Month: June 2013

Washington State lawmakers are continuing to debate raising the state’s gasoline tax by 10 cents per gallon, as they have for much of this year, but with perhaps a renewed sense of urgency following the collapse of the Skagit River Bridge. But while a 10 cent increase would provide a needed boost in transportation revenues today, such an increase would do little to reform the state’s broken gas tax structure for the long-term.

Washington is like a majority of states in levying its gas tax as a flat number of cents per gallon—37.5 cents, to be specific.  But flat-rate gas taxes inevitably fall short when construction costs rise and gas tax rates don’t.  Because of this, states like Maryland and Virginia both redesigned their gas taxes this year to rise alongside gas prices, and Massachusetts and the District of Columbia are contemplating similar reforms.  Washington State would be wise to follow their lead.

According to a new analysis (see chart below) by the Institute on Taxation and Economic Policy (ITEP), Washington State’s gas tax rate (adjusted for inflation) would remain low relative to prior years even if it were increased by 10 cents per gallon.  More importantly, by retaining the state’s simplistic flat-rate gas tax structure, such a reform would leave the state unprepared to deal with increases in the cost of infrastructure construction in the future. 

By 2023, we project that the state’s inflation-adjusted gas tax rate will slip back down to the same, inadequate level it is today.  This unsatisfactory outcome could be avoided by tying the tax rate to rise with either inflation or gas prices after the 10 cent increase is implemented.

Thirty-five years ago today, California voters passed an initiative that would change the fiscal trajectory of their great state for decades: Proposition 13.

Championed by two citizen-activists with a politically popular message, but ill-conceived vision for California’s fiscal future, Proposition 13 cut and capped the state’s property tax at one percent and allowed for assessed property values to rise by no more than 2 percent per year. Stripping localities of their primary ability to raise revenues, the initiative changed how public services like K-12 education, police and fire protection, road and bridge upkeep, and water and sewers would be paid for.

Many proponents of Proposition 13 were individual homeowners who saw housing prices grow rapidly throughout the 1970s. Because California property taxes were assessed at market value, rapidly growing housing prices were causing property tax liabilities to grow in matching fashion. As Bruce Bartlett recently wrote in the New York Times, “Many Californians were literally being taxed out of their homes.” (Proposition 13 was a poorly targeted response to this problem because research has shown time and again that sensible options exist that wouldn’t involve capping property taxes). Additional supporters included those who believed the initiative would shrink the size of government – a mentality that went on to cause what commonly referred to as the “national tax revolt.”

Thirty-five years later, Proposition 13 is still in full effect. How has the 1978 ballot initiative fared? Well, after years of fiscal crises, several of the country’s largest municipal bankruptcies, deteriorated spending on public education (PDF) at both the state and local level, and increased reliance on the very regressive sales tax, Proposition 13 didn’t have exactly the impact its advocates had hoped for.

Proposition 13’s shortfalls are becoming increasingly clear, particularly in how it has shifted revenue collection (and spending power) from local governments to the state. Take K-12 education, for example. According to the California Budget Project (CBP)  (PDF), “Passage of Proposition 13 in 1978 fundamentally changed how schools receive their dollars,” by significantly shifting their revenue source from the local level to the state level. Alone, this shift shouldn’t have affected schools negatively, but state lawmakers engaged in poor fiscal stewardship throughout the 1990s and 2000s (primarily in the form of tax cuts, spending cuts, and a weak rainy day fund) and generally failed to fund schools as well as local governments previously did. CBP writes, “State cuts to education combined with California schools’ substantial reliance on state dollars explains the widening gap between the resources available to California schools and those of the rest of the US.”

William Fulton and Paul Shigley, experts on Proposition 13 and editors of the California Planning & Development Report, who summarize this dilemma by saying:

“In the old days, property taxes were high, but at least you could have a debate at your local city hall about how much they would be increased and what the money would be used for. No more.”

In addition to this shift in responsibility, Proposition 13 has shifted the property tax burden away from commercial property owners and onto residential homeowners. This shift has taken place due to a loophole which allows companies to avoid reassessments when properties change hands, allowing them to pay taxes on assessed land values from years (and in some cases decades) ago. This practice is termed the “Dell Tax Maneuver,” after Michael Dell, who has avoided paying more than one million dollars a year in property taxes on a piece of commercial property he bought in 2006, but which is still taxed at its 1999 assessed value.

In May, Assemblyman Tom Ammiano (D-San Francisco) introduced AB 188, a bill that would keep residential homeowners under Proposition 13’s umbrella, but would force business owners to pay property tax based on a more realistic assessment of their property’s value. While the bill stalled in committee and most likely won’t be heard again until next year, it is a step in the right direction – and the public seems to agree.

According to a new survey (PDF) conducted by the non-partisan Public Policy Institute of California, a majority of voters – regardless of political affiliation – support splitting the property tax roll.

This movement is significant. It signals that after thirty-five years of wreaking fiscal havoc on the state, both the political climate and public opinion are such that change to Proposition 13 is possible.

The tax reform debate is heating up in North Carolina. Three competing plans have emerged from the House and Senate, and Governor McCrory has publicly endorsed what he considers to be the more “moderate” of the plans.  While there are certainly differences between the three plans, they all share in common the goal of moving away from reliance on the progressive personal income tax onto expanded, regressive consumption taxes.  This tax swap approach to tax reform has the inevitable and destructive impact of shifting tax responsibility away from the wealthiest households and onto low- and middle-income families.  ITEP analyses of the three plans has found that, on average, the bottom 80 percent of taxpayers will pay more as a share of income in taxes under all three approaches while the richest 5 percent will pay significantly less.  All three plans would also move the personal income tax away from a graduated rate structure to a flat rate, further eroding the progressivity of the state’s best tool for tax fairness.

Alexandra Sirota, the Director of the NC Budget and Tax Center, described the three plans this way when asked by the Raleigh News and Observer’s editors: “They all take different roads, but they get to the same place. We still have proposals that are more a tax shift than tax reform.”

Things are moving fast. This week, the House Finance Committee approved an amendment to the House tax plan (PDF) that would have added $500 million to the proposal’s cost as it provides a larger tax cut for wealthy households.  However, other House members refused to take up the proposal with the costly amendment and reached agreement to return to the original plan. On Thursday, the proposal was amended yet again (reinstating the cap on the mortgage interest deduction but now allowing taxpayers to claim unlimited amounts of charitable contributions) and sent to the House floor where it could be approved as early as tomorrow, setting up a showdown with the two Senate approaches.

The North Carolina Senate budget plan approved two weeks ago included significant revenue reductions (and corresponding spending cuts) to make room for tax reform which they agreed to take up through a separate process.  Senate President Phil Berger and Finance Chair Bob Rucho are championing the most extreme Senate plan, which would flatten the state’s income tax to 4.5 percent and make up part of the revenue loss with a comprehensive expansion of the sales tax, including adding food to the state sales tax base and taxing prescriptions drugs for the first time.  The other plan from the Senate is a so-called bipartisan effort to enact “revenue–neutral” tax reform, but as with the other two plans, the biggest winners under the bipartisan plan are profitable corporations and wealthy households. 

North Carolina is a state worth watching on the tax reform front.  Advocacy groups on the left and right (including Americans for Prosperity and Americans for Tax Reform) and special interest groups, like the real estate lobby, have spent hundreds of thousands of dollars to either promote, prevent or amend the three proposals.  And, for five straight weeks, a growing and diverse crowd of demonstrators have gathered at the General Assembly on “Moral Mondays” with calls to stop these tax giveaways to the rich as a major part of their message to lawmakers.

More from the News and Observer editorial:: “Republicans talk about making the tax code fairer – the Republican Senate bill is called the N.C. Fair Tax Act – but they can’t let go of the idea that if the rich were just taxed less everyone would prosper. That hasn’t worked and it won’t work. What’s needed isn’t an unburdening of the rich and the well-off. What’s needed is a cleaned-up tax code that distributes the tax burden fairly and progressively without special exemptions and loopholes. That’s simple, fair and right. What’s soon to come out of the tax mash up at the General Assembly is unlikely to be any of the three.”

Last week we wrote about Governor Cuomo’s ill-conceived Tax-Free NY initiative.  We reserve judgment as to whether it’s politically motivated ( a New York Post column called him “Gov $uck-up”, for instance, and this column also questions the motivation) but we can be pretty sure it will cost more than it will benefit the people of New York, because this is what business tax credits do.

Still, since that post, the Governor has continued his promotional tour of New York campuses, so we spent some time digging into how actual businesses would fare under his plan. As it turns out, the Governor’s focus on rewarding new investment could end up arbitrarily discriminating against existing small businesses (and their employees) who are already doing the same things Cuomo’s plan will reward others to start doing.

Capraro Technologies, Inc. (CTI), for example, has been based in Utica (home to SUNY Institute of Technology) for almost two decades. The company shares the SUNY-IT mission of advancing the field of information technology through research and innovation, and appears to be a model of the kind of business the Governor hopes to attract. But CTI would be ineligible for any benefits under Tax-Free NY, and the company could find itself at a disadvantage relative to other firms who do qualify for the tax-free treatment.

To gain eligibility, CTI would need to “expand its New York operations while maintaining its existing jobs.” But such an expansion would need to take place within one mile from the SUNY-IT campus. Unless CTI were able to obtain a special waiver, this would mean having to open a new office about two miles down the road from its current location; hardly an example of economic efficiency.

CTI is only one of many existing companies throughout the state that could be placed at a disadvantage relative to new competitors. BlueRock Energy, a Syracuse-based company that helps customers lower their energy costs and environmental footprint and would be ineligible for Tax-Free NY benefits if it expanded at its current lots, is another case-in-point. Located about 2.5 miles away from the SUNY College of Environmental Science and Forestry, BlueRock Energy shares a common mission with SUNY-ESF.

And the list goes on. From mobile app creator miSoft Studios near SUNY Binghamton to software developer Wetstone Technologies near SUNY Cortland, existing local businesses across the state will all reap zero rewards for having already done exactly what the Governor will allegedly incentivize other businesses to do in the future.

And of course, you are not only out of luck if you started your business at the wrong time, but place matters, too. State tax expert David Brunori at Tax Analysts summed up one of Tax-Free NY’s absurdities by highlighting, “if you are in the community you don’t pay taxes. If you are outside, even by six inches, you do.”

Existing small businesses are not the only losers because the plan extends to employees, too. Professor John Yinger, an expert in fiscal policy from Syracuse University, says the Governor’s plan “means some businesses are getting lower taxes than others and in this case it means some people are getting much lower taxes than others, those are new sources of inequities.”

There are so many problems with Governor Cuomo’s idea for tax-free zones, it’s hard to know where to begin. But the Institute on Taxation and Economic Policy’s (ITEP) policy briefs library is a good place to look, and we invite the Governor to consider this guidance (all links are PDF’s).

Taxes and Economic Development 101: “Lawmakers are under intense pressure to create a healthy climate for investment. But the simplistic view that tax cuts are the best medicine can result in unintentionally making this climate worse. Unaffordable tax cuts shift the cost of funding public services onto every business that isn’t lucky enough to receive these tax breaks—and makes it harder to fund the public investments on which all businesses rely.”

Accountable Economic Development Strategies: “Some lawmakers are wising up to the idea that subsidies don’t work. But for policymakers who insist on offering incentives, there are some important, simple, and concrete steps that can be taken to ensure that subsidies aren’t allowed to go unchecked.”

Tax Principles: The principle of neutrality (sometimes called “efficiency”) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment.”

Recent Congressional hearings on the international tax-avoidance strategies pursued by the Apple Corporation documented the company’s strategy of shifting U.S. profits to offshore tax havens. But a new report from Citizens for Tax Justice (CTJ) documents seventeen other Fortune 500 corporations which disclose information, in their financial reports, that strongly suggests they, too, have paid little or no tax on their offshore holdings. It’s likely that hundreds of other Fortune 500 companies are doing the same, taking advantage of the rule allowing U.S. companies to “defer” paying U.S. taxes on their offshore income.

Read the report, Apple is Not Alone.

Apple is one of eighteen Fortune 500 companies that disclose that they would pay at least a 30 percent U.S. tax rate on their offshore income if repatriated. These 18 corporations have $283 billion in cash and cash equivalents parked offshore.
The report also identifies an additional 235 companies that choose not to disclose the U.S. tax rate they would pay on an almost $1.3 trillion in combined unrepatriated offshore profits.

Taken together, if all of these companies’ offshore holdings were repatriated, it could amount to $491 billion in added corporate tax revenue according to CTJ’s calculations.

CTJ concludes that the most sensible way to end offshore tax avoidance of the kind documented in this report would be to end “deferral,” the rule that indefinitely exempts offshore profits from U.S. income tax until these profits are repatriated. Ending deferral would mean that all profits of U.S. corporations, whether they are generated in the U.S. or abroad, would be taxed by the United States – with, of course, a “foreign tax credit” against any taxes they pay to foreign governments to ensure that these profits are not double-taxed.

The damage that austerity budgets have done to economies in Europe and elsewhere poses a problem for proponents of smaller government and lower taxes. How can they argue that cutting spending and shrinking government is such a good thing when it has it turned out so dismally for other countries? The arguments they employ to escape this problem show that they are far more committed to keeping taxes low than any other goal.

At a May 22 hearing of the Senate Budget Committee, Veronique de Rugy of the Mercatus Center argued that the composition of deficit-reduction programs is what matters. The problem with the recent deficit-reduction packages, she said, is that they relied too much on tax increases. If they had relied on spending cuts, their economies would be doing just fine and they would be more successful at getting their deficits under control.

At a June 4 hearing of the committee, Salim Furth of the Heritage Foundation made the same argument, and went further by claiming that most of the governments thought to have austerity budgets have actually increased their deficits because they increased spending by more than they raised taxes.

But this time at least one of the Senators had done his homework and had looked up the data. Senator Sheldon Whitehouse of Rhode Island presented data from the OECD (which Furth said he was relying on) showing 15 countries in Europe did enact austerity plans (plans reducing their budget deficits) and the spending cuts outweigh the tax increases in 9 of these. In only two of these countries did tax increases make up 60 percent of more of the enacted deficit-reduction.

As Dylan Matthews of the Washington Post’s Wonkblog explains, Furth’s claim that most governments increased deficits is based on each country’s spending as a percentage of Gross Domestic Product (GDP), or to put it differently, spending as a percentage of the overall economy. Some of the countries have seen their GDP shrink so dramatically in recent years that even after serious cutbacks of public services, their spending as a percentage of GDP is higher than before the recession. (At the same hearing, Larry Summers presented a more sensible way of measuring the deficit reduction governments have enacted.)

The bottom line is that governments in Europe and elsewhere are cutting the deficit mainly by cutting spending, and the economy has struggled as a result. Blaming sluggish economic growth on high taxes is simply wrong.

During the tax cut debate last year in Kansas, Governor Sam Brownback characterized his own radical tax cuts as a “real live experiment.” Now, following the actions of the legislature this past weekend, the experiment continues.

To fully understand the scope of the tax cuts that passed in a recent Sunday morning session, it’s necessary to review what was signed into law last year: Income tax rates were reduced (the top rate dropping from 6.45 to 4.9 percent and the bottom rate dropping from 3.5 to 3.0 percent). Kansas became the only state in the nation that levies an income tax to exempt all “pass-through” business income from the personal income tax base. A variety of targeted tax credits, including the Food Sales Tax Rebate, Child and Dependent Care Credit, and the Homestead Property Tax Refund for renters, were eliminated and the standard deduction for head of household filers and married couples was increased to $9000. The Institute on Taxation and Economic Policy (ITEP) estimated that the cost of the tax cuts would be $760 million.

Kansans hadn’t even had a chance to file income tax returns reflecting this slew of new provisions before Governor Brownback was advocating for yet another round of tax cuts. After several weeks of pretty cantankerous negotiations it became clear that the Kansas “experiment” would now have even higher stakes. As this ITEP analysis shows, it didn’t matter whether the House or the Senate plan was adopted because both of them pave the way for complete elimination of the state’s personal income tax.

Two groups that usually find themselves on opposite sides of tax debates, the Tax Foundation and the Center on Budget and Policy Priorities, agreed that the Kansas experiment part deux was “the worst in the nation.” But the Sunflower State’s elected leaders aren’t letting facts and policy experts get in their way.

Instead, Governor Brownback is expected to sign the new legislation that further reduces income tax rates (to 2.3 and 3.9 percent), reduces the standard deduction, increases the sales tax (from 5.7 to 6.15 percent), disallows 50 percent of all itemized deductions (except for charitable donations, which will be fully deductible) and allows for the potential elimination of the income tax entirely if revenues targets are reached. ITEP found that the bill would cost $186 million, raise taxes on the poorest 20 percent of Kansans but give every other income group a tax cut. The impact of these last two rounds of tax cuts in Kansas will be a whopping $1.1 billion, according to ITEP’s estimates (to be published soon).

Tax cuts don’t actually pay for themselves, and Kansans will likely face some serious fallout from their failed experiment. Lawmakers are on a path to complete elimination of the most progressive major revenue source the state levies (the income tax) and this will force the state to depend on regressive sales and property taxes to make ends meet. Phase one of this experiment made it a fiscal cautionary tale for other states, and its political leaders are making their state’s tax structure even more regressive.

In Arizona, The Republic explains the “mixed legacy” left by the temporary, 1 percent sales tax increase that expired last week.  Rather than using the revenue for education, as voters expected when they approved the increase, “the tax revenue also partially subsidized an ambitious $538 million business tax-cut package that lawmakers approved less than a year after passage of [the sales tax increase].”  

Pennsylvania lawmakers are likely to vote this week on a bipartisan bill that would uncap the state’s gas tax. Pennsylvania’s gas tax is supposed to rise alongside gas prices, but an outdated tax cap still on the books prevents that from happening when gas prices exceed $1.25 per gallon. The result has been hundreds of millions in lost revenue as the gas tax has failed to keep pace with the rising cost of construction. The change is supported by Governor Corbett, and is just one of many transportation revenue enhancements that have been debated or enacted this year.

In reaction to the complete failure of radical tax reform this year, Nebraska lawmakers unanimously passed legislation forming the Tax Modernization Committee to study the state’s tax structure. Fourteen senators are expected to sit on the Committee and issue recommendations in December.

Here’s an interesting piece on the donation “check offs” available on the Wisconsin income tax forms. Interested in knowing which nonprofits are most popular in terms of giving? Check out the article and then ponder whether state Department of Revenues should be burdened with the administration of collecting donations for these (albeit worthy) causes.