Month: October 2013

At the behest of Kansas Governor Sam Brownback, the state legislature has enacted two rounds of major tax cuts that disproportionately benefit the wealthiest Kansans. After signing into law the first set of tax cuts, Governor Brownback called the radical bill “a real live experiment.” He was quite proud of the legislation, saying that it wouldn’t affect the state’s ability to provide quality education and meet the needs of its poorest residents because the tax cut would eventually pay for itself by generating increased economic growth. The Governor said, “I want to ride the income tax rates on down, keep this glide path going to zero that we’re on, to get to a pro-growth position.”  But any good experiment calls for constant monitoring and so far, the Governor’s experiment is failing.

For starters, there is evidence that local governments are feeling enormous pressure to make up for reductions in state support by increasing their property tax rates. Hannes Zacharias, Johnson County’s Manager said, “Indeed, we are at the end of the food chain, and we’re the ones who have to clean up the mess.”  And as the Associated Press reports: “the county has lost state revenue for jobs such as inspecting sewer septic tanks for new residents in rural areas. In addition, furloughs in district court operations caused by limited state funds mean defendants must stay in county jails longer while awaiting trial, a cost picked up by local governments.”

And what of the Governor’s promise to continue to provide quality education?  It turns out that this is another instance where the state’s supply-side experiment has apparently been less than successful.  The Lawrence Journal-World reports that because of cuts in state classroom spending, school finance as a percentage of Kansas personal income will next year hit its lowest level in history. And soon the Kansas Supreme Court will be taking up this very issue. The Topeka Capital-Journal writes that the lawsuit before the Kansas Supreme Court could actually “end Brownback’s tax legacy.”  If the Court rules that more state money needs to be spent on public education, the legislature will likely need to raise hundreds of millions of dollars in new taxes.

The Governor’s office claims that state general fund monies to schools have increased since he took office, but this is apparently because the administration is now including contributions made to teacher retirement funds in its math. Teacher retirement funding dollars have never been used to calculate overall classroom spending in the past.

So far, the Governor’s experimental policies are actually not that popular with Kansans. But in some circles, the clamor for tax cuts persists.  Infamous billionaire anti-taxer Rex Sinquefield, for example, is urging Missouri lawmakers to follow Kansas’ lead.  He writes (with no evidence) of the Kansas experience: “Lower income tax rates have in fact stimulated the economy by reducing the price both of work and conducting business in the state, not to mention that lower rates have predictably proven effective when it comes to luring out-of-state businesses to Kansas’ friendlier business environment.”

Thankfully, the Kansas City Star took the time to refute Mr. Sinquefield’s wild claims: “What we do know is corporations have moved from Missouri to Johnson County and vice versa because of generous tax incentives that have nothing to do with Brownback’s income tax cuts. One year later, what we also know is from July through September, revenue to the state coffers has declined by $135 million, or a 9 percent drop from last year. The Legislature’s research staff projects that there will be a net reduction this fiscal year of a half billion dollars and a billion dollars by 2018.”

The House and Senate budget conference committee that was formed as part of the deal that ended the federal government shutdown and raised the debt ceiling is unlikely to come to any “grand bargain” that dramatically reduces the deficit or increases public investments. This is because, as House Budget Committee Chairman Paul Ryan reiterated this week, Congressional Republicans will oppose any proposal that includes new revenue.

“Taking more from hardworking families just isn’t the answer. I know my Republican colleagues feel the same way,” Ryan said during a meeting of the conference committee on Wednesday. “So I want to say this from the get-go: If this conference becomes an argument about taxes, we’re not going to get anywhere. The way to raise revenue is to grow the economy.”

There can be no reasonable “grand bargain,” which is usually interpreted to mean a deal including cuts to programs like Social Security and Medicare, if Congressional Republicans continue to block any and all revenue increases. The U.S. collects lower taxes as a percentage of its economy, than any Organisation for Economic Co-operation and Development (OECD) nations other than Mexico and Chile. Our current federal tax system is projected to collect revenue equal to 18.5 percent of our economy a decade from now. As we have pointed out before, in only a handful of years over the past three decades has federal spending been this low.

There are still useful things the committee might do, in theory, like changing the way sequestration affects certain programs. But the overall level of federal spending may be stuck at its current austere level, which has already done much damage to the economy.

Even the apparent glimmers of interest in revenue among Republicans on the conference committee are misleading. Rep. Tom Cole, for example, raised the possibility of “raising revenue” by enacting a tax amnesty for repatriated offshore profits like the one that was enacted in 2004. The non-partisan Joint Committee on Taxation has already concluded that allowing American corporations to officially bring to the U.S. their offshore profits (many of which are already being invested in the U.S.) would raise revenue for a few years and then lose revenue as companies are encouraged to shift even more profits offshore and wait for the next tax amnesty.

Committees can talk around the issue all they want, but there is simply no getting around the need for increased revenue.

Happy Halloween to our readers!

Kansas Governor Sam Brownback’s bloodcurdling vision for his state is on display in a new article in Governing magazine, which poses the question “Can Tough Love Help Reduce Poverty?” As the article notes, Brownback has demanded that poverty-stricken Kansans get off welfare and get a job, despite the dearth of quality employment opportunities in the state. What makes this fanciful approach to poverty-alleviation even more revolting is that Brownback’s own policies don’t support the working poor. For example, he has proposed to eliminate the state’s Earned Income Tax Credit — which, as the name implies, only goes to those with wages earned through work during the year. While that proposal was rejected by the legislature, the tax cut bills he ultimately signed in 2012 and 2013 were wildly unfair, raising taxes on low-income families in order to give tax breaks to the wealthy.
 

The frighteningly incoherent world of online shopping sales taxes is undergoing yet another change this week.  We recently wrote about how a court ruling in Illinois limits the state’s ability to enforce its sales tax laws. In other states, though, things are moving in exactly the opposite direction.  The world’s largest online retailer–Amazon.com–will begin collecting sales taxes in Massachusetts and Wisconsin this Friday under agreements reached with those two states.
 

Advocates of “pay-per-mile” taxes are continuing to tell hair-raising stories about how the gas tax is doomed by the growing popularity of hybrids and alternative fuel vehicles–most recently in the Los Angeles Times.  But while fuel-efficiency gains may spell trouble in the long-term, the Institute on Taxation and Economic Policy (ITEP) recently explained that the root cause of our current transportation funding nightmare is much more straightforward.  78 percent of the gas tax shortfall we see today is simply a result of Congress’ failure to plan for inflation.
 

ITEP got a shout-out in a recent New York Times editorial urging voters to reject New York Governor Andrew Cuomo’s shortsighted plan to increase the number of casinos in the state. As the editorial points out, ITEP has shown that higher state revenues from casino gambling are fleeting, often vanishing like a ghost to neighboring states and leaving in-staters, particularly those afflicted with gambling addictions, holding the bag.

One question that comes up in debates about the corporate income tax is who pays it. Even though the corporate tax is officially paid by corporations, all taxes are ultimately paid by actual people.

It is clear that the corporate tax is, in the short term, borne by the owners of capital — meaning it’s paid by the owners of corporate stocks and other business and investment assets because the tax reduces what corporations can pay out as dividends to their shareholders. But those who promote corporate tax breaks sometimes argue that in the long-term the tax is actually borne by labor — by workers who ultimately suffer lower wages or unemployment because the corporate tax allegedly pushes production activity offshore.

Most experts who have examined the question believe that investment is not entirely mobile in this way and that the vast majority of the corporate tax is borne by the owners of capital, who mostly (but not exclusively) have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of Treasury concluded that 82 percent of the corporate tax is borne by the owners of capital. According to Treasury, this results in the corporate income tax being distributed as illustrated in the table to the right, which shows that the richest one percent of Americans pay 43 percent of the tax while the richest 5 percent pay 58 percent of the tax. These figures were used by CTJ to estimate the distribution of tax increases resulting from corporate loophole-closing in our new comprehensive tax reform proposal.

Treasury’s findings are similar to those of other analysts. The Tax Policy Center, for example, has concluded that 80 percent of the corporate income tax is borne by the owners of capital.

Two weeks ago, the Joint Committee on Taxation (JCT), the official revenue estimators for Congress, announced that it would finally include corporate income taxes in its distributional tables showing the effects of proposed tax changes. This will make JCT’s analyses more consistent with other analyses (including CTJ’s), and will mean that lawmakers will no longer get a free pass in JCT’s distributional tables when they enact regressive corporate tax cuts.

In conjuction with its announcement, JCT published a report estimating that in the short-run all of any change in the corporate tax will benefit or burden owners of capital, while in the long-run 75 percent of a corporate tax change will affect owners of capital (and the rest will affect labor income).

JCT’s conclusion is not all that different from the conclusions of others, but some observers seem to think it is “news” and have misinterpreted its importance. For example, Bruce Bartlett, who typically has a lot of insightful things to say about taxes, wildly misinterprets JCT’s conclusion:

Politically, it is now easier to show that a cut in the corporate tax rate will have benefits that are broadly shared, especially by those with incomes below $30,000. Conversely, it means that the Obama administration’s plan to raise new revenue by closing corporate tax loopholes will have a harder time gaining traction, because much of the burden will fall on those with low incomes.

This is all wrong. Bartlett includes some tables from the JCT report in his piece but fails to include the table that actually matters, which is at the top of page 27 and is titled “Distribution of a $10 Billion per Year Increase in Corporate Income Taxes.” This table shows JCT’s estimates of how much taxes would go up for taxpayers at different income levels in each of the next 11 years. JCT’s figures are in millions of dollars, but with some simple arithmetic, we can calculate the share of a corporate tax increase paid by each of the income groups that JCT presents. We focus on the first and last year that JCT analyzes, to show both the immediate and longer-term impacts.

The result is the table below, which shows that under JCT’s assumptions, over half of a corporate income tax increase would be paid by people with income exceeding $200,000. Well over three-fourths would be paid by people with incomes exceeding $100,000. Only about 6 percent would be paid by the 55 percent of taxpayers earning less than $50,000, whose average tax increase from a $10 billion corporate tax hike would be only $7.

In other words, any provision that raises revenue by closing corporate tax loopholes will have a progressive impact, meaning it will increase the share of taxes paid by high-income people.

Low- and middle-income Americans will be hurt by proposals being debated like cuts to Social Security, Medicare and Medicaid and proposals recently put into effect like sequestration of funds for Head Start. It would be far better for lawmakers to achieve whatever savings they think are necessary by closing corporate tax loopholes, because very little of the resulting tax increase would be paid by low- and middle-income Americans.

A headline in a publication read widely by tax experts (subscription only) this morning screamed “PwC Study: Effective Corporate Tax Rate Topped Statutory Rate From 2004 to 2010.”

The actual report, which was published in a rival publication this week (subscription only), provides three different ways of measuring effective corporate tax rates, and only one tells us anything about how our corporate tax system is working. That measure — the percentage of worldwide profits paid in worldwide taxes for corporations that were profitable from 2008 through 2010, was 22 percent, the study concludes.

This is not surprising at all. CTJ’s study of most of the Fortune 500 corporations that were consistently profitable from 2008 through 2010 found their effective U.S. federal corporate income tax rate on their U.S. profits to be 18.5 percent over that period. The PwC study finds that worldwide profits (not just U.S. profits) were subject to worldwide taxes (including U.S. federal and state taxes plus foreign taxes) of 22 percent.

These two findings are entirely compatible. The effective worldwide tax rate can be expected to be slightly higher than the effective U.S. tax rate that CTJ calculated because the CTJ study also found most of the corporations to pay higher taxes in the other countries where they did business, and because the worldwide rate includes state corporate taxes.

However, PwC’s report also includes two other, odd measures of corporate tax rates that are irrelevant to the policy debate, and tries to get reporters to focus on these irrelevant figures. One includes companies whether they were profitable are not in the years examined. Of course, corporations that are not profitable are not expected to pay the corporate income tax, which is a tax on profits. But including corporations with losses reduces the total amount of profits and makes the effective tax rate (taxes as a percentage of profits) appear much larger.

Another irrelevant measure used by the PwC study includes all corporations with positive taxable income. This measure leaves out corporations that actually are profitable but avoid taxes because of breaks (like depreciation breaks) that reduce their taxable income to below zero. This measure simply excludes the corporations that are most effective at dodging taxes.

The author of the PricewaterhouseCoopers report, Andrew Lyon, was called out by CTJ in 2011 for a report he wrote for the Business Roundtable claiming that U.S. corporations pay higher effective tax rates than corporations of other countries. It appears that this time around, his better angel compelled him to include a straightforward, relevant statistic even while he tries to divert readers’ attention to his report’s other, meaningless findings.

Citizens for Tax Justice released a detailed tax reform plan this week that accomplishes the goals we set out in an earlier report: raise revenue, enhance fairness, and reduce tax incentives for corporations to shift jobs and profits offshore.

A budget resolution approved by the House of Representatives in the spring called for a tax reform that raises no new revenue, while a budget resolution approved by the Senate called for $975 billion in new revenue over a decade. CTJ’s report on goals for tax reform explained why we need even more revenue than the Senate resolution calls for, and the plan we released this week would raise $2 trillion over a decade

Our proposal would accomplish this by ending some of the biggest breaks for wealthy individuals and corporations. The proposal includes the following reforms:

■ Repealing the special, low tax rates for capital gains and stock dividends, as well as the rule allowing accumulated capital gains to escape taxation when the owner of an asset dies.

■ Setting the top tax rate at 36 percent — which would be a significant tax increase on the wealthy because this rate would apply to the capital gains and stock dividends that mostly go to the richest Americans and which are now taxed at much lower rates.

■ Increasing the standard deduction by $2,200 for singles and twice that amount for married couples.

■ Replacing several “backdoor” taxes (like the Alternative Minimum Tax) with President Obama’s proposal to limit the tax savings of every dollar of deductions and exclusions to 28 cents.

■ Repealing several enormous corporate tax breaks, including the rule allowing American corporations to “defer” paying U.S. taxes on their offshore profits until those profits are officially brought to the U.S.

Read our tax reform reports:

Tax Reform Goals: Raise Revenue, Enhance Fairness, End Offshore Shelters
September 23, 2013

Tax Reform Details: An Example of Comprehensive Reform
October 23, 2013

Colorado’s Child Care Tax Credit would be expanded for low-income families under a bill approved by a special task force of legislators last week.  As the Colorado Center on Law and Policy explains (PDF), some Colorado households are actually too poor to benefit from the federal credit right now because it’s only available to families who make enough to have some income tax liability; if you don’t pay income taxes, you can’t receive any state tax credit.  This bill would fix that problem at the state level by letting families earning under $25,000 claim a credit equal to 25 percent of their child care expenses, regardless of what credit they did (or did not) receive at the federal level.

Montgomery County, Maryland continues to make progress toward restoring its Earned Income Tax Credit (EITC) to its pre-recession level: 100 percent of the state’s EITC.  The enhancement was approved by a committee on Monday and will now go before the full council.  For more information, see our blog post on the history, and the benefits, of Montgomery County’s EITC.

Maine Governor Paul LePage is coming under fire for wildly inaccurate comments he made (which were secretly recorded) at a meeting of the Greater Portland chapter of the Informed Women’s Network.  Gaining him national attention, LePage told his audience  that “47 percent of able-bodied people in Maine don’t work,” a claim that is ridiculous.  At the same meeting LePage also said the following to justify his proposals to cut taxes for wealthy Mainers: “25 years ago Maine had about 2,000 millionaires. Maine has 400 now. New Hampshire at the time had about 500, right now they have 4,000. That’s the difference. That’s when you talk about prosperity and you talk about building an economy those are the things that you need to concern yourself with. So, I am looking at taxation as a big issue.”  Like his 47 percent claim, LePage evidently pulled these numbers out of thin air as data from the IRS do not back this statement. In fact, the number of tax returns with more than $1 million of income increased more in Maine (83%) than in New Hampshire (64%) between 1997 and 2011 (the years IRS data are available).

Some bad ideas just won’t die. Despite being rejected by the Pennsylvania House of Representatives by a vote of 138-59 last month, a proposal to eliminate school property taxes and reduce spending for schools is now being reconsidered by the state’s Senate. The bill, SB 76, replaces the property tax with higher sales and income taxes but then limits how much of the new revenue would flow to schools. The legislature’s own Independent Fiscal Office warned last week that the bill would create a $2.6 billion funding gap within five years. While reducing property taxes, which have been rising in recent years, may make sense (for low-income renters and fixed-income homeowners in particular), it should not be done at the expense of students, nor in the form of across-the-board cuts that also benefit big businesses. The House-passed HB 1189 at least ensured that the lost property tax revenues would be replaced with some other source, but neither bill addresses the longstanding problem of inadequate and unequal school funding in Pennsylvania.

Last week, the Illinois Supreme Court struck down a state law (commonly called the “Amazon law”) that would have helped solve some of the sales tax enforcement problems surrounding online shopping.  As things currently stand in Illinois (and most other states), traditional retailers with stores, warehouses, or actual employees in Illinois are required to collect  state sales taxes from their customers, while online retailers who don’t employ any Illinois residents (or have any other “physical presence”) are given a free pass.  Online shoppers are supposed to pay the sales tax directly to the state when e-retailers fail to collect it, but few shoppers actually do this in practice.

Illinois, along with nine other states, had tried to strengthen its sales tax enforcement by requiring more online retailers to collect the tax (specifically, those retailers partnering with Illinois-based “affiliates” to market their products).  But this court ruling strikes down Illinois’ law on the grounds that it treats companies partnering with online affiliates differently than companies who advertise in Illinois through traditional media.  According to a majority of the justices, this feature of Illinois’ “Amazon law” violates a federal law enacted in 2000 that bars “discriminatory taxes on electronic commerce.”

In his dissent, Justice Lloyd Karmeier points out that Illinois’ “Amazon law” didn’t actually impose any new taxes—it simply required a larger number of retailers to be involved in collecting and remitting sales taxes that are already due.  Karmeier went on to say that he would have upheld the law – in much the same way that New York’s highest court did with a similar law in that state earlier this year.

With Illinois’ and New York’s courts disagreeing on this issue, legal observers seem to think there’s a growing chance that the U.S. Supreme Court will consider the case next year.  But it’s a shame it’s come to this.  The Supreme Court already made clear over two decades ago that Congress has the authority to set up a more rational, nationwide policy for how states can tax purchase made over the Internet.  The U.S. Senate did exactly that this May with a bipartisan vote in favor of the Marketplace Fairness Act, but so far the U.S. House of Representatives has yet to act on it.  We presume it’s the political disagreements among activists and lobby groups that’s prevented the House from acting so far, but it’s increasingly urgent that states finally be allowed to resolve the mess that is tax collection for online shopping.

Cartoon by Monte Wolverton, available at and courtesy Cagle Cartoons.

Earlier this month, with an unexpected $100 million biennial budget surplus burning a hole in his pocket, Wisconsin Governor Scott Walker proposed to use the one-time surplus to permanently cut local property taxes. In a whirlwind legislative session, a bipartisan group of Wisconsin lawmakers approved Walker’s tax cut with little opposition. Walker signed it into law over the weekend in a media-friendly event, with a red barn as the backdrop and children as nearby props.

The new law adds $100 million in state aid to local school districts over the next two years—which, due to the state’s strict local revenue limits, means that local governments receiving the new aid will be forced to reduce their property taxes dollar for dollar.

But there’s a hitch. The forecast $100 million surplus may be just a memory two years from now, but the new state aid will be permanently on the books. As the Wisconsin Budget Project (WBP) points out, using a one-time budget surplus to fund a permanent property tax cut is a recipe for long-term fiscal difficulties. Down the road, lawmakers will likely be forced to either hike state taxes or cut other areas of spending to pay for Walker’s tax cut. And “down the road” isn’t that far off: the Legislative Fiscal Bureau is already estimating a budget shortfall of about $725 million for the biennium starting in 2015.

Even worse, the new law will offer trivial tax breaks to homeowners, despite its huge price tag. The typical homeowner will see just $33 in property tax cuts over the next two years and many ordinary homeowners will see no cut at all. This is because the Governor’s plan will cut property taxes across the board, offering tax breaks to big corporations, shopping malls and vacation homes in addition to Wisconsin homeowners who happen to live in the right school districts.

In an attempt to disguise this campaign season ploy as a fiscally responsible plan, defenders of the new law argue that a new deal requiring Amazon.com to collect sales taxes in Wisconsin will help pay for the cut. But the estimated $30 million a year from that deal is not “new revenue,” and it’s already got a purpose—it’s legally-owed sales tax revenue that should already have been helping to fund schools, roads and medical care for years.

One of the few responsible legislators who voted against the tax bill offered some illuminating observations. Noting that it amounts to less than a dollar a month for the average home owner, State Senator Tim Cullen said that this trumpeted “tax relief” was aimed at nothing more than ensuring Governor Walker’s re-election. “That at the end of the day is what this is all about — $100 million of property tax relief. Nice headline.” More specifically, many share the view that the Governor was more interested in scoring political points than promoting good tax policy, and it’s a shame so many members of his legislature willingly played along.