Month: October 2013

In his reelection campaign, New Jersey Governor Chris Christie has been touting his record as a self-proclaimed fiscal conservative, bragging that “not one tax has been raised since I’ve been governor.” Many low-income New Jersey families would disagree. That is because Christie cut the state’s property and earned income tax credits, two critical anti-poverty measures for low-income workers, during his first term.

On property taxes, Christie boasts that he “successfully implemented a 2-percent property tax cap.” But many low- and moderate-income homeowners actually pay more now in property taxes than before the cap took effect. That is because he reduced funding for the Homestead Benefit and Senior Freeze programs, costing working families hundreds of millions of dollars. That is one reason why the public’s view of Christie’s handling of the property tax issue is so low.

On income taxes, Christie reduced the state’s EITC by 20 percent in 2010, costing 1.5 million workers a total of $100 million in tax credits over the last two years. The governor then refused to restore the cuts unless he got his way on an across-the-board income tax cut. In fact, he twice vetoed legislation that would restore the EITC, effectively holding low-income New Jersey workers hostage to his demands.

In contrast, Christie’s opponent, Barbara Buono, has promised to “restore New Jersey’s Earned Income Tax Credit and protect property tax relief for the families who need it most.” At the same time, Buono is supporting a millionaire’s tax that Governor Christie rejected (vetoing it three times) in order to fill in revenues needed for education in particular, which has been severely cut during Christie’s tenure.

A candidate for governor who says, as Buono does, that tax credits and incentives work best when targeted is one who better understands the role of taxes in the economy and budget than one committed to across-the-board income tax cuts (which do zero for a state’s economy and always benefit the wealthiest instead of taxpayers who actually need relief).   

Sixteen days after parts of the federal government were shut down because House Republicans refused to approve a spending plan unless it defunded or delayed health care reform and after coming close to causing a breach of the federal debt limit that would cause a catastrophic default, Congress and the President have enacted legislation to address both problems — for a while.

The deal does not change health care reform in any significant way and provides appropriations to keep the federal government running through January 15. It also suspends the debt ceiling until February 7, likely giving the Treasury until sometime in March before it requires another change in the debt ceiling.

As we have already explained, President Obama and Congressional Democrats had already more or less accepted the level of spending demanded by Republicans (a level of spending that assumed sequestration or other cuts equally large would stay in place) at the beginning of the debate over the continuing resolution (CR) that Congress needed to enact to keep the government running. But House Republicans demanded eliminating or delaying the health care reform law — even though it is funded entirely separately from the programs covered by the CR.

Of course, this all could happen again. The government could partially shut down again on January 15 if spending legislation is not enacted, and the U.S. could default on its debt in March if legislation is not enacted to raise the debt ceiling. Hopefully, Congressional Republicans will accept President Obama’s stance that the debt ceiling is simply not something that should be negotiated at all because a debt default would be so calamitous for the U.S. and the world economy. But there will still be plenty to argue about when Congress turns to the spending legislation needed to avoid another shutdown.

Budget Conference Panel Should Raise Taxes or Go Home

The deal that Congress and the President just enacted sets up a process for Congress to work out its differences and avoid another shutdown, at least in theory. The deal calls for the House and Senate to form a conference committee to work out the differences between the fiscal year 2014 budget resolutions approved in the spring by each chamber, and to report an agreement by December 13.

But the most likely scenario is that the committee will come to no agreement at all by December 13, and Congress eventually will enact another continuing resolution that keeps federal spending at the current harmfully anemic level.

Unlike the President’s debt commission in 2010 (the “Simpson-Bowles commission”) and the Joint Select Committee on Deficit Reduction in 2011 (the “Super Committee”), this panel is the normal conference committee that traditionally works out differences between House-passed and Senate-passed bills.

But it’s very unlikely that the committee can come to any such agreement. The Senate budget resolution is relatively moderate, but the House budget resolution is so ideological that it makes compromise seem impossible.

The House budget resolution, nicknamed the “Ryan Plan” after House Budget Committee Chairman Paul Ryan, calls for overhauling the tax code without raising any new revenue and calls for huge program cuts to balance the budget. The Senate budget resolution, crafted by Senate Budget Committee Chair Patty Murray, would raise $975 billion over a decade, bringing revenue to an extra 0.7 percent of the economy, and also calls for $975 billion in spending cuts.

We have pointed out before that the level of tax revenue projected to be collected under current law (which has recently been adjusted downward from 19.1 to 18.5 percent of the economy) would not have covered federal spending in any but a handful of the past thirty years. It is also wildly unrealistic to assume, as the Ryan plan does, that the deficit can be eliminated without raising revenue from this level.

This is why the spending cuts included in the Ryan plan are so draconian that they involve eliminating health insurance for millions of Americans and making massive cuts to safety net programs for poor and working families.

A CTJ report explains that the few details that the Ryan plan does set out for tax reform could not possibly be enacted without giving millionaires an average tax cut of at least $200,000, while requiring people at lower income levels to make up the difference.

The two resolutions also take different approaches to the deficit. The Senate resolution reduces it but does not eliminate it entirely, which is appropriate given that the projected short-term deficit has dropped sharply. Paul Ryan’s schizophrenic view that deficits are a huge problem but revenue increases cannot be used to address them is reflected in the House resolution’s reliance on enormous, harmful cuts in entitlements and safety net programs to balance the budget.

In theory, Murray and Ryan, who will co-chair the new budget conference committee, could come up with a compromise that does some good, like ending the damage done by sequestration. But any “deal” or “compromise” that fails to raise tax revenue from wealthy individuals and corporations should be rejected. 

Responding to growing international pressure over his country’s role in facilitating international tax avoidance, Ireland’s Minister of Finance, Michael Noonan, proposed a new measure that would end the ability of companies to avoid taxes by incorporating in his country without declaring any country of residence for tax purposes. The move comes after a Senate investigation in the U.S. that revealed Apple’s massive tax avoidance involving subsidiaries in Ireland.

But this move will not make any difference in the ability of Apple and other companies to avoid Irish, and by extension, other countries’ taxes. The law, as proposed, would continue to allow a company incorporated in Ireland to select any country to be its “residence,” the place where it is technically managed. In other words, a subsidiary company incorporated in Ireland can declare a tax haven as its residence and pay zero taxes on its profits and on profits funneled to it from related companies in other countries.

In fact, this approach is already being used by Google, which reportedly routed $12 billion in royalty payments to Bermuda, an infamous tax haven, using the “Double Irish with a Dutch Sandwich” technique. This strategy involves shifting profits (on paper) through subsidiaries that are shell companies in several jurisdictions until they are officially in an Irish shell company that legally “resides” in a country like Bermuda or the Cayman Islands which has no corporate income tax. The U.S. and many other countries have rules that would immediately tax certain payments made directly into a shell company in Bermuda or the Cayman Islands, so this complicated strategy takes advantage of the treaties between Ireland, the Netherlands, and many other countries that waive those taxes.

While it would fail to block this sort of tax avoidance, Ireland’s new proposal has succeeded so far in generating headlines that suggest the country is taking action and doing its part in international efforts to crack down on tax avoidance. Most reporting does, however, note somewhere in the text of the article, if not the headline, the fact that the change would likely have no material effect on tax avoidance (unlike some of the fumbled reporting on the end of the Securities and Exchange Commission investigation into Apple).

The leaders of the U.S. Senate investigation into Apple’s tax practices, Senators Carl Levin and John McCain, noted in a statement that in order for Ireland to demonstrate that it’s truly “ready to close the door on these egregious corporate tax abuses,” it must ensure that the new rules truly prevent companies from excluding substantial income from the Irish corporate tax by declaring residency in a tax haven. In other words, unless this recent proposal is followed up with changes that would actually impact tax avoidance, then it may be nothing more than a PR move.

Congress can end Apple’s and other U.S. companies’ avoidance of U.S. taxes right now, without waiting for Ireland to do the right thing. The best way is to simply repeal the rule that allows American corporations to defer paying (PDF) U.S. taxes on their offshore profits.  American corporations only use gimmicks like the “Double Irish with a Dutch Sandwich” so that they can defer (for years or forever) U.S. taxes on profits they claim are earned offshore. If Congress fails to repeal deferral, it can at least curb the worst abuses of deferral by enacting the Stop Tax Haven Abuse Act which Senator Levin has introduced.

Nebraska’s Tax Modernization Committee, which we promised to keep tabs on in July, is scheduled to hold its final public hearings this week. But rather than wait to hear what the panel has to say, Governor Dave Heineman decided to renew his calls for lower property and income taxes. While some have argued that Nebraska’s property taxes are too high, slashing property taxes without increasing state aid to local governments would put significant strain on vital local services. Today, Nebraska ranks 43rd nationally in the amount of state aid it provides to local governments, and 49th in the aid it gives to schools. If Governor Heineman succeeds in his quest to cut state taxes, increasing local aid will become even more difficult. The Open Sky Policy Institute has issued thoughtful recommendations on this and other issues facing the Committee.

If you’re wondering whether you should put any stock in the Tax Foundation’s newest “Business Tax Climate Index,” the answer is No.  For starters, Good Jobs First has shown that, contrary to popular belief, the Tax Foundation’s rankings aren’t a very good predictor of how much a business would actually pay in taxes if it were located in any given state.  And now Governing magazine has taken a critical look at the rankings in a new article, and concludes that states earning high marks from the Tax Foundation don’t actually have stronger job markets or higher medium wages.

U.S. News & World Report is running an opinion piece by Carl Davis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), highlighting the fact that the federal gas tax has not been raised in exactly 20 years – and has been losing value ever since. The essay draws heavily from research that ITEP published late last month, and concludes that “it’s time for our elected officials to accept that keeping the gas tax cryogenically frozen at 18.4 cents per gallon is costing Americans a lot more than it’s helping them.”

West Virginia is thinking about how best to use the tax revenues it expects to collect from sales of its natural gas resources. The Associated Press reports that “[f]or decades, coal from West Virginia’s vast deposits was mined, loaded on rail cars and hauled off without leaving behind a lasting trust fund financed by the state’s best-known commodity. Big coal’s days are waning, but now a new bonanza in the natural gas fields has state leaders working to ensure history doesn’t repeat itself.” According to the AP, the state’s Senate president, Jeff Kessler, is looking to use some of the severance tax revenues on oil and natural gas to create an enduring trust fund, as other states with significant natural resources have done. “His goal: a cushion of funds long after the gas is depleted to buoy an Appalachian mountain state chronically vexed by poverty, high joblessness, and cycles of boom and bust.”

Arkansas Advocates for Children and Families Executive Director, Rich Huddleston, was one of four Arkansas leaders invited to contribute to Talk Business Arkansas magazine with ideas for how to “construct a fairer state tax code.” His proposal (citing ITEP data) is here, and begins: “The goal of any good tax system is to raise enough revenue to fund critical public investments that improve well-being of children and families while also promoting economic growth and prosperity.”

Congressman Paul Ryan, chairman of the House Budget Committee and former vice presidential candidate, penned an op-ed in the Wall Street Journal this week proposing that Congress might end the government shutdown and avoid a cataclysmic debt default if Democrats agree to cut spending and not raise revenue. There is absolutely nothing new about Rep. Ryan taking this approach. (Although some of his Republican peers are reportedly disappointed that he did not also call for the defunding of health care reform.)

As we recently explained, the President and Congressional Democrats have already completely capitulated to Republican demands on reduced levels of spending to be set out in a “continuing resolution” (CR) to keep the government running. The shutdown resulted from House Republicans’ refusal to approve a CR that did not also defund or delay health care reform, which is an unrelated matter because it is funded separately (and in fact its implementation moves forward even now as much of the government is closed).

We also explained that the need to increase the debt ceiling does not involve increasing the deficit or increasing the size of government, but only carrying out the laws already enacted by Congress. And yet, House Republicans have demanded several policy “concessions” in return for raising the debt limit, which is necessary to avoid a catastrophic default on U.S. debt obligations.

In his Walls Street Journal op-ed, Ryan argues that we should “ask the better off to pay higher premiums for Medicare… reform Medigap plans to encourage efficiency and reduce costs… and ask federal employees to contribute more to their own retirement.”

President Obama, according to Ryan, “has embraced these ideas in budget proposals he has submitted to Congress. And in earlier talks with congressional Republicans, he has discussed combining Medicare’s Part A and Part B.”

Others have pointed out that all of President Obama’s comprehensive budget proposals have, in fact, included the entitlement cuts Ryan mentions, but coupled them with increased revenues. For example, CTJ has explained that the President’s proposed budget blueprint for fiscal year 2014 would have raised revenue by $851 billion over a decade (not counting certain revenue-raising provisions that the President unfortunately wants to use to offset tax breaks for businesses). The idea has always been that the President would agree to some spending cuts if Congressional Republicans agree to a revenue increase.

A graph from the Washington Post shows that the offers traded back and forth between President Obama and House Speak John Boehner leading up to the “fiscal cliff” deal all included significant revenue increases as well as cuts in spending. (Yes, even Speaker Boehner offered significant revenue increases initially).

But Ryan ignores all of that. He argues that a deal to end the shutdown and raise the debt ceiling should include a move towards tax reform that would not raise revenue. “Rep. Dave Camp and Sen. Max Baucus have been working for more than a year now on a bipartisan plan to reform the tax code,” Ryan writes. “They agree on the fundamental principles: Broaden the base, lower the rates and simplify the code.”

Actually, one of the most fundamental principles needed in designing a tax code is determining the amount of revenue you want to raise, and Camp and Baucus have not come to any agreement on that. Camp, like Ryan, has repeatedly called for a reform of the tax code that does not raise any additional revenue, while Baucus has called for a revenue increase without being specific about the amount.

A recent CTJ report explains that the level of revenue the federal government will collect under our current tax laws would equal about 18.5 percent of our economy a decade from now. That’s lower than the level of federal spending for all but a few years over the past three decades. With the retirement of the baby-boomers and the need for public investments in infrastructure, education, nutrition and other programs that will help us thrive as an economy and as a nation, it is simply absurd to call for a budget deal that precludes any increase in revenue.

On Wednesday, the New York Times examined the practice of some U.S. corporations inverting (reincorporating in another country) by merging with foreign companies, and the extent to which this is done to avoid U.S. taxes. This problem is probably somewhat overblown, but to the extent that it exists, there are straightforward ways Congress can address it.

It used to be that U.S. tax law was so weak in this area that an American corporation could reincorporate in a known tax haven like Bermuda and declare itself a non-U.S. corporation. (Technically a new corporation would be formed in the tax haven country that would then acquire the U.S. corporation.) In theory, any profits it earned in the U.S. at that point should be subject to U.S. taxes, but profits earned by subsidiaries in other countries would then be out of reach of the U.S. corporate tax.

But what sometimes happened in practice was that even the profits earned in the U.S. were made to look (to the IRS) like they were earned in the tax haven country through practices like “earnings stripping,” which involves loading up the American subsidiary company (the real company) with debt owed to the foreign parent (the shell company). That would reduce the American company’s taxable profits and shift them to the tax-haven parent company, which wouldn’t be taxable. A 2007 Treasury study concluded that a section of the code enacted in 1989 to prevent earnings-stripping (section 163(j)) did not seem to prevent inverted companies from doing it.

This problem was to some extent addressed by the “anti-inversion” provisions of the American Jobs Creation Act (AJCA) of 2004, resulting in the current section 7874 of the tax code. The problem highlighted in the Times article is that American corporations today can sometimes get around section 7874 by merging with an existing foreign corporation.

It’s a safe bet that some of these mergers really are motivated partly by a desire to avoid U.S. taxes on profits earned in other countries and also to avoid U.S. taxes on what are really U.S. profits but which are shifted into tax havens through earnings stripping. This may well be the case in the three examples cited of American corporations merging with Irish corporations, as Ireland has a low corporate tax rate and has featured prominently in tax schemes used by Apple and other companies.

In other cases, tax avoidance may not be the only factor in firms deciding to merge — as in the examples cited in the article of an American company merging with a French firm and another merging with a Japanese firm. But even in both of these cases, the new companies are to be incorporated in the Netherlands, which has also featured in tax avoidance schemes used by companies like Google, which suggests that tax avoidance is certainly a sweetener in the deal.

One question not addressed is the extent to which an Obama administration proposal to crack down on earnings stripping by inverted companies would resolve this problem. This proposal would basically apply a stricter version of section 163(j), the provision that is supposed to stop earnings stripping, to inverted companies that manage to avoid being treated as a U.S .corporation under section 7874, the anti-inversion provision enacted in 2004.

Specifically, section 7874 treats an ostensibly foreign corporation as a U.S. corporation for tax purposes if (1) it resulted from an inversion that was accomplished (meaning the U.S. corporation became, at least on paper, obtained by a corporation incorporated abroad) after March 4, 2003, (2) the shareholders of the American corporation own 80 percent or more of the voting stock in the new corporation, and (3) the new corporation does not have substantial business activities in the country in which it is incorporated.

Section 7874 provides much less severe tax consequences for corporations that meet these criteria except that shareholders of the American company now own between 60 percent and 80 percent (rather than 80 percent or more) of the voting stock in the newly formed corporation. Section 7874 does not treat these corporations as U.S. corporations, and that may allow them to save a lot of money by stripping earnings out of their American subsidiary companies. The President’s proposal would apply a stricter version of section 163(j), the provision that is supposed to prevent earnings stripping, to these companies (and to companies that inverted before 2003).

Tax avoidance by the corporations resulting from the mergers discussed in the Times article might be curbed by the Obama proposal. To be affected, the new corporations need to be at least 60 percent owned by the shareholders of the American company and also have no substantial business activities in the country where they are incorporated. For example, the merger between an American company and a French company and the merger between an American company and a Japanese company both resulted in companies incorporated in the Netherlands. They may be over 60 percent owned by the American shareholders and it’s likely that they have no substantial business in the Netherlands, a notorious tax-haven conduit.

But even if the resulting company does not meet these tests, Congress should subject them to the stiffer earnings stripping rule. In other words, the administration’s proposal is arguably too weak. For example, even if one of these mergers results in a company that does have substantial business activities in the country where it is incorporated, why should that company be allowed to strip earnings from its American subsidiary companies?

For that matter, the stricter earnings stripping standard that would be imposed under the President’s proposal is one that reasonably should apply to any foreign-owned company. Among other things, it would bar an American subsidiary company from taking deductions for interest payments to a foreign parent company in excess of 25 percent of its “adjusted taxable income,” which is defined as taxable income plus most certain significant deductions that corporations are allowed to take.

This seems like a reasonable standard to apply regardless of whether or not an inversion has taken place. In other words, Congress should enact an expanded, stronger version of the President’s proposal.

In less than a month, Colorado voters will decide whether to abandon the state’s flat-rate income tax in favor of a more progressive, graduated rate tax.  The main purpose of this reform is to raise nearly $1 billion in new revenue each year to offset the disastrous effects that strict constitutional limits on tax collections (i.e. TABOR) have had on the state’s K-12 education system.  But a new analysis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), shows that the proposal would have another benefit: improving the fairness of Colorado’s regressive tax system (PDF).

According to ITEP’s Who Pays? report, the poorest 20 percent of Coloradans currently spend 8.9 percent of their income paying state and local taxes, while the wealthiest 1 percent pay just 4.6 percent of their income in tax.  One reason for this gap is that unlike most states, Colorado’s income tax uses a single flat rate, and therefore doesn’t live up to its potential for offsetting the steep regressivity of sales and excise taxes.

The proposal being voted on in November (Amendment 66) would change this by giving Colorado a fairer, two-tiered income tax.  Specifically, the Amendment would raise the state’s income tax rate from 4.63 percent to 5 percent on incomes below $75,000, and from 4.63 percent to 5.9 percent on incomes over that amount.  If approved by voters, the gap in overall tax rates paid by Coloradans at different income levels would be reduced.  The wealthiest 1 percent would see taxes rise by 0.8 percent relative to their incomes, while lower-income taxpayers would see just a 0.1 percent increase.

Amendment 66 asks the most of those taxpayers currently paying the lowest effective tax rates.  While most families would see a modest increase in their income tax bills under the amendment, just 16 percent of the revenue raised by Amendment 66 would come from the bottom 80 percent of earners.  The bulk of the revenue (63 percent) would come from the wealthiest 20 percent of Coloradans.  And the remainder (21 percent) would not come from Coloradans, but rather from the federal government as Coloradans reap the benefits of being able to write-off larger amounts of state income tax when filling out their federal tax forms.

As the Colorado Fiscal Institute points out, that 21 percent federal contribution is a big deal.  If Coloradans reject Amendment 66 this November, they’ll essentially be turning down $200 million in federal dollars that their K-12 education system could put to very good use.

Read the report

Following the Securities and Exchange Commission (SEC)’s announcement (PDF) that it had closed its review of Apple’s financial disclosures, headlines like “SEC Agrees That There’s Nothing Wrong With Apple’s US Taxes” started appearing, giving the false impression that what Apple has somehow been exonerated for is its tax avoidance practices. The reality, however, is that the SEC is now satisfied that Apple is not violating the rules in the disclosure of its tax circumstances to the agency, which has nothing to do with the legal validity of its tax avoidance methods more generally. In addition, the SEC only closed its investigation after Apple agreed to disclose more information on its foreign cash, tax policies and plans for reinvestment of foreign earnings; that makes it pretty clear that the SEC did not judge the company’s previous disclosures adequate.

Much of the news coverage took its cues from a story at the Dow Jones tech news site, All Things D. called “SEC Clears Apple’s Tax Strategy.” To that site’s credit, it corrected the story, explaining that the article “was updated to make it clear that the SEC’s review concerned Apple’s tax disclosures, not the legality of its tax practices under U.S. tax law, which is the purview of the IRS.” Also relevant is a Los Angeles Times story that ran several days before All Things D’s. It got no significant pick-up from other news outlets because it rather blandly, and accurately, conveyed that this whole thing was simply a step in a bureaucratic process. Unfortunately, the flurry of stories and columns suggesting that Apple had been wrongly convicted in the court of public opinion are still out there, uncorrected, creating an impression that Apple’s tax practices are pure benevolence.  

Going beyond just the misleading headlines, articles like the editorial in the Wall Street Journal turned the SEC letter into an opportunity to argue that the Senate investigation into Apple was really just a “three-ring media circus” created by Senators to “please their political masters.” (Some believe that corporations like Apple are themselves the political masters, but that’s another matter.) But the WSJ editorial misconstrues… everything. The entire point of the Senate investigation and subsequent hearing is that what Apple does may be legal, but it also allows the company to escape paying its fair share in taxes on its high profits.

As Citizens for Tax Justice (CTJ) noted in a May report, Apple has managed to manipulate the international tax system using tax havens to such an extent that it paid almost nothing in income taxes on over $102 billion in foreign profits. While Apple’s abuses of the international tax system are particularly striking, CTJ also found that Apple is joined by companies like Dell, Microsoft and Qualcomm in shifting billions of dollars of profits to tax havens. CTJ was unable, however, to include many other companies engaging in these kinds of manipulations because the SEC is not using its authority to require companies to disclose all the information needed to make these determinations about every company. (Ironically, Apple has been more forthcoming than other notorious tax dodgers like Google and GE.) 

Rather than fixating on whether what Apple does is technically legal, the focus needs to be on how lawmakers can put an end to these elaborate tax dodges altogether. The most straightforward way to stop companies from dodging taxes would be to end deferral (PDF), which allows companies like Apple to indefinitely postpone paying taxes on offshore profits. In addition, lawmakers could follow the recommendations from the Senate investigation’s report (PDF) on Apple, which proposed tightening transfer pricing rules and reforming the “check-the-box” and “look-through” rules in the Internal Revenue Code.

There is mounting public outrage over the way corporations are avoiding U.S. taxes using offshore tax havens, and one move that would encourage Congress to do the right thing sooner would be for the SEC to tighten its disclosure requirements. The agency should ask for more detail on country-by-country income shifting, in particular, since that’s the direction the world is going anyway.  It’s time for the SEC to start exercising the authority it has, and for Congress to stop the revenue hemorrhage that is corporate tax avoidance.

Cartoon by Mike Smith, courtesy the Press Democrat.

Governor Sam Brownback’s tax policies are being challenged by a state legislator who’s running to unseat him, Paul Davis. “Gov. Brownback’s `real live experiment’ is not working,” Davis said, using Brownback’s own description of the extreme tax changes he signed into law. Davis was referring to rising unemployment rates and a new Kansas Department of Revenue report showing revenues are falling below projections. Kansas lawmakers have slashed taxes over the past two legislative sessions and, despite what supply-siders would have you believe, tax cuts really don’t pay for themselves.

The Institute for Illinois’s Fiscal Stability at the Civic Federation in Chicago issued a report describing the lack of movement on fiscal issues as a “lost opportunity” for the state (we agree). Laurence Msall, president of the Civic Federation said, “This year was a lost opportunity as legislators failed to prepare for the extreme financial challenges everyone knows are on the immediate horizon. We see some progress this year on the backlog of unpaid bills, but nothing to address the unresolved pension crisis or to plan for the revenue loss coming next year.”  Next year, the state’s income tax rate is scheduled to be reduced and with that even larger shortfalls in the state’s budget are expected.

Following up a story from last week about Archer Daniels Midland Company (ADM) asking for $20 million in tax breaks from Illinois, Illinois Governor Pat Quinn is now saying that he won’t approve any ADM tax breaks until the state’s pension system has been reformed.

For evidence of why special “tax incentives” don’t work in boosting state economies, look no further than this Washington Post story on the tax breaks that the District of Columbia tried to give LivingSocial last year.  Shortly after being offered $32.5 million to expand its DC presence, the tech company did exactly the opposite, cutting its DC payroll from nearly 1,000 employees to just over 600.  Today, just 244 DC residents work for the company.  Had LivingSocial seen a rising demand for its product, it would no doubt have expanded its payroll and happily collected a $32.5 windfall courtesy of DC taxpayers. But promises of a special tax break aren’t enough on their own to convince a smart business owner to expand.

After three days of debate and backroom deals, lawmakers in Oregon delivered hundreds of millions of dollars in unwarranted tax cuts to businesses as part of the state legislature’s 2013 special session on Wednesday.

The Governor’s objective for calling the special session was to increase education spending, reduce public employee pensions, and limit regulation of genetically modified agriculture, among other priorities. But buried in one of the five bills that came up for consideration – all of which passed on Wednesday – were tax rate cuts for partnerships, limited liability companies, and “S corporations.”

As we and the Oregon Center for Public Policy have demonstrated, these cuts far outweighed increased assistance for working families, which came in the form of a modest increase in the state Earned Income Tax Credit (EITC). Moreover, the budget math only works for the first two years. Oregon’s own Legislative Revenue Office expects the costs of those business tax cuts to grow rapidly starting in 2015, eating away at the limited new revenues in the deal. This will likely create another budget crunch a few years down the road. And despite the political rhetoric about jobs and small business surrounding the tax cuts, the beneficiaries are almost exclusively individuals in the top 1 percent.

Rep. Brent Barton, D-Oregon City, himself a lawyer in private practice, asked an important question about the deal: “What is the message that this Legislature is sending when we cut my taxes 20 percent? We cut taxes on thousands of lawyers, doctors, lobbyists, accountants on the same day that we cut benefits for retirees. What message does that send?”

Unfortunately, advocates for working Oregonians will have little time to recover from the special session fight before they’re confronted with Governor Kitzhaber’s next pet project: weakening Oregon’s so-called “over-reliance” on income taxes.