What Are the Tax Implications of the Supreme Court Ruling on Marriage Equality?

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The Supreme Court’s decisions striking down the law banning federal recognition of gay marriages, as well as the Court’s decision to not rule on the California ban on gay marriage that the state government has decided not to enforce, make our nation’s tax system fairer and are expected to reduce the federal deficit.

Up until the Supreme Court’s ruling, the Defense of Marriage Act (DOMA) prevented the recognition of same-sex marriage for the purposes of more than 1,100 different federal laws, including many tax provisions that consider marriage status when determining an individual’s rights and responsibilities. For example, the original petitioner in the Supreme Court case challenging DOMA, United States v. Windsor, Edith Windsor was forced to pay an additional $363,053 more in federal estate taxes because her same-sex marriage was not recognized for the “surviving spouse” estate tax exemption. Because of the Supreme Court ruling in her favor, however, the IRS will have to pay Windsor back the $363,053 taxes she paid originally, plus interest.

Windsor’s windfall notwithstanding, the overall effect of recognizing gay marriage is likely to reduce the federal deficit. A 2004 report from the Congressional Budget Office (CBO) concluded that if the federal government recognized gay marriages performed in all the states, revenues would increase by around $400 million a year and outlays would decrease by $100 million to $200 million a year. These are relatively small numbers in the context of the federal budget, and the effect of this week’s rulings will be smaller because the Court ruled that the federal government must recognize gay marriages only in the minority of jurisdictions that have legalized it. (Currently, only 31 percent of the US population lives in a state that allows the freedom to marry or honors out-of-state marriages between same-sex couples.)

Nonetheless, CBO’s findings provide an answer to critics like the chairman of the Alabama Republican Party, who complained on Wednesday that Alabama taxpayers would “be on the hook” for funding federal benefits for same-sex spouses.

The reason for the revenue increase is that same-sex spouses will now generally file jointly, whereas previously they were barred from doing so. While the effect of this will increase revenues overall, some same-sex spouses would actually see their tax rates go down, depending on how much each spouse makes.

On the state level, studies have similarly found that allowing same-sex marriage would increase revenue slightly. One think tank found, for instance, that allowing same-sex couples to marry will generate $7.9 million benefits to state coffers in Maine and $1.2 million in Rhode Island.

Obama’s Treasury Department Prioritizes Interests of Multinational Corporations Over Reducing Tax Avoidance

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In the debate over offshore tax avoidance by multinational corporations, one proposal that should not be controversial is country-by-country reporting. The U.S. government does collect information on what profits corporations claim to earn and what taxes they pay in each country, but this information is not available to lawmakers or the public. Some developing countries that suffer the most from outflows of capital into offshore tax havens do not seem to have country-by-country reporting even for the purposes of tax administration.

And so, the declaration issued by the G-8 governments in Northern Ireland last week included a plea that “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Note that this does not even call for such information to be made public but only available to tax authorities. Given that tax authorities in the U.S. already have this information and corporations like Apple are still able to artificially shift their profits into tax havens, this seems like an awfully small step towards reform. Perhaps if this information was collected and actually made public, then ordinary citizens would find out how many other corporations engage in the same type of offshore tax avoidance and demand reform.

But even a small step in this direction seems to be too much for officials at the U.S. Treasury Department to contemplate, as they rushed this week to assure multinational corporations that their interests would take priority over stopping tax avoidance.

An article appearing Wednesday in Tax Notes Today (subscription required) tells us, “With both the G-8 and the OECD’s base erosion and profit shifting (BEPS) project examining expanded country-by-country reporting by multinationals, Treasury officials say the tax information should not be made available to the public.”

The article quotes Brian Jenn, an attorney-adviser with the Treasury Office of International Tax Counsel, saying “For us it is important that that information be restricted to tax administrations and not be publicly available.”

“Jenn said,” the article informs us, “that in addition to addressing concerns about uncoordinated legislative actions, the BEPS project is meant to ward off aggressive positions by tax administrations that could be ‘disruptive to multinationals.’”

This is an alarming statement because anything that stops offshore corporate tax avoidance would be considered “disruptive” to the companies involved in it. It’s a sure bet that Apple’s CEO Tim Cook would find it “disruptive” if the company had to pay taxes on the profits that it claims are generated by a zero-employee subsidiary that allegedly has no country of residence for tax purposes. This seems to confirm the suspicion that the OECD’s latest talk of working to stop corporate tax avoidance is really an effort to throw a few symbolic bones to the principles of tax fairness in order to prevent any real reform from developing.

Arlene Fitzpatrick, attorney-adviser in the Treasury Office of International Tax Counsel, also commented on the OECD’s BEPS project, saying “We don’t want to have a situation where unilateral action is taken and you wind up with a situation where we have double tax rather than double nontax [profits not taxed in any country].” This statement defies belief, as the problem of double-non-taxation (that is, corporate profits being taxed in no country at all) is the defining feature of the current international corporate system and should be the number one focus of international efforts.

Jenn stressed that any solutions would be tailored as narrowly as possible and that solutions could be found in changing the OECD’s “transfer pricing” guidelines, which some countries have adopted for their rules.

But these “transfer pricing” rules are hopeless. They are an attempt to get different parts of a corporation spanning different countries to treat each other as unrelated parties engaging in transactions when they exchange, say, a patent or charge royalties for the use of a patent.

Tax authorities are supposed to apply an “arm’s length” standard, meaning the subsidiaries of a corporate group (the different parts of a multinational corporation) must charge market prices when they engage in these transfers with each other, otherwise (for example) a subsidiary in the U.S. will tell the IRS that it has no profits because it had to pay enormous royalties to its subsidiary in Bermuda (which is probably just a post office box). But what’s the market price for a patent for a brand new invention? Neither the tax authorities nor anyone else has any idea.

As we’ve argued before, the international tax system needs a more fundamental overhaul. But, sadly, the Obama Treasury Department resists fundamental change and resists even telling the public what corporations are claiming to earn and the taxes they pay in other countries so that we can determine how much profit-shifting is taking place.

Good News for America’s Infrastructure: Gas Taxes Are Going Up on Monday

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The federal government has gone almost two decades without raising its gas tax, but that doesn’t mean the states have to stand idly by and watch their own transportation revenues dwindle.  On Monday July 1, eight states will increase their gasoline tax rates and another eight will raise their diesel taxes.  According to a comprehensive analysis by the Institute on Taxation and Economic Policy (ITEP), ten states will see either their gasoline or diesel tax rise next week.

These increases are split between states that recently voted for a gas tax hike, and states that reformed their gas taxes years or decades ago so that they gradually rise over time—just as the cost of building and maintaining infrastructure inevitably does.

Of the eight states raising their gasoline tax rates on July 1, Wyoming and Maryland passed legislation this year implementing those increases while Connecticut’s increase is due to legislation passed in 2005California, Kentucky, Georgia (PDF) and North Carolina, by contrast, are seeing their rates rise to keep pace with growth in gas prices—much like a typical sales tax (PDF).  Nebraska is a more unusual case since its tax rate is rising both due to an increase in gas prices and because the rate is automatically adjusted to cover the amount of transportation spending authorized by the legislature.

On the diesel tax front, Wyoming, Maryland, Virginia (PDF) and Vermont passed legislation this year to raise their diesel taxes while Connecticut, Kentucky and North Carolina are seeing their taxes rise to reflect recent diesel price growth.  Nebraska, again, is the unique state in this group.

There are, however, a few states where fuel tax rates will actually fall next week, with Virginia’s (PDF) ill-advised gasoline tax cut being the most notable example. Vermont (PDF) will see its gasoline tax fall by a fraction of a penny on Monday due to a drop in gas prices, though this follows an almost six cent hike that went into effect in May as a result of new legislation. Georgia (PDF) and California will also see their diesel tax rates fall by a penny or less due to a diesel price drop in Georgia and a reduction in the average state and local sales tax rate in California.

With new reforms enacted in Maryland and Virginia this year, there are now 16 states where gas taxes are designed to rise alongside either increases in the price of gas or the general inflation rate (two more than the 14 states ITEP found in 2011).  Depending on what happens during the ongoing gas tax debates in Massachusetts, Pennsylvania, and the District of Columbia, that number could rise as high as 19 in the very near future.

It seems that more states are finally recognizing that stagnant, fixed-rate gas taxes can’t possibly fund our infrastructure in the long-term and should be abandoned in favor of smarter gas taxes that can keep pace with the cost of transportation.

See ITEP’s infographic of July 1stgasoline tax increases.
See ITEP’s infographic of July 1stdiesel tax increases.

State News Quick Hits: The Folly of Cutting Virginia’s Corporate Tax, and More

The Commonwealth Institute of Virginia explains the folly of cutting state corporate income taxes – a move endorsed by Virginia gubernatorial candidate Ken Cuccinelli, among others. The Institute points out that corporations are already paying a smaller share of state income taxes than in years past, and have left individual taxpayers to pick up the rest of the tab. Moreover, Virginia analysts say (PDF) that about three-quarters of any corporate income tax cut would actually flow outside of Virginia’s borders, since most of the cut would go to large, multi-state corporations.

The Washington Post reports on the state of America’s bridges, and provides some consumer-focused context for why raising taxes to fund infrastructure repair is so important.  “In many cases … a bridge has weakened to the point where it can no longer handle the heavy loads it once did. When lower weight restrictions are imposed, the big trucks that deliver goods of all sorts have to detour, making their routes longer, and that cost generally trickles down to the price consumers pay for almost everything.”

Illinois lawmakers have been focused on pension reform lately, but this Crain’s Chicago Business piece highlights the need for real tax reform in the state. Notably two aspects of the state’s income tax are flagged for reform (the same ones we’ve been talking about for years) – the state’s exemption for all retirement income and a universal property tax credit that’s not based on need.

Last week, Arizona Governor Jan Brewer signed into law SB 1179, a bill containing a wide assortment of tax breaks. The bill’s initial goal was to create a small tax break for one specific industry, but it ended up being a vehicle for tax breaks that lawmakers couldn’t pass individually. The final bill provided certain exemptions for an energy drink company, a sales tax break for companies that rent ignition devices to people with DUI convictions, and an extended property tax break for biofuel manufacturers. The Associated Press reports it this way: “As lawmakers rushed to adjournment last week, those with bills that had languished looked for places for them to land. House members with tax breaks in mind found SB1179, adding four amendments in the late-night hours of June 13.”

Amazon.com Bails on Minnesota, Shows Congress Must Act on Online Sales Taxes

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Throughout most of its existence, online retailer Amazon.com aggressively avoided having to collect state sales taxes from its customers.  Its 5 to 10 percent price advantage relative to local retailers who have to collect the tax wasn’t something that Amazon was willing to give up.

More recently, however, Amazon’s business strategy seems to have shifted.  In order to provide faster delivery times to more of its customers, Amazon has opened up warehouses and distribution centers in a growing number of states (Florida being the most recent example), even though doing so means the company will be subject to the same sales tax collection requirements as Wal-Mart, Home Depot, mom-and-pop bookstores and every other brick and mortar retailer.

But recent events in Minnesota confirm that while sales tax dodging is less central to Amazon’s business strategy than in years past, the company still thinks that not collecting the tax is an advantage.  A new law just passed by Minnesota’s legislature redefines what constitutes a “physical presence” in the state, and it means that Amazon has enough affiliates in Minnesota to have to begin collecting the state’s sales tax this month. So in order to save some nickels and dimes, Amazon has decided to cut its ties with businesses based in the Gopher State so it can keep selling to Minnesotans tax-free.

This development points toward a need for Congressional action for lots of reasons, including these two:

First, it reinforces the point that local retailers are being harmed by their online competitors’ ability to dodge sales tax collection requirements. Why would Amazon bother cutting ties with Minnesota businesses if it didn’t think its market share would suffer from having to play by the same rules as companies with actual stores and employees in Minnesota?

Second, it highlights the degree to which online shopping sales tax laws have become an indefensible patchwork. In geographically large and heavily populated states like Florida and Texas, Amazon has little choice but to have a “physical presence” in the state (and collect sales tax) if it wants to offer reasonably fast delivery times. In other states, however, shipping products from outside the state’s borders is much less of a logistical problem.

There’s no question that Amazon is capable of collecting sales taxes in Minnesota, particularly since the state has already taken steps to simplify its sales tax system by adhering to the Streamlined Sales Tax Agreement.  In fact, Amazon said it plans to begin collecting Minnesota sales taxes as soon as the federal Marketplace Fairness Act (which it supports and which has passed the U.S. Senate) is enacted into law.  In the meantime, however, Minnesota is out of options for getting Amazon to play by the same rules as other businesses selling to its residents.  Amazon’s recent actions make clear that just because the company can do what’s right, that doesn’t mean it will do so voluntarily.

New from CTJ: Congressman Delaney’s Delusion — An Infrastructure Bank Run by Corporate Tax Dodgers

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Congressman John Delaney, a Democrat from Maryland, has proposed to allow American corporations to bring a limited amount of offshore profits back to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters.

The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment. Rep. Delaney seems to believe his bill (H.R. 2084) can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which he believes would create jobs in America.

A new CTJ report explains why this is a strange and problematic way to fund infrastructure projects. Delaney’s bill will provide the greatest benefits to corporations that are engaging in accounting schemes to make their U.S. profits appear to be generated in offshore tax havens, further encouraging such tax avoidance and resulting in a revenue loss in the long-run. Incredibly, a super-majority of the infrastructure bank’s board of directors would, under Delaney’s bill, be chosen by the corporations that receive the most tax breaks.

Read the CTJ report on Rep. Delaney’s proposal.

Issues with the Partnership to Build America Act

June 25, 2013 11:45 AM | | Bookmark and Share

Latest Proposed Tax Amnesty for Repatriated Offshore Profits Would Create Infrastructure Bank Run by Corporate Tax Dodgers

Read this report in PDF

Congressman John Delaney, a Democrat from Maryland, has proposed to allow American corporations to bring a limited amount of offshore profits back to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters. The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment.[1]

Rep. Delaney seems to believe his bill (H.R. 2084) can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which he believes would create jobs in America. As explained below, this is a strange and problematic way to fund infrastructure projects. In addition, Delaney’s bill will provide the greatest benefits to corporations that are engaging in accounting schemes to make their U.S. profits appear to be generated in offshore tax havens, further encouraging such tax avoidance and resulting in a revenue loss in the long-run. Incredibly, a super-majority of the infrastructure bank’s board of directors would, under Delaney’s bill, be chosen by the corporations that receive the most tax breaks.

“Offshore” Profits Are Not “Locked” Offshore

Some members of Congress, pundits and corporate lobbyists claim we need a tax amnesty to lure to the U.S. the $2 trillion of “permanently reinvested earnings” that American corporations hold in foreign subsidiaries. These are profits that U.S. corporations have generated (or claim to have generated) in foreign countries and on which they have not yet paid U.S. taxes. Proponents of a repatriation tax amnesty argue that forgiving the U.S. tax that is normally due when these profits are brought to the U.S. will get this money “back” into the U.S. economy.

But much, if not most of these “offshore” profits are actually already in the U.S. economy, and nothing prevents our corporations from using them to make investments here. A December 2011 study by the Senate Permanent Subcommittee on Investigations surveyed 27 corporations, including the 15 corporations that repatriated the most offshore cash under the 2004 law, and concluded that in 2010, 46 percent of the “permanently reinvested earnings” held offshore by these corporations were invested in U.S. assets like U.S. bank deposits, U.S. stocks, U.S. Treasury bonds and similar investments.[2] In other words, U.S. corporations are free to invest their funds in the U.S. economy.

The only thing corporations are unable to use their offshore cash for are dividends to their shareholders. But even this is allowed if the corporations simply pay the U.S. tax that is due — which is equal to the U.S. corporate income tax rate of 35 percent minus whatever the corporation has already paid to the government of the foreign country where the profits are said to be generated.

“Offshore” Profits Largely Represent Profits Generated in the U.S.

Some of these offshore profits really are generated in another country. For example, an American corporation may have a subsidiary in France that makes cars and sells them to French citizens, generating profits in France that the subsidiary there is likely to reinvest in its factories and other assets there.

But in many other situations, an American corporation generates profits in the U.S. but uses accounting gimmicks to tell the IRS that they are generated by a subsidiary in a country with no corporate tax or a very low corporate tax (an offshore tax haven). Often this subsidiary company carries out no actual business and consists of little more than a post office box.

How do we know that the profits our corporations claim to have generated in low-tax or no-tax countries do not represent any real business activity? Because most countries where Americans corporations are likely to carry out real business — countries like France, Germany, Japan and others with developed economies and consumers who buy our products — have a corporate tax. On the other hand, most of the countries with a very low corporate tax or no corporate tax are tiny economies that cannot be the location for very much legitimate business.

Luxembourg and Bermuda serve as two examples of tax havens. The Congressional Research Service recently found that the profits that American corporations claim (to the IRS) to have earned through their subsidiaries in Luxembourg in 2008 equaled 208 percent of that country’s gross domestic product (GDP). That’s another way of saying American corporations claim to have earnings in Luxembourg that are twice as large as that nation’s entire economy, which is obviously impossible. The profits that American corporations claimed to have earned through subsidiaries in Bermuda equaled 1000 percent of that tiny country’s economy.[3] It is clear that most of the profits American corporations claim are earned by their subsidiaries in these tax havens are not the result of any real business activity there.

Greatest Benefits of Tax Amnesty Go to the Worst Corporate Tax Dodgers

Unfortunately, the profits artificially shifted to offshore tax havens are the profits that American corporations are most likely to “repatriate” under the type of tax amnesty enacted in 2004 and under the measure proposed by Rep. Delaney. An October 2011 study by the Senate Permanent Subcommittee on Investigations surveyed 20 corporations, including the 15 that repatriated the most offshore funds under the 2004 measure, and found the following:

The data collected by the Subcommittee survey shows that a significant amount of the repatriated funds under Section 965 flowed from tax haven jurisdictions, including the Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Costa Rica, Hong Kong, Ireland, Luxembourg, Netherlands Antilles, Panama, Singapore, and Switzerland. Of the 19 corporations surveyed, seven or 37% repatriated between 90 and 100% of funds from tax haven jurisdictions… Of the remaining 12 corporations surveyed by the Subcommittee, five repatriated from 70% to 89% of their funds from tax havens; three repatriated between 30 and 69% of their funds from tax havens; two repatriated around 7%; and two repatriated less than 1%.[4]

There are at least two reasons why profits artificially shifted into offshore tax havens are the most likely to be “repatriated” under this type of tax amnesty. First, the offshore profits that result from real business activity (like the profits generated by an American car manufacturer in France in the hypothetical example given above) are typically reinvested in factories or training the French workforce or in some other way. The U.S. corporation that owns that subsidiary in France cannot easily bring the “permanently reinvested earnings” back to the U.S. because that would require selling factory equipment or other similar assets.

But the “offshore” profits that are claimed to be generated by a subsidiary that is really just a post office box in a tax haven like Bermuda or Luxembourg are much easier to “move” because they don’t represent any real investments in the foreign country.

The second reason is that profits in tax havens get a bigger tax break when “repatriated” under such a tax amnesty. Again, the U.S. tax that is normally due on repatriated offshore profits is the U.S. corporate tax rate of 35 percent minus whatever was paid to the government of the foreign country. Profits that American companies claim to generate in tax havens are not taxed at all (or taxed very little) by the foreign government, so they might be subject to the full 35 percent U.S. rate upon repatriation — and thus receive the greatest break when the U.S. tax is called off.

The Proposal Will Encourage Corporations to Shift Even More Profits into Tax Havens, Causing Revenue Loss in the Long-Run

Rep. Delaney’s bill specifically states that part of the mission of the infrastructure bank’s board of directors is “to at all times make clear that no taxpayer money supports the AIF [the infrastructure bank] or ever will.” But the infrastructure bank will cost taxpayers, and it would be far more sensible to finance the infrastructure bank with traditional direct government spending.

To understand why, note that U.S. corporations have shifted profits offshore at a greater rate since the 2004 measure was enacted.[5] This means a greater amount of corporate profits are not subject to the U.S. corporate tax.

Indeed, in 2004, many critics argued that the measure, which  temporarily taxed repatriated offshore corporate profits at a tiny rate of just 5.25 percent, would encourage corporations to artificially shift even more profits into tax havens in anticipation for the next “repatriation holiday” enacted by Congress.

This fear becomes particularly warranted if Congress demonstrates that it is willing to enact such measures multiple times less than a decade apart. In 2011, as some members of Congress discussed enacting a second repatriation tax amnesty like the 2004 measure, the non-partisan Joint Committee on Taxation (JCT) concluded that this would cost $79 billion over a ten-year period partly because it would encourage American corporations to artificially shift even more profits offshore in anticipation of the next tax amnesty.[6]

Delaney’s Proposed Infrastructure Bank Would Be Controlled by the Most Aggressive Corporate Tax Dodgers

There are some peculiar features of Rep. Delaney’s bill that lawmakers should consider. Rather than temporarily allowing American corporations to pay a corporate tax rate of just 5.25 percent on repatriated profits (as the 2004 measure did), Delaney’s proposal would temporarily tax repatriated profits at a rate of zero percent — if the corporation agreed to buy bonds to fund an infrastructure bank.

Corporations would be allowed to repatriate a certain number of dollars of offshore profits for each dollar it spends on purchasing bonds. The exact ratio would be determined by a bidding process, with the bonds (and the tax amnesty) going to those corporations offering the lowest bids. (The proposal would not allow bids for repatriation of more than six dollars in offshore profits for each dollar of bonds purchased.) The total amount of bonds issued to finance the bank would be $50 billion.

The bank would be controlled by a board of directors with 11 members. Four of those members would be appointed by the President and approved by the Senate. Delaney’s bill also instructs that the board would include “Seven additional members, appointed one each by the seven entities purchasing the largest amount of bonds….” Since the amount of bonds purchased would be linked to the amount of offshore profits a corporation repatriates, this means that those corporations that repatriate the most under the proposal would effectively control the board of directors and thus the infrastructure bank.

Because the profits most likely to be repatriated under the measure are those profits artificially shifted into offshore tax havens (as explained above) this means that the most aggressive corporate tax dodgers would effectively control the infrastructure bank.

Delaney’s Proposal Shows How Far We Are from Real Tax Reform

Perhaps the worst aspect of Rep. Delaney’s proposal is that it signals an obvious misunderstanding of, or indifference to, the fundamental problems with our corporate tax system, which is in desperate need of reform and which would become more dysfunctional under this proposal.

The main reason U.S. corporations have so much in “permanently reinvested earnings” offshore is the rule allowing American corporations to “defer” paying their U.S. taxes on those profits until they are repatriated. Deferral essentially provides a benefit for holding profits offshore, or at least convincing the IRS that they are offshore.

There is a broader debate taking place right now about how the tax system could be reformed to address this problem and several others. The most logical solution would be to repeal “deferral” so that U.S. corporations pay U.S. taxes on all their profits when they are earned (minus any corporate income taxes paid on these profits to foreign governments).

Many members of Congress, including the chairman of the House Ways and Means Committee, propose to move in the opposite direction and permanently exempt the offshore profits of U.S. corporations from U.S. taxes. This type of permanent exemption for offshore corporate profits is often called a “territorial” system, whereas a temporary exemption for offshore corporate profits is called a “repatriation holiday.”

We have argued elsewhere that if allowing American corporations to “defer” paying U.S. taxes on their offshore profits has encouraged them to shift jobs and profits offshore, then completely exempting these profits from U.S. taxes will logically increase those terrible incentives.[7]

This is true even if the exemption is a temporary one (a “repatriation holiday”), because corporations will come to expect it to be repeated. Even worse, corporate CEOs will understand that Congress is not even close to enacting a real tax reform that cracks down on offshore profit-shifting by corporations.


[1] Despite provisions that were supposed to require repatriated funds to be used for investment and job creation, the Congressional Research Service concluded that the offshore profits repatriated under the 2004 tax amnesty went to corporate shareholders and not towards job creation. In fact, many of the companies that benefited the most actually reduced their U.S. workforces. Donald J. Maples, Jane G. Gravelle, Congressional Research Service, “Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis,” May 27, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/crs_repatriationholiday.pdf

[2] United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, “Offshore Funds Located Onshore: Majority Staff Report Addendum,” December 14, 2011. http://www.hsgac.senate.gov/download/report-addendum_-psi-majority-staff-report-offshore-funds-located-onshore

[3] Mark P. Keightley, “An Analysis of Where American Companies Report Profits: Indications of Profit Shifting,” Congressional Research Service, January 18, 2013.

[4] United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, “Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals: Majority Staff Report,” October 11, 2011. http://www.hsgac.senate.gov/download/report-psi-majority-staff-report_-repatriating-offshore-funds-oct-2011

[5] Citizens for Tax Justice, “Data on Top 20 Corporations Using Repatriation Amnesty Calls into Question Claims of New Democrat Network,” August 26, 2011. http://ctj.org/ctjreports/2011/08/data_on_top_20_corporations_using_repatriation_amnesty_calls_into_question_claims_of_new_democrat_ne.php; Citizens for Tax Justice, “Apple, Microsoft and Eight Other Corporations Each Increased Their Offshore Profit Holdings by $5 Billion or More in 2012,” March 11, 2013, http://ctj.org/ctjreports/2013/03/apple_microsoft_and_eight_other_corporations_each_increased_their_offshore_profit_holdings_by_5_bill.php; Citizens for Tax Justice, “Apple Is Not Alone,” June 2, 2013. http://ctj.org/ctjreports/2013/06/apple_is_not_alone.php

[6] Letter from the Thomas A. Barthold, Joint Committee on Taxation to Congressman Lloyd Doggett, April 15, 2011. https://ctj.sfo2.digitaloceanspaces.com/pdf/jct_repatriationholiday.pdf.

[7] Citizens for Tax Justice, “Congress Should End ‘Deferral’ Rather than Adopt a ‘Territorial’ Tax System,” March 23, 2011. http://ctj.org/ctjreports/2011/03/congress_should_end_deferral_rather_than_adopt_a_territorial_tax_system.php

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Governor Cuomo, Meet Governor Brown

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California Shows that Geographically Targeted Tax Incentives Don’t Work

Last week, the New York State Legislature overwhelmingly passed START-UP New York (previously known as Tax-Free NY). The approval came after nearly a month of Governor Cuomo’s state-wide campus PR tour where he touted the plan’s infallible greatness, a claim we have explained is almost completely unjustified.

3,000 miles to the west, in California, fellow Democratic Governor Jerry Brown is telling a different story. He has proposed eliminating the state’s costly Enterprise Zone (EZ) Program, citing its ineffectiveness and huge cost as the rationale for the move.

California’s EZ Program was created in 1986 and has been the state’s primary policy tool in attempting to promote economic development in distressed areas. Like START-UP NY, California’s EZ Program provides geographically targeted tax breaks to 40 “zones” determined by the state. (START-UP NY provides tax breaks to over 70 zones, primarily college campuses.)

According to the Public Policy Institute of California, however, the EZ Program has had “no effect on business creation or job growth.” Furthermore, the California Budget Project has found that EZs “have cost the state a total of $4.8 billion in lost revenue since the program’s inception” while benefiting “less than half of one percent of the state’s corporations.”

Governor Brown’s proposal – initially outlined in his May budget revision (PDF) – signifies an important shift away from using geographically targeted tax breaks as an economic development tool. A growing body of research has shown (and shown again) tax incentives of most kinds to be poor tools for economic development, and California’s three decades of experience with its EZ Program is a case in point.

“California’s thirty-year-old Enterprise Zone program is not enterprising, it’s wasteful. It’s inefficient and not giving taxpayers the biggest bang for their buck,” said the Governor in a meeting with business leaders and labor groups. “There’s a better way and it will help encourage manufacturing in California.”

It must be noted, of course, that Governor Brown’s “better way” is only half better; it throws half of those EZ Program dollars at similarly unproven tax breaks while spending the other half – wisely – on a reduction in the sales tax (PDF) businesses pay.  Still, a governor who is beginning to listen to policy experts over pollsters deserves some credit for moving in the right direction.

If Governor Brown’s proposal is enacted (it may be on the ballot next year), it appears we will have a tale of two states: in California, a state trying to learn from the past; in New York, a state blindly shaping policy based on political interests.

Immigration Reform Bill Will Substantially Reduce the Deficit, According to CBO

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On Tuesday, the non-partisan Congressional Budget Office (CBO) found that the immigration reform bill currently making its way through the US Senate will actually decrease the deficit by $197 billion between 2014-2023. The report’s findings are at odds with claims by the bills opponents that increased immigration would be fiscally harmful to the US. In fact, House Speaker John Boehner said today that if the CBO is right, those revenues could be a “real boon” for the US.

According to the CBO, the bill would generate $459 billion in additional revenue over the next decade. Allowing unauthorized immigrants to seek legal status would increase tax compliance, and also increase the wages and thus the taxes of those same immigrants. In addition, the CBO found that the increase in the immigrant population and the number of individuals working in the US as a result of the bill would also substantially increase revenue.

Conservative critics of the immigration bill have tried to argue that the bill will drain public resources as immigrants obtain government benefits. The reality, according to the CBO, is that the required increase in government outlays (primarily in the form of refundable tax credits, Medicaid, and health insurances subsidies) would amount to only $262 billion over the next decade, meaning that immigrants as a group would end up paying more than they receive. This would be even more true over the bill’s second decade (from 2024-2033), during which the CBO estimates the federal deficit would be decreased by an additional $700 billion.

The bill’s positive fiscal impact could undermine efforts by lawmakers like Senators Marco Rubio, Orrin Hatch, and Jeff Sessions to add amendments to the bill that would create extra obstacles for immigrants in terms of taxes and government benefits.


New Hampshire Court Agrees: Tax Breaks Cost Public Dollars

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Last year we wrote about an unwelcome mini-trend in state corporate tax policy: the creation of “neo-vouchers,” tax breaks for businesses that donate money to private-school scholarship funds. At the time, advocates for these neo-vouchers were making the (not very convincing) case that these programs shouldn’t be counted as government spending since the programs were quite specifically designed such that “the money would never go into public accounts, making it less susceptible to court challenges.” (The legal challenges are often based on the argument that most private schools are religious in nature and the First Amendment prohibits public funds from supporting religion.) In other words, the argument went, if a company gets a million dollar tax break for donating money to private school scholarship funds, those million dollars never got collected by the state, so they remain somehow private dollars, outside the grasp of the state government.

At the time, a number of states were contemplating enacting tax breaks of this kind, (available to individuals, corporations or both), and New Hampshire subsequently did enact neo-vouchers in June of 2012, overriding a veto by Governor John Lynch, and took effect in January 2013. The law gives New Hampshire corporations a tax credit equal to 85 percent of any contributions they make to private school foundations. The law’s authors also attempts to codify the “private dollars” argument and inoculate it against constitutional challenges by asserting (PDF), “[c]redits provided under this chapter shall not be deemed taxes paid.” If the money was never handed over to the public treasury, it was never the public’s money, right?

Wrong, at least according to a lower court in the Granite State that just ruled the new tax credit is unconstitutional, explicitly rejecting the “private dollars” charade. The judges wrote:

“The phrases ‘public funds,’ or ‘money raised by taxation,’ focuses the Court’s inquiry not on when the government’s technical ‘ownership’ of funds or monies arises, but on when, or at what point, the public’s interest fairly arises in how funds or monies are spent. The Court concludes that the interest of New Hampshire taxpayers in regard to challenging the legality of legislation such as the program at bar does not arise only after money is deposited in the New Hampshire treasury….”

The Court sensibly notes that if “money that would otherwise be flowing to the government is diverted” for private ends, that is essentially the same as direct government spending. This shouldn’t be news to anyone familiar with the “tax expenditure” concept—the notion that a $1 million tax break for a specific business is not meaningfully different from government writing a $1 million check to the same business.

Of course, it’s not hard to see that the neo-voucher idea is bad policy whether it’s constitutional or not. It erodes corporate tax revenues, takes money away from already-strapped public schools, and (in the case of the New Hampshire laws) sharply limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. But the New Hampshire court’s finding underscores the absurdity of the fiction that neo-vouchers subsidized by corporate tax credits can be thought of as “private dollars” outside the purview of state governments—and offers a helpful precedent for advocates seeking to repeal neo-vouchers in other states.