Ultra-Wealthy Dodge Billions in Taxes Using “GRAT” Loophole

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A new Bloomberg report describes how billionaires have dodged an estimated $100 billion in gift and estate taxes since 2000, according to the lawyer who perfected the practice.

The trick involves temporarily putting corporate stocks (or similar assets) into a “Grantor Retained Annuity Trust” (GRAT), where the grantor gets the stocks back after two years, plus a small amount of interest, while any appreciation of the stock goes to the grantor’s heirs tax-free.

Because the initial gift has no inherent value (it’s essentially a gift to oneself), there is no gift tax at the time the GRAT is set up. The loophole is that the appreciation of the stock that goes to the heirs is not subject to gift tax either. As a result, extremely wealthy individuals avoid billions of dollars in gift and estate tax.

This is what Sheldon Adelson did (to take just one example) when he put much of his Las Vegas Sands stock in GRATs when the stock had plummeted during the recession. Adelson knew that the stock was likely to rise significantly from that low point. If Adelson had simply given his heirs the stock, the gift tax would have  applied to the value of the stock at the time it was given. Or if he bequeathed the stock upon his death, the estate tax would apply.

But by using GRATS, neither the value of the stock at the time it was temporarily put into the GRAT nor the subsequent appreciation was subject to gift or estate tax. See the graphic below from Bloomberg for how the shelter works in practice.

Many well-known figures, such as Facebook CEO Mark Zuckerberg, Goldman Sachs CEO Lloyd Blankfein and fashion designer Ralph Lauren, have set up GRATs to shelter their assets from gift and estate tax. Bloomberg estimates that Adelson, whose net worth is more than $30 billion, has already avoided at least $2.8 billion in US gift taxes using at least 25 different GRATs over time.

For his part, Adelson has not just sought to follow (or exploit) whatever law is on the books, but has actually taken an active role in trying to shape the law and the government that enacts it. In 2012, Adelson spent an astonishing $150 million to support conservative candidates and has said that he’s ready to “double” his donations to candidates going forward. Considering the billions that Adelson has at stake, this exuberant campaign spending may actually be a prudent investment if it works to preserve the GRAT loophole and the plethora of other massive tax breaks for the wealthy individuals embedded in the tax code.

To their credit, the Obama Administration has proposed to curb (PDF) the use of GRATs by requiring that a GRAT have a minimum term of 10 years. As the Treasury explains (PDF, pg. 142), this would create some downside risk to using a GRAT because it increases the likelihood that the grantor will die before the GRATs paid out the appreciation to the heirs, at which point that appreciation would be subject to the estate tax. Unfortunately, this proposal has been brushed aside by Republicans who seek to eliminate the estate tax entirely and by some Democrats who are not enthusiastic about taking on a tax break used by the large campaign donor class.

State News Quick Hits in Wisconsin, Illinois, Kentucky and Oklahoma

The LaCrosse Tribune gets it right in this editorial titled, “Don’t Conduct Tax Talks in Private.” As we told you last week , Wisconsin  Governor Scott Walker asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Unfortunately, the first invitation-only discussion happened behind closed doors. We couldn’t agree more with the Tribune that, “true tax reform deserves feedback and input from all Wisconsin citizens because while we may not all contribute to political candidates or align ourselves with political parties, we all pay taxes.” Now we hear that the Governor is interested in  income tax repeal. Let’s hope this debate doesn’t happen behind closed doors.


Illinois Governor Pat Quinn has come out in favor of reviewing tax breaks given to businesses over the last several years in order to see if they really had a positive impact on the state’s economy.  We’ve been critical of the Governor for offering such tax incentives to specific companies.  Reviewing those giveaways for effectiveness is long overdue.


In more good news for those of us concerned with the “race to the bottom” in which states are doling out massive tax incentives to businesses with little oversight, Archer Daniels Midland is set to announce that they will move their headquarters to Chicago without receiving any state or city incentives in return.

Kentucky Governor Steve Beshear is (again) committing himself to tax reform. He recently said in 

an interview, “Tax reform remains a top priority of mine, and I am hopeful that we can address it in some way in the upcoming session.”

The Oklahoma Supreme Court recently struck down a regressive and unpopular cut to the state’s top income tax rate that Governor Mary Fallin signed into law earlier this year.  According to the court, the bill containing the tax cut violated a provision in the Oklahoma constitution requiring each bill to be focused on a “single subject.”  In addition to cutting the state’s income tax, the bill would have also provided funding to repair the state’s Capitol building. 

Murray-Ryan Budget Deal Avoids Government Shutdown but Does Not Close a Single Tax Loophole, Leaves Many Problems in Place

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The latest budget deal in Congress seems to indicate that anti-government, anti-tax lawmakers will not force a costly shutdown of the federal government in 2014 as they did in 2013, although they still threaten to cause the U.S. to default on its debt obligations if some yet-undefined demands are not met. In today’s dysfunctional Congress, that’s considered a great achievement. Congress could have replaced all of the harmful sequestration of federal spending for next year and the year after by closing the tax loopholes used by corporations to shift jobs and profits offshore, as recently proposed by Reps. Lloyd Doggett and Rosa DeLauro. Sadly, the deal negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan does none of that.

Deal Replaces Some Sequestration, Further Reduces the Deficit

On Wednesday the U.S. Senate approved the Murray-Ryan budget deal, which was negotiated by Senate Budget Chairman Patty Murray and House Budget Chairman Paul Ryan and approved last week by the House. It would undo $63 billion of the $219 billion sequestration cuts scheduled to occur in 2014 and 2015 under the Budget Control Act of 2011 (the deal President Obama and Congressional Republicans came to in one of the previous hostage-taking episodes).

Most mainstream economists believe that governments should not cut spending when their economies are still climbing out of recessions, but that’s pretty much exactly what Congress did by approving the 2011 law resulting in sequestration of about $109 billion each year for a decade.

The Murray-Ryan deal would reduce that by $45 billion next year and by $18 billion in the following year. While the deal replaces $63 billion of sequestration, the total savings in the deal add up to $85 billion, which means the deal technically reduces the deficit compared to doing nothing. But about $28 billion of the savings come from simply extending some of the sequestration cuts longer than they were originally intended to be in effect (extending them into 2022 and 2023). This enables Rep. Ryan to claim that the deal further reduces the deficit. But this has no real policy rationale except for those who believe that shrinking government is good in itself, regardless of the impacts.

Any major budget deal approved during a recession ought to provide an increase in unemployment insurance, which is the sort of government spending that puts money in the hands of the people most likely to spend it right away, thus enabling local businesses to retain or create jobs. But under the Murray-Ryan deal, the extended unemployment benefits that were enacted to address the recession would run out (at the end of this month for many people). As the Center on Budget and Policy Priorities explains, in the past Congress has not allowed these benefits to run out until the rate of long-term unemployment was much lower than it is today.

Tax Loopholes Left Untouched, but Revenue Raised through Fees

The Murray-Ryan deal does not close a single tax loophole for corporations or individuals. A bill recently introduced by Reps. Lloyd Doggett and Rosa DeLauro demonstrates exactly how this could be done. The DeLauro-Doggett bill basically borrows the loophole-closing provisions from Senator Carl Levin’s Stop Tax Haven Abuse Act and uses the revenue savings to replace sequestration for two years.

To take just one of many examples of how it would work, the DeLauro-Doggett bill would close the loophole allowing corporations to take deductions each year for interest payments related to the costs of offshore business even though the profits from that offshore business will not be taxable until the corporation brings them to the U.S. years or even decades later. This reform is estimated to raise around $50 billion over a decade. Another provision would reform the “check-the-box” rules that allow corporations to tell different governments different things about the nature of their subsidiaries and whether or not their profits have been taxed in one country or another, resulting in profits that are taxed nowhere. This reform is estimated to raise $80 billion over a decade.

These two reform options appear on a list of potential loophole-closing measures released by Senator Murray’s committee (as well as in the DeLauro-Doggett legislation). The committee’s list also included others that Citizens for Tax Justice has championed, like closing the carried interest loophole to raise $17 billion over a decade, closing the John Edwards/Newt Gingrich loophole (for S corporations) to raise $12 billion, closing the Facebook stock option loophole to raise as much as $50 billion, and several others. (Many of the reforms on the budget committee list are explained in this CTJ report.)

Instead of closing tax loopholes, the Murray-Ryan deal raises revenue through fee increases that are not technically tax increases but would probably feel like tax increases to the people experiencing them. For example, fees on airline tickets that pay for the Transportation Security Administration (TSA) would increase to $5.60 per ticket, raising $12.6 billion over a decade. The premiums paid by companies for the Pension Benefit Guaranty Corporation (to guarantee employee’s pension benefits) would increase, raising $7.9 billion over a decade. Another provision would increase federal employee pension contributions, raising $6 billion over a decade. These are just a few examples.

These measures do raise revenue, but it would seem more straightforward to remove the loopholes that complicate the main taxes we rely on to fund public investments and that eat away significantly at the amounts of revenue they can raise. Members of Congress can only run for so long before facing the need for tax reform.

Income Tax Deductions for Sales Taxes: A Step Away from Tax Fairness

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Sales taxes are the biggest tax fairness problem facing state and local governments: they inexorably fall hardest on the low-income families who are least able to pay them, while asking far less, as a share of income, from the very best-off taxpayers. So if the federal government enacts a tax break designed to offset the impact of sales taxes, that can’t be a bad thing, right? As it turns out, it IS a bad thing, as explained in a recent report from Citizens for Tax Justice.

A deduction for sales taxes existed in the past but was repealed as part of the loophole-closing Tax Reform Act of 1986. In 2004 Congress brought the concept back as the itemized deduction that federal income taxpayers can claim for state and local sales taxes they pay each year.

Spearheaded by then-House Majority Leader Tom DeLay, the provision, enacted as part of the “American Jobs Creation Act of 2004,” gave itemizers the choice of deducting either their state and local income taxes or their sales taxes. The provision was set to expire two years later–and that’s how it joined the big happy family of “tax extenders,” the motley crew of temporary tax giveaways Congress now extends every couple of years.

Almost a decade later, the sales tax deduction is once again set to expire at the end of 2013. However, the deduction has a vocal fan base among politicians in the nine states that have no broad-based income taxes and rely more on sales taxes to fund public services. Since these states include large states like Florida and Texas, it’s a constituency that is difficult to ignore. Their Congressional delegations argue that it’s unfair for the federal government to allow a deduction for state income taxes, but not for sales taxes, but this misses the larger point. The underlying problem with sales taxes is their impact on low-income families, and itemized deductions don’t help low-income people, who mostly take the standard deduction rather than itemizing. Also, the higher your income, the more the deduction is worth, since the tax benefit depends on your income tax bracket.

The table above includes taxpayer data from the IRS for 2011, the most recent year available, along with data generated from the Institute on Taxation and Economic Policy (ITEP) tax model to determine how different income groups would be affected by the deduction for sales taxes in the context of the federal income tax laws in effect today.

As illustrated in the table, people making less than $60,000 a year who take the sales-tax deduction receive an average tax break of just $100, and receive less than a fifth of the total tax benefit. Those with incomes between $100,000 and $200,000 enjoy a break of almost $500 and receive a third of the deduction, while those with incomes exceeding $200,000 save $1,130 and receive just over a fourth of the total tax benefit.

So the sales tax deduction is both complicated and regressive, not to mention an added burden on the vast majority who don’t use it but have to pay for it (in the form of higher tax rates or skimpier public services). Yet too many of our politicians seem to think “other than those flaws, what’s not to like?”

The good news is that all Congress has to do in order to make this bad dream end is… nothing. Since the tax break is set to expire on New Year’s Day, Congressional tax writers can achieve a small, but meaningful, victory for tax fairness and simplification by simply sitting on their hands.

Hey, Hey, Ho, Ho, Tax Simplicity Has Got to Go, says Iowa Governor

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Iowa Governor Terry Branstad is reportedly interested in implementing an alternative income tax structure for the Hawkeye State’s wealthiest taxpayers.

The state’s income tax rate structure is a bit deceptive because Iowa is one of just six states offering a deduction for federal income taxes paid. ITEP has written a whole report on this costly and regressive loophole available here (PDF). The ability of Iowans to write off all of their federal income taxes on their state income tax forms means that the state needs higher income tax rates in order to raise necessary revenue. The state’s top personal income tax rate is 8.98 percent—and some elected officials believe this makes it difficult to attract businesses to the state. But, Iowans pay an effective tax rate far lower than 8.98 percent because of the generous deduction for federal income taxes paid.

In order to combat this public relations problem, Governor Branstad is considering proposing an alternative income tax that has lower rates and no deduction for federal income taxes paid. Iowans would be allowed to file their taxes either way, but of course, most taxpayers would compute their income tax bills twice to determine which results in lower tax liability. In other words, the proposal completely disregards the tax policy principle of simplicity. It’s also likely that offering this “optional” income tax would cost the state in terms of revenue, since most people will choose it only if it saves them money.

The Governor’s proposal has come under scrutiny from some in the legislature and from various advocacy groups. Iowa Citizens for Community Improvement released a statement saying, “Iowa’s wealthiest citizens need to pay their fair share in taxes. They don’t need more options for how to pay less.”

The track record for proposals of this type isn’t very good. One need only look to the 2008 presidential campaign and Senator John McCain’s tax proposal. During the campaign Citizens for Tax Justice analyzed the Senator’s alternative “simplified” tax and found that in 2012 alone, the alternate tax “would cost $98 billion, and 58 percent of this would go to the richest five percent of taxpayers.” Let’s hope Governor Branstad’s proposal falls the way of McCain’s.

Rental Housing and the Tax Code

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More than sixty years after President Franklin Delano Roosevelt made “freedom from want” one of the “four freedoms” he sought to guarantee to families worldwide, one important component of Roosevelt’s vision—affordable housing—is further and further away for many low-income families. It’s well-known that the gradually unfolding foreclosure crisis of the past half-decade put homeownership out of reach for millions of American families. But as a new study from Harvard’s Joint Center for Housing Studies (JCHS) shows, many of these families have found that shifting from homeownership to renting has hardly eased the burden of housing costs. The study, America’s Rental Housing: Evolving Markets and Needs, finds that half of all renters nationwide are now paying more than 30 percent of their incomes on rent.

This is significant because housing experts have traditionally viewed the 30-percent-of-income threshold as the upper limit on affordable housing costs—and because the share of American renters paying burdensomely high rents, by this measure, grew faster over the past decade than at any time in the past half century. In 1960, JCHS finds, the share of renter households paying more than 30 percent of their income was 22 percent. In 2000, that share had risen to 38 percent, and in the decade that followed it jumped to 50 percent.

The JCHS measure breaks out families whose rental costs are “moderate burdens” (30 to 50 percent of income) and “severe burdens” (more than 50 percent of income). Disturbingly, the last decade’s jump in unaffordable rents was driven primarily by those with “severe” rental costs. An astonishing 27 percent of American rental households now spend more than half their income on rent alone, up sharply from 19 percent at the turn of the century. 

But as a September 2013 ITEP report notes, an increasing number of state tax systems have a straightforward mechanism in place, the property tax “circuit breaker” credit, that can be tailored to reduce the burden of rental housing cost for families. Circuit breakers are designed to prevent housing costs from exceeding some “excessive” share of income, and nearly half of the states now offer renters at least a small tax credit to keep their rental costs below these excessive levels. Recent expansions in renter tax breaks in Minnesota and the District of Columbia, described in our September report, show that even in a fiscally challenging environment these relatively inexpensive tax credits can be achievable for states.

In fact, circuit breakers administered by state governments may be the most attainable policy solution going forward for mitigating the excessive rental housing costs that millions of low-income families currently face. This is because, as the JCHS report shows, direct rental subsidies have actually been provided to fewer and fewer rent-challenged families even as rental costs have soared. The share of eligible households receiving rental subsidies fell from 27 to 23.8 percent during the past five years alone. In other words, state circuit breakers may be the last backstop for near-poverty families facing severe housing costs.

New CTJ Report: Congress Should Offset the Cost of the “Tax Extenders,” or Not Enact Them At All

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Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. A new report from Citizens for Tax Justice explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs. It is entirely inappropriate that lawmakers refuse to fund infrastructure repairs or Head Start slots for children unless the costs are offset, while routinely extending these tax breaks without paying for them.

The tax breaks usually considered part of the “tax extenders” were last enacted as part of the deal addressing the “fiscal cliff” in January of 2013. At that time most of the provisions were extended one year retroactively and one year going forward, through 2013. As these tax breaks approach their scheduled expiration date at the end of this year, they are again in the news.

Read the report.

Congress Should Offset the Cost of the “Tax Extenders,” or Not Enact Them At All

December 12, 2013 04:56 PM | | Bookmark and Share

Congress should end its practice of passing, every couple of years, a so-called “tax extenders” bill that reenacts a laundry list of tax breaks that are officially temporary and that mostly benefit corporations, without offsetting the cost. This report explains that none of the tax extenders can be said to help Americans so much that they should be enacted regardless of their impact on the budget deficit and other, more worthwhile programs.

Read the report.

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State News Quick Hits: Wisconsin Tax Policy Round Tables, Unpopular Tax Cuts in Kansas, and More

Governor Scott Walker says that one of his goals is to lower taxes for all Wisconsinites. He’s asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Regrettably, transparency clearly isn’t another one of the Governor’s goals as the first roundtable discussion was closed to the public (and press) and only business leaders were invited.

In “race to the bottom” news, Missouri lawmakers approved a 23-year, $1.7 billion package of tax cuts for Boeing in an attempt to lure the manufacturer to the state. Missouri is one of twelve states vying for the opportunity to make the new 777X passenger jets. As we have explained, Missouri seems eager to repeat the mistakes of of Washington State, which recently provided Boeing with the largest state tax cut in history, at $8.7 billion.

It turns out that Kansas’ recent tax cuts aren’t just bad policy.  They’re also unpopular.  The income tax cuts, sales tax hikes, education cuts, and social service cuts that resulted from Governor Brownback’s tax plan are all opposed by a majority of Kansans, according to polling highlighted in The Wichita Eagle.

Due to the extensive changes to North Carolina’s personal income tax starting in 2014, the state’s Department of Revenue has asked all employers to distribute new state income tax withholding forms to their employees.  The need for a new form has unfortunately led to a lot of confusion and some really inaccurate press coverage on the regressive and costly tax “reform” package enacted this year.  Some articles mistakenly reported that everyone will get an income tax cut (and thus a little more money in their paychecks next year), but we know this is not the case.  The loss of the state’s Earned Income Tax Credit, personal exemptions (despite a higher standard deduction), and numerous other deductions and credits will negatively impact many working North Carolina families and seniors living on fixed incomes.  And, these stories all failed to point out that while income taxes may be going down for some, sales tax on items including movie tickets, service contracts and electricity will be going up in 2014.

Oregon Governor has Bad Intel on Corporate Tax Breaks

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State tax giveaways for business are reaching a fever pitch in the Pacific Northwest. Washington lawmakers last month enacted an $8.7 billion “mega-deal” package of state and local tax breaks designed to keep the state’s aerospace industry, dominated by Boeing, in the state. The sheer scale of the package, which is designed to last until 2040, has prompted some to wonder whether the time has finally come to end the tax-incentive arms race between the states. 

But across the Columbia River in Oregon, Governor John Kitzhaber is having none of this talk. Computer chipmaker Intel has just inked a new package of guaranteed tax breaks, not through legislative action but through direct negotiation with Governor Kitzhaber. In brief, Intel gets a guarantee that it will be able to use the coveted “single sales factor” manufacturing tax break for 30 years– even if the legislature repeals it for everyone else doing business in the state.

In return for a tax break that will outlive many current Oregon voters, Intel agrees to do…nothing they weren’t already doing. As the Oregon Center on Public Policy points out, the company has already begun construction of a new research facility in the state, and the result of this agreement is simply that they will continue building the facility. Intel senior leaders admit that Intel’s current investments on this site are “nothing new…just continued expansion of the site.”

Why does Governor Kitzhaber have the power to unilaterally negotiate tax deals with Fortune 500 companies? Because the legislature gave him that power. In a special legislative session last year, the legislature enacted a bill (PDF) initially designed to authorize a similar tax break package for the Nike corporation, but ultimately crafted to allow any large company to negotiate directly with the governor on tax incentive packages, as long as those negotiations took place before the end of 2013. (Reminder to mom-and-pop businesses in Oregon: you’ve got just two short weeks left to set up your personal meeting with Kitzhaber if you want to secure similar tax breaks– better get with the program!)

The good news is that in the limited time Kitzhaber has had access to his “magic wand” for granting tax breaks, he’s only done it for Intel and Nike. So when Kitzhaber turns over a new leaf and starts pushing for comprehensive tax reform after the next gubernatorial election, he’ll have to spend a bit less time undoing the damage he’s wrought in 2013.

What makes this all the more astonishing is that Kitzhaber and the legislature have no idea whether these companies are paying a meaningful amount of income tax to Oregon to begin with—and there’s anecdotal evidence that they don’t. A 2011 report from Citizens for Tax Justice and the Institute on Taxation and Economic Policy shows that Intel was one of over a dozen Fortune 500 companies that, despite being hugely profitable between 2008 and 2010, managed to pay not even a dime of state corporate tax nationwide during this three-year period.

Public disclosure of corporate tax payments (PDF) remains a terrific, if largely unfulfilled, step toward reform, and it’s worth asking: if Kitzhaber, to say nothing of Oregon taxpayers, knew just how little income tax Intel is paying right now to Oregon, would this horrific deal have ever seen the light of day?