Month: July 2013

A number of important changes to the District of Columbia’s tax laws will go in effect in the months ahead as part of a budget passed by the DC Council earlier this summer.  A detailed budget toolkit assembled by the DC Fiscal Policy Institute’s (DCFPI) notes that the budget raises $72 million in new revenues, but that it does so largely through traffic cameras and improved tax enforcement—not broad-based tax increases.  Some of the more notable tax changes in the budget include:

Expanding the District’s property tax “circuit breaker” credit, known as Schedule H.  Much like an electrical circuit breaker, DC’s Schedule H “circuit breaker” is designed to protect taxpayers from a property tax “overload”—a situation where property taxes grow too high relative to their incomes.  Prior to this summer, DC’s circuit breaker credit hadn’t been updated for 35 yearso.  Under the expanded credit, the income cut-off for eligibility will rise from $20,000 to $50,000 and the credit’s maximum benefit will grow from $750 to $1,000.

Reforming the gasoline tax.  The District joins Maryland, Massachusetts, Vermont, and Virginia in reforming its gas this year in order to improve its long-term revenue growth.  By switching from an unsustainable fixed-rate tax to one equal to 8 percent of gas prices, DC will be better positioned to pay for the gradually rising cost of public infrastructure in the years ahead.  The Institute on Taxation and Economic Policy (ITEP) testified in support of this reform in June.

Cutting the sales tax rate.  On October 1, the District’s general sales tax rate is scheduled to fall from 6 to 5.75 percent.  While the change will be progressive overall, DCFPI’s proposal to expand either the standard deduction or personal exemption would have been better targeted to lower- and moderate-income District residents, as opposed to largely benefiting tourists and nonresident commuters.

Exempting interest income on out-of-state government bonds.  The least defensible tax change contained in the DC budget is the reinstatement of an unusual and regressive tax break for people investing in out-of-state bonds.  North Dakota is the only state offering such a break.  Three out of every four dollars of tax exempt interest flows to households with total incomes over $200,000.

For more information on DC’s budget and the tax changes it contains, be sure to read DCFPI’s budget toolkit.

If lawmakers and the media are confused about the President’s recent proposal to enact a business tax reform tied to a jobs program, it’s because the White House has not explained it very well. The President’s plan has been depicted by some as a major shift away from his long-held position that tax reform affecting corporations (and possibly other types of businesses) should be revenue-neutral.

That’s all wrong. What the President just proposed is not much different from his previous proposals. If the President really had shifted away from his previous position and declared that corporations should contribute more to fund public investments on a permanent basis, we’d be a lot happier about it. But that’s not what the President has said. If anything, his “new” proposal is more of a clarification than a shift in policy.

(See our previous blog post describing the President’s proposal.)

President Obama has consistently said that business tax reform should be “revenue-neutral,” meaning loopholes and special breaks would be eliminated but the revenue savings would all be used to offset a reduction in tax rates paid by corporations, so that, overall, corporations would not pay more than they do today. The fact sheet released by the White House yesterday still describes his approach to reform as “revenue-neutral.”

All that’s changed is that the President acknowledged that some of the revenue raised from eliminating loopholes and special breaks might be temporary, meaning it would only show up in the first few years or so. This temporary revenue increase cannot be used to pay for anything that is permanent (like the reductions in tax rates). Instead, the White House argues, reasonably, that a temporary revenue increase should be used to pay for something that is temporary. The President proposes to use this temporary revenue to fund a temporary jobs program.

Not counting this temporary revenue increase (which might only appear in the first decade or so after a tax overhaul is enacted) the President’s approach would be revenue-neutral. So the President’s approach still falls short of the “revenue-positive” corporate tax reform that CTJ and others organizations have called for.

The President did not elaborate on possible temporary revenue increases, but here’s an example of how it might work. We have argued that businesses, particularly those set up as corporations, often benefit entirely too much from accelerated depreciation and that this does not help our economy. Accelerated depreciation consists of businesses taking deductions for investments in equipment much more quickly than the equipment actually wears out. If Congress repeals or limits accelerated depreciation, that means businesses will have to take these deductions over a longer period of time. They’ll pay more early on, but less in later years because these deductions are spread out over a longer period of time.

This means that some of the revenue raised by repealing or limiting accelerated depreciation simply represents a timing shift. Taxes are paid during this decade that would otherwise be paid in the next decade. On the other hand, some of the revenue increase we see in the first decade would be permanent, occurring again in the next decade and the decade after.

If lawmakers want to offset a permanent reduction in tax rates, only the permanent part of this revenue increase can be used for that. Otherwise the reform will be “revenue-negative,” meaning it loses revenue, in the second decade or third decade after it’s enacted.

There are other types of changes that can lead to timing shifts, resulting in a larger revenue increase in the first decade than in the second or third decade after reform is enacted. For example, if Congress enacts some sort of tax on profits that corporations have accumulated offshore, then part of the resulting revenue gain would be temporary because some of those profits would have been repatriated and taxed at a later date under the current rules. (Keep in mind that here we’re talking about a mandatory tax of some sort on offshore profits, not the sort that would be paid under a “repatriation holiday” for corporations to choose to bring profits back to the U.S. — that sort of proposal loses revenue.)

None of this was explained in the President’s speech on this topic or in the fact sheet released by the White House, but rather was mentioned when Gene Sperling, director of the National Economic Council, explained to reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”

So the only new development is that the White House has acknowledged that some of the revenue increase that comes from closing corporate tax loopholes would be temporary and therefore should be used to fund something temporary rather than permanent rate cuts. CTJ’s longstanding view has been that corporations should contribute more on a permanent basis to support the public investments that make this nation prosperous — and that make their profits possible. That’s why we see the President’s proposal as only a slight improvement over his previous one.

Here’s a look at some of the best and worst ideas that Senators submitted as part of the “blank slate” tax reform process proposed by Senators Max Baucus and Orrin Hatch, the chairman and ranking member of the tax-writing committee in the Senate. In theory, the “blank slate” is supposed to be an approach that assumes Congress is drawing the tax code completely from scratch, with no “tax expenditures” (subsidies provided through the tax code) and Senators were asked to explain which tax expenditures they would want to preserve in a newly reformed tax system.

Of course, this list is not comprehensive. Only a minority of Senators both submitted letters to Baucus and Hatch and made their letters public.

While CTJ has criticized Baucus and Hatch’s “blank slate” approach as ignoring the most crucial issue (the dire need for increased revenue), we have also put forward an approach to determine which tax expenditures should be repealed or preserved. Lawmakers should repeal tax expenditures that are regressive and serve no policy goals, preserve tax expenditures like the EITC that are progressive and do accomplish policy goals, and reform those tax expenditures that fall somewhere in between. CTJ has also explained that revenue should be raised by closing tax expenditures for corporations, particularly those that encourage corporations to shift jobs and profits offshore.

Some Senators, like Bernie Sanders and Jay Rockefeller, submitted letters very much in agreement with our approach. Others, like Jeff Flake, Mike Enzi and Mike Crapo, submitted letters that run completely counter to our approach. 

Worst Idea Submitted: Enact the Ryan Plan

Senator Jeff Flake of Arizona proposes that tax reform follow the approach taken by the House budget plan (also known as the Ryan plan), which would replace our progressive personal income tax rates with two rates of just 10 percent and 25 percent, and would lower the corporate income tax rate to 25 percent. CTJ has frequently pointed out that the Ryan plan would reduce taxes on the very rich no matter how the details are filled in, which means low- or middle-income people would have to pay more if the frequently cited goal of revenue-neutrality is to be achieved.

Senator Flake also repeats several myths about how certain types of income, like corporate stock dividends, are allegedly double-taxed. (CTJ has explained why dividends are rarely, if ever, double-taxed.)

Worst Proposal to EXPAND a Tax Expenditure for Corporations: Enact a “Territorial” Tax System

Senator Mike Enzi of Wyoming calls for enactment of his legislation, S. 2091 from the 112th Congress, to create a territorial tax system. In this context, a “territorial” tax system, which is also endorsed by Senator Mike Crapo of Idaho, is a euphemistic way of describing an exemption of offshore corporate profits from U.S. taxes.

Right now, U.S. corporations already get a big break from the rule that allows them to “defer” paying U.S. taxes on the profits of their offshore subsidiaries until those profits are brought to the U.S. “Deferral” is one of the biggest tax expenditures for corporations and, as we have explained, it encourages American corporations to shift operations offshore or engage in accounting gimmicks to make their U.S. profits appear to be generated in a country like Bermuda or the Cayman Islands that won’t tax them. Expanding deferral into an exemption for offshore profits would only increase these terrible incentives.

Worst Proposal to EXPAND a Tax Expenditure for Individuals: Cut Rates for Capital Gains

The letter from Senator Mike Crapo of Idaho lauds the approach to tax reform taken by the Simpson-Bowles plan — which would remove most tax expenditures and adopt a set of low rates — but then proposes to increase the most regressive tax expenditure of all, the preferential income tax rate for capital gains and stock dividends. A recent CTJ report explains that 68 percent of the benefits of this tax expenditure are estimated to go the richest one percent of Americans this year.

Senator Crapo also believes that further reducing the tax rates on capital gains and dividends will “stimulate investment, capital formation, and additional revenue.” Senator Crapo is referring to the argument made by Arthur Laffer that cutting tax rates on capital gains causes revenue to actually increase. The CTJ report explains that this idea has been disproven time and again by the revenue statistics.

Best Ideas for Ending Tax Expenditures: Eliminate Deferral and Preferential Rates for Capital Gains and Dividends

The letter from Senator Bernie Sanders of Vermont includes several proposals, and among the most significant are repeal of deferral and repeal of the preferential personal income tax rate for capital gains and stock dividends for the rich. Senator Sanders cites the two terrible incentives that deferral creates and that have already been mentioned (incentives to shift jobs offshore and make U.S. profits appear to be generated in offshore tax havens) and also explains that the capital gains and dividends break is the reason why wealthy investors like Warren Buffett can pay lower effective tax rates than many middle-income people.

Best Articulation of Key Principles for Tax Reform: Increase Progressivity and Raise Revenue

Senator Jay Rockefeller of West Virginia writes that his “highest priority for tax reform is to reduce income inequality.” While he praises Senators Baucus and Hatch for committing to maintain the tax code’s current progressivity, “we must go further, by requiring the wealthiest individuals and businesses to contribute more.” He writes that, “While incomes for the top one percent soared over the past two decades, effective tax rates for these same individuals declined dramatically,” and that “too many giant corporations pay no tax…”

Senator Rockefeller also writes that some tax expenditures like the EITC provide a “solid foundation for increasing opportunity and upward mobility for people who are low-income…” The recent CTJ report on individual tax expenditures explains how the EITC is the most progressive tax expenditure and is extremely effective at accomplishing policy goals like encouraging work. 

Finally, Senator Rockefeller is refreshingly candid about the uselessness of any debate over tax reform that does not lead to increased revenue. “I can assure you that I will not support tax reform that does not raise real, sustainable revenue,” he writes. “Frankly, I would rather the tax reform process be delayed for another Congress than pass a bad bill this year that raises inadequate revenue.”

Obama’s Plan Wisely Makes Job Creation the Priority, But Unwisely Lets Corporations Off the Hook

President Obama has once again proposed to reform business taxes without raising any revenue in the long-term. He has shifted his position slightly, however, by proposing to raise some revenue in the very short-term from businesses in order to fund infrastructure and other investments that would create jobs.

While the President’s focus on job creation is laudable, the fact that he still refuses to call for permanently increasing the amount of revenue generated from the corporate tax is a big disappointment. Over the last three years, CTJ has written reports and op-eds explaining why reform of the corporate income tax (as well as reform of the personal income tax) should raise revenue. CTJ also published reports explaining that profitable corporations pay an effective tax rate that is far lower than the statutory tax rate of 35 percent (which corporate lobbyists want to lower), and many pay no taxes at all.

A letter to members of Congress that was circulated by CTJ in 2011 and signed by organizations in every state explains that, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”

A similar letter was signed by even more organizations at the end of 2012 before being sent to members of Congress. 

President Obama’s Same Old Framework, with One Addition

While speaking today at an Amazon facility in Chattanooga Tennessee, President Obama proposed that Congress enact a business tax reform that closes loopholes, “ends incentives to ship jobs overseas, and lowers rates for businesses that create jobs right here in America,” and also simplifies tax filing for businesses. He also proposed to “use some of the money we save by transitioning to a better tax system to create more good construction jobs” and other types of jobs.

A fact sheet released by the White House explains that the tax reform would be “revenue-neutral” in the long-run, because revenue saved from closing loopholes would go towards offsetting the cost of lowering the corporate tax rate from 35 percent to 28 percent (and setting the rate even lower, at 25 percent, for domestic manufacturing).

This is entirely in keeping with the “framework” for business tax reform that the President proposed in February of 2012. CTJ criticized the framework for not calling for increased revenue and for failing to explain which loopholes would be closed to offset the costs of the rate reductions.

The one thing that is new, based on the President’s speech in Chattanooga, is his proposal to use a temporary increase in revenue generated from “transitioning to a better tax system” for public investments that create jobs. This new wrinkle is the President’s recognition that some of the tax reforms under consideration will raise money in the short run, but will raise far less after they are fully phased in. The President says this short-term revenue should not be counted in calculating whether tax reform is “revenue-neutral,” but should instead be devoted to his “jobs program.”

Such short-term extra revenues could come from changes that alter the timing of tax payments, like limiting accelerated depreciation so that business must wait longer before they can write off the cost of equipment, or from a transition rule for taxing current offshore corporate profit hoards (at an unspecified tax rate). In speaking about this type of timing shift, Gene Sperling, director of the National Economic Council, told reporters that “That money can’t responsibly be used to lower rates because it doesn’t sustain itself.”

Overall, however, the President continues to ignore what should be an essential result of real tax reform: to make corporations pay their fair share of taxes in order to provide the additional revenues we need to provide the public services and investments that our country needs.

Did you know that “Nike Waffle” isn’t just a shoe? It’s also a tax shelter.

Nike, like companies such as Apple, Dell and Microsoft, has a huge stash of offshore profits that it hasn’t paid U.S. taxes on. We also know that Nike, like these other corporations, has paid little or nothing in foreign taxes on these profits either. And we also know that all these companies have many offshore subsidiaries in tax-haven countries.

Nike’s latest annual report, released earlier this week, shows just how blatant multinational corporations have become in using offshore tax havens to avoid their U.S. tax responsibilities.

Nike reports that its cache of “permanently reinvested offshore profits” ballooned from $5.5 billion to $6.7 billion in the past year — meaning that the company moved $1.2 billion of its profits offshore. Nike also discloses that if it were to pay U.S. taxes on its offshore stash, its federal tax bill would be $2.2 billion, a tax rate of just under 33 percent. Since the federal income tax is 35 percent minus any taxes corporations have paid to foreign jurisdictions, it’s easy to deduce that Nike has paid virtually no tax on its offshore profit hoard.

Nike’s long list of offshore subsidiaries includes twelve shell companies in Bermuda alone, ten of which are named after one of Nike’s own shoes! To wit: Air Max Limited, Nike Cortez, Nike Flight, Nike Force, Nike Huarache, Nike Jump Ltd., Nike Lavadome, Nike Pegasus, Nike Tailwind and Nike Waffle!

Why does Nike want to pretend that its product names live in Bermuda? To avoid paying taxes, of course. When multinationals move their brand names and other “intellectual property” to tax-haven subsidiaries, they can have their subsidiaries “charge” the U.S. parent companies big royalties for using the names. These transactions reduce U.S. taxable income and rob state and federal governments of tens of billions of dollars each year.

You might think that American multinational corporations might be just a little embarrassed by such nefarious behavior. But no, they mostly aren’t. Nike, in particular, is thumbing its corporate nose at the IRS and ordinary taxpayers by making its tax avoidance maneuvering so obvious and having a little fun at our expense.

Frontpage Photo of Nike Shoes via Daniel Y. Go Creative Commons Attribution License 2.0 

Lawmakers are often criticized for not taking a long-term perspective on important issues.  But when it comes to the gas tax, elected officials in four states this year (Maryland, Massachusetts, Vermont, and Virginia), as well as the District of Columbia, have done just that.

As we have shown, collecting a “fixed-rate” gas tax (i.e. one that doesn’t change from year-to-year) leaves state transportation departments totally unprepared to deal with rising infrastructure construction costs and the consequence of growing vehicle fuel-efficiency cutting into gas sales.  At the start of the year, only fourteen states handled this reality by levying gas taxes that gradually grow over time alongside either gas prices or the general inflation rate in the economy.  That number has now risen to seventeen, with Maryland, Virginia, and now Massachusetts joining that group.  (The District of Columbia recently enacted this reform as well, and Vermont reformed its already price-based gas tax in a way that links it even more closely to gas prices.)

The Massachusetts reform comes after months of back-and-forth between Governor Patrick and the state legislature.  The Governor originally proposed a much more far-reaching and progressive revenue package that would not only have raised gas and cigarette taxes, but also reformed the income tax and cut the sales tax rate.  That proposal failed to gain traction, and the legislature ultimately opted just to raise the cigarette tax and the gasoline tax, and to index the gas tax so that it grows alongside inflation in the future.

This reform will put the state’s gas tax on a much more sustainable trajectory.  As the above chart shows, Massachusetts’ gas tax rate was scheduled to fall to its lowest (inflation-adjusted) level in its history next year.  The increase, which takes effect next week, will prevent that from happening.

But lawmakers shouldn’t pretend that the state’s transportation funding problems are completely solved.  While indexing the tax to inflation should make it easier for the state to afford the rising cost of construction materials, it still leaves the gas tax vulnerable to decline as Massachusetts residents switch to more fuel-efficient cars and purchase less gas as a result. Moreover, as Governor Patrick pointed out, the state’s toll road revenue is scheduled to take a major hit in 2017 when tolls on the Massachusetts Turnpike will be reduced. Patrick wanted to include an additional gas tax hike in 2017 to compensate for this loss—and even vetoed the package passed by the legislature in an effort to see it included—but his veto was overridden.  These looming challenges mean that Massachusetts lawmakers will likely have to consider another gas tax increase in a few years, but for now this reform is certainly a step forward.

Looking at the rest of the country, legislatures in most states where gas tax reform was a real possibility have gone home for the year, but there’s still a chance Pennsylvania could revisit the idea this fall. With luck, the number of states levying a smarter gas tax could rise to eighteen before the year is over.

On July 19, CTJ’s Steve Wamhoff made a presentation to members of the Alliance for a Just Society on the details of corporate tax reform. Because several of the audience members were small business owners, the presentation partly focused on the offshore tax loopholes that give large multinational corporations an unfair advantage over domestic businesses, which are often smaller businesses.

The presentation makes the following points:

1. The U.S. needs more revenue.

2. New revenue must come from progressive sources.

3. The corporate tax is a progressive revenue source.

4. American corporations are undertaxed.

5. One way to get more corporate tax revenue is to close tax loopholes related to offshore tax havens.

6. We must stop current proposals to expand these loopholes (territorial tax system, repatriation holiday).

Needless to say, corporate lobbyists and many of their friends in Congress and even in the Obama administration disagree with many of these points, so the presentation provides a detailed argument for each.

See the slideshow from the presentation, providing details on each of these points.

Last year, Texas lawmakers refused to use the state’s emergency “rainy day” fund to save education from deep spending cuts.  But now that the state’s transportation system is facing the budget axe, those same lawmakers appear to have changed their tune.  By the end of this week, the legislature is expected to approve a resolution asking voters to permanently divert some of the state’s rainy day funds to supplement the state’s woefully inadequate transportation revenues.

Texas has been playing a dizzying fiscal shell game, moving money back and forth between education and transportation for years, all because its regressive tax system simply brings in too few revenues to cover services its growing population needs (especially schools). The reason for Texas’ current transportation funding deficit, however, has less to do with this shell game than it does with its transportation funding sources.

Like most states, Texas relies heavily on a “fixed-rate” gasoline tax whose revenues fall further behind each year as infrastructure costs grow and vehicles become more fuel-efficient.  When we analyzed Texas’ gas and diesel taxes in 2011, we found the state could raise more than $2.1 billion in revenue per year just by updating the tax rates to catch up with the last two decades of inflation in construction costs.

This latest scheme to find money for transportation will raise less than half that much ($800 million), though, and it will do so by first transferring money away from the rainy day fund into the education fund, and then taking it from education to pay for roads.  Given that Texas needs at least $4 billion in additional revenue just to maintain its current transportation network, this proposal can hardly be considered a real “solution.”

Just as importantly, this shuffling of revenues does nothing to improve the unsustainable trajectory of Texas’ transportation finances.  The above chart shows that Texas’ gas tax rate has been in constant decline, as a result of inflation, since it was last raised in 1991.  In fact, adjusted for inflation, Texas’ gas tax rate is at its lowest point since 1983—a full thirty years ago.

Not even a month after cutting personal income taxes and raising the state’s sales tax, Ohio Governor John Kasich is pledging to further lower the state’s top income tax rate to below 5 percent (the top rate was 5.925% before being dropped to 5.3% this year).  Speaking at a plastics plant last week, the Governor said, “we have momentum” with tax cuts, and expressed his belief that low taxes will draw more business to the Buckeye State.

Proponents of the $800 million regressive income tax cut package that was vetoed by Governor Jay Nixon last month are spending millions of dollars to convince lawmakers to override the veto. Missouri’s Chamber of Commerce is airing TV ads in support of the cuts and conservative political activist Rex Sinquefield (who has been a long-time funder of the anti-tax agenda in Missouri) has given more than $2 million to efforts to overturn the veto.  For his part, Governor Nixon is spending the summer trying to convince lawmakers and others that the veto should be sustained, particularly if they care about quality education.  At a St. Louis Chamber event Governor Nixon said, “members of the General Assembly can either support (the tax cut) or they can support education. They cannot do both.”

The Salt Lake Tribune reports on the growing chorus of support for raising taxes in Utah in order to pay for improvements to the state’s transportation infrastructure.  According to the Tribune, everybody from the state Chamber of Commerce to local governments and non-partisan think tanks has been “working to build a case that transportation tax hikes are overdue.”

A story in Kentucky’s Courier-Journal highlights some of the problems with paying for roads and bridges with tolls.  Drivers who happen to live or work close to a tolled bridge end up paying far more for infrastructure than those drivers who are lucky enough to have un-tolled routes available to them.  Moreover, low-income drivers are always affected most by tolls — a fact that’s led some local lawmakers to begin discussing ideas like exempting drivers from tolls if their incomes are low enough to qualify for the Earned Income Tax Credit (EITC).

Congress Should End the Most Regressive Ones, Maintain the Progressive Ones, and Reform the Rest to Be More Progressive and Better Achieve Policy Goals

A new report from Citizens for Tax Justice explains how Senators responding to the “blank slate” approach to tax reform should prioritize which “tax expenditures” to preserve, repeal or reform.

Read the report.

Senators Max Baucus and Orrin Hatch, chairman and ranking member of the tax-writing committee in the Senate, have asked their colleagues to assume tax reform starts from a “blank slate,” meaning a tax code with no tax expenditures (special breaks and subsidies provided through the tax code). Senators are asked to provide letters to Baucus and Hatch by this Friday explaining which tax expenditures they would like to see retained in a new tax code.

CTJ’s report evaluates the ten costliest tax expenditures for individuals based on progressivity and effectiveness in achieving their stated non-tax policy goals — which include subsidizing home ownership and encouraging charitable giving, increasing investment, encouraging work, and many other stated goals.

CTJ’s report concludes that:

1. Tax expenditures that take the form of breaks for investment income (capital gains and stock dividends) are the most regressive and least effective in achieving their stated policy goals, and therefore should be repealed.

2. Tax expenditures that take the form of refundable credits based on earnings, like the Earned Income Tax Credit (EITC) and the Child Tax Credit, are progressive and achieve their other main policy goal (encouraging work) and therefore should be preserved.

3. Tax expenditures that take the form of itemized deductions are regressive and have mixed results in achieving their policy goals, and therefore should be reformed.

4. Tax expenditures that take the form of exclusions for some forms of compensation from taxable income (like the exclusion of employer-provided health insurance and pension contributions) are not particularly regressive and have some success in achieving their policy goals, and therefore should be generally preserved.

Read the report.