apple and other multinational corporations conduct these paper transfers as if they were transactions between unrelated companies. But the tax authorities clearly find these complicated rules impossible to enforce.
The Bottom Line
So despite the fact that almost all of Apple’s profits ought to be taxable in the United States, most of its profits are not taxable anywhere.
Ending the rule that allows a U.S. corporation like Apple to indefinitely defer U.S. taxes on offshore profits would mean that none of Apple’s schemes to avoid taxes would be successful. We have argued before that the only way to completely end the incentives for corporations to shift profits into tax havens is to repeal deferral.
Short of full repeal of deferral, Congress could close some important tax loopholes that Apple and other multinational corporations use to make their schemes work. For example, PSI explains how Apple uses a tax regulation known as “check-the-box” to simply tell the IRS to disregard many of its offshore subsidiaries. This allows Apple to continue deferring U.S. tax on the payments made from one subsidiary to another, which circumvents a general rule that deferral is not supposed to be allowed for such “passive,” easily moved income.
One of the recommendations of the committee is to reform the “check-the-box” rules, which was also a proposal in President Obama’s first budget. (This proposal was left out of subsequent White House budgets, apparently in response to corporate lobbying).
PSI also suggests that the U.S. tax foreign corporations that are controlled and managed in the U.S. (like Apple’s Irish subsidiaries), that Congress strengthen rules governing transfer pricing, and makes several other recommendations to block the type of tax avoidance techniques used by Apple.
More than a month after Louisiana Governor Bobby Jindal “parked” his widely-panned proposal to repeal the state’s income tax, state policymakers now are returning to what should be a more straightforward tax reform issue. A new report (PDF) from the Louisiana Legislative Auditor critically evaluates the workings of the state’s film tax credit, which gives Louisiana-based film productions a tax credit to offset part of their expenses when they hire Louisiana workers or spend money on production expenses locally.
From a cost perspective alone, it makes sense to take a hard look at this provision: the state has spent over $1 billion on these Hollywood handouts in the past decade.
But the Auditor’s report is also a good reminder of just how little the state is getting in return for this massive outlay. The report estimates that after doling out almost $200 million in film tax breaks in 2010, the state enjoyed just $27 million in increased tax revenue from the film-related economic activity supposedly encouraged by this tax break.
This means a net loss to the state of about $170 million in just one year.
It’s hardly news that film tax credits offer little bang for the buck: last year the Louisiana Budget Project reported (PDF) that each new job created by the film tax credit is costing the state $60,000, and a recent report (PDF) from the Massachusetts Department of Revenue found that a huge chunk of that state’s film tax credits were going to wealthy taxpayers living in other states. Even when these credits create in-state jobs (and they do generate some economic activity), the transitory nature of film productions means those jobs probably will be gone when the production leaves town. And it’s virtually impossible for lawmakers to know whether they’re really attracting film productions to the state—or just rewarding moviemakers for doing what they would have done anyway (as “incentives” often do). Either way, Louisiana taxpayers are still doling out more than they are getting back.
But it’s not all bad, according to the Auditor’s report: the Louisiana credit does appear to be going largely to film productions that are technically eligible for it. So, as far as the Auditor can tell us, the film tax credit is simply ineffective and not an outright scam. Or at least, it wasn’t until this guy pleaded guilty to fraudulently claiming the credit, which is similar to what happened repeatedly in Iowa after that state’s disastrous experiment with Hollywood tax breaks.
After surviving the three-month train wreck that was the rollout of Governor Jindal’s tax plan, Louisiana lawmakers should find the film tax credit an easy problem to solve since they know how much it costs and just how little they’re getting in return. Right now they’re just tinkering around the edges, but pulling the plug on handouts to Hollywood should be high on policymakers’ to-do list.