Month: December 2013

Having already cut taxes for the state’s wealthiest residents, Governor Mike Pence and Indiana’s legislative leadership have shifted their focus toward cutting taxes for businesses.  Specifically, they’ve declared eliminating or reducing the business personal property tax to be a top priority for the upcoming legislative session.  The business personal property tax, levied mainly on equipment and machinery, currently raises over $1 billion each year for localities, school districts, and library districts.  State lawmakers would not see their revenues directly affected by repeal of the tax.

Governor Pence says that he wants to take this revenue source away from local governments in a way that would not “unduly harm” them, though he did not specify how he would accomplish this goal, or what an acceptable level of “harm” would be.  While some localities collect just 3 percent of their total property tax revenues from business property, others depend on the tax for as much as 40 percent of their property tax collections.

If the tax is repealed, state aid would be hugely important in avoiding deep cuts in local services, but other states’ track records in providing such aid is less than encouraging.  Lawmakers face a constant temptation to renege on promises they’ve made to localities as they begin to look for ways to pay for their own tax or spending priorities, or when the state budget eventually falls on hard times.

Unsurprisingly, then, the head of the Indiana Association of Cities and Towns says that “every mayor that I have spoken with is deeply concerned about what the elimination of the personal property tax might mean to local government.”  The Associated Press also provides some important context for their concern, noting that “many communities are still struggling with their budgets five years after the enactment of statewide property tax caps.”

If the business personal property tax is repealed and local governments are left to fend for themselves, Dr. Larry DeBoer of Purdue University estimates that other property owners would be asked to make up about half of the lost revenue.  Specifically, he expects that they would see their property taxes raised by a combined total of about $453 million per year.  In part because of the 2008 property tax caps, however, localities would also have to cut their budgets to make up much of the difference.  Unless state lawmakers devise a plan to truly make localities whole (and actually to stick to that plan), Indiana residents could expect their local services to be cut by up to $510 million each year, on top of the cuts that have already gone into effect.

When Washington State lawmakers approved a record $8.7 billion in tax breaks for Boeing and other aerospace companies last month, many observers hoped that the unprecedented scale of the new tax cuts—which will last through 2040—might open policymakers’ eyes to the folly of the “race to the bottom” that will eventually result from ever-increasing corporate giveaways. But Missouri Governor Jay Nixon’s eyes remain firmly shut. Nixon has called a special legislative session to urge the Missouri legislature to approve tax cuts totaling $1.7 billion , also geared toward Boeing and other aerospace companies.

Nixon’s professed hope is that the tax breaks will entice Boeing to produce their 777X commercial aircraft in Missouri. But Boeing’s own taxpaying behavior suggests that for some, the “race to the bottom” may already be over: a recent CTJ report found that over the past decade Boeing managed to avoid paying even a dime of state income taxes nationwide on $35 billion in pretax U.S. profits.

When state governments force cuts in local tax collections, as New Mexico did almost a decade ago under Governor Bill Richardson, these cuts are often accompanied by a “hold harmless” promise, under which locals will (in theory) be reimbursed for the taxes they are no longer allowed to collect. But the hold harmless pledge often works out to be what Mary Poppins called a “pie crust promise”—easily made and easily broken. Just nine years after Governor Richardson burnished his tax-cutting credentials by exempting groceries from local (and state) gross receipts taxes—while simultaneously implementing a “hold harmless” provision so that locals wouldn’t feel the pain of losing such a large chunk of their tax base—a law is now in place that will completely phase out the hold-harmless aid to locals between 2015 and 2030.  A recent Santa Fe New Mexican editorial correctly rakes the legislature over the coals for its “fickle” attitude toward fiscally-strapped local governments.

The lesson for local policymakers facing the threat of state-mandated tax cuts? Hold-harmless provisions should be a basic component of any such cuts—but the state aid resulting from these provisions will be a all-too-tempting target for state lawmakers whenever the economy slows.

This week, the Supreme Court declined to hear the e-commerce industry’s challenge to New York’s trend-setting “Amazon law.”  The law, which was upheld by New York’s highest court, successfully expanded the number of online retailers collecting New York sales taxes.  It did this by requiring any e-retailer to collect the tax if they partner with New York based “affiliates” to generate over $10,000 in sales.  Because of the law, Amazon.com has been collecting sales taxes from its New York customers for more than 5 years, generating millions in revenue for public services and making the state’s sales tax base slightly more rational.

In the wake of the Court’s refusal to hear Amazon.com and Overstock.com’s appeals, some observers are already predicting that more states will be tempted to follow New York’s lead.  And follow it they should.  More than a dozen states have “Amazon laws” patterned after New York’s and while they’re not a panacea for the tax base erosion that online shopping has caused, they are the best option states have available to them right now.

If anybody needs to pay attention to the Court’s ruling, though, it’s the U.S. House of Representatives.  Almost seven months ago the Senate passed a bipartisan bill that would have made New York’s law irrelevant by empowering all states to apply their sales tax collection laws more broadly to all e-retailers above a certain size.  The bill has widespread support among traditional retailers and a broad coalition of state-level lawmakers, but has so far been stopped—like many other reforms—by the House’s aversion to virtually anything that would improve tax collections at any level of government.

In what has been a cherished annual tradition for tax accountants everywhere, the day is approaching—January 1, to be precise—when dozens of temporary federal income tax provisions are set to expire. The so-called “extenders”—tax breaks enacted by Congress on a temporary basis and extended at the last minute, usually because lawmakers can’t find a way to pay for making them permanent—include a rogue’s gallery of ineffective giveaways ranging from the research and experimentation tax credit to a special write-off for race horses. One of these temporary tax breaks is an increase in the income tax exclusion for employer-provided mass transit to make it equal the existing exclusion for employer-provided parking benefits. As an NPR story recently explained, the expiration of the mass transit increase would create a glaring inequity between workers who use mass transit and those who drive: come January 1, Americans who drive to work will be able to write off $250 a month in employer-provided benefits for commuting-related costs, while those relying on mass transit will only be able to exclude $130 a month of such expenses from income.

If this seems unjustifiably discriminatory, that’s because it is: there’s no defensible rationale for systematically giving car commuters a bigger tax break than those relying on mass transit. Policymakers sensibly want commuters to rely on public transit because it reduces highway gridlock and pollution—benefits that accrue to all Americans, however they get to work. No one thinks it’s a smart idea to encourage more Americans to drive to work rather than using mass transit—yet that could be the impact of allowing the mass transit subsidy to fall at year’s end.

One seemingly-obvious solution, promoted by Oregon Representative Earl Blumenauer, would maintain the status quo, which gives the exact same tax benefit for mass transit that is available for those driving to work. But this approach is disturbingly discriminatory as well: like any exclusion from the progressive federal income tax, it offers bigger benefits to the upper-income taxpayers who pay at the highest marginal rates—and offers the least to those low-income workers who earn too little to pay federal income taxes. (Since fringe benefits like parking subsidies are excluded from the federal payroll tax as well, the exclusion does offer some benefits to even the poorest workers.)

This isn’t to say that making commuting more affordable is a bad idea: for the many low-wage workers who can’t afford to live in the central cities where they work, a long and costly commute is often a harsh reality. Yet the current tax subsidies for driving and mass transit are at best an inefficient way of solving this problem. For every dollar of tax break given to a low-wage worker, these subsidies give a much bigger tax break to the best-off Americans. Allowing the temporary higher benefit for mass-transit commuters to expire would be the worst possible way of paring back this tax break. A more straightforward alternative would be to simply end all tax subsidies for costs of commuting to work and instead put this revenue toward public investment in better and more affordable transportation infrastructure.

American Express’s Tax Avoidance Opposed by Most Small Businesses

Since 2010, American Express has boosted itself as a supporter of small businesses, by promoting “Small Business Saturday” as a counterpart to Black Friday. But American Express is no friend of American small business. Not only does it charge merchants high swipe fees, but it also uses and wants to expand offshore tax loopholes that most small businesses can’t use and want to close.

A short report from CTJ explains that the company’s SEC filings indicate it is holding $8.5 billion in low-tax offshore jurisdictions, including at least 22 offshore subsidiaries in 8 jurisdictions typically identified as “tax havens.” By its own estimates, American Express has avoided paying $2.6 billion in U.S. taxes by holding these profits offshore. To give some perspective, this amount is two and half times the budget of the entire Small Business Administration.

Even on the $21.3 billion in pretax profits that American Express officially earned in the U.S. over the past five years, the company has paid only half the 35 percent federal statutory tax rate.

Read the CTJ report.

Read the report.

Business lobbyists are pushing Congress to enact tax “extenders” — a bill to extend several temporary tax breaks for business that expire at the end of this year. A new report from Citizens for Tax Justice examines the largest of those provisions, the federal research and experimentation tax credit, a tax subsidy that is supposed to encourage businesses to perform research that benefits society. The report explains that the research credit is riddled with problems and should be either reformed dramatically or allowed to expire.

Created in 1981, the credit immediately became the subject of scandals when it was claimed by businesses that no ordinary American would consider deserving of a tax subsidy (or any government subsidy) for research — like fast food restaurants, fashion designers and hair stylists.

Reforms enacted in 1986 were supposed to prevent these abuses, but there is evidence that corporate tax planners have often out-maneuvered the reforms.

The report explains that many of the problems it describes are the work of accounting firms that wrote the book on abusing the credit — and quite literally wrote the credit regulations as well. The credit’s rules are so lax thanks in large part to Mark Weinberger, a Bush top Treasury appointee who had previously lobbied for a broader definition of “research” while he was at Ernst and Young and, after he left the Treasury, returned to a grateful Ernst and Young where he was eventually promoted to CEO.

Another firm behind abuses of the credit is Alliantgroup, a tax consulting firm with former IRS Commissioner Mark W. Everson serving as its vice chairman and Dean Zerbe, former senior counsel to former Senate Finance Committee Chairman Charles Grassley, as its managing director.

Members of Congress have pushed to remove what reasonable restrictions remain on the research credit. For example, the report explains that Senators Charles Grassley and Amy Klobuchar have both called on the Treasury Department to make it easier for businesses to claim the credit on amended returns for research done in previous years, which cannot possibly achieve the goal of providing an incentive to do research. (A business’s research cannot possibly be the result of a tax incentive that the business was unaware of until years after the research was carried out.)

Meanwhile, a report coauthored by former Clinton adviser Laura D’Andrea Tyson argues that Congress should simply repeal the reforms of 1986 and make legal the abuses that the IRS is trying to stop.

The CTJ report explains that even when the credit is claimed by companies doing legitimate research, it’s difficult to believe that the research was a result of the credit.

Congress should let the research credit expire, and redirect the billions of dollars that it costs into true, basic, truly scientific research, which businesses rarely engage in because the payoffs often take years to arrive.

The report explains that if lawmakers insist on extending the research credit once again when it expires at the end of 2013, they should address three broad problems. If these problems are not addressed, then the credit should be allowed to expire.

Read the report.

MassBudget, in partnership with the Schott Foundation’s Opportunity to Learn Campaign, has launched a new website: “Investing in the Future: Revenue Options to Give Every Child the Opportunity to Learn.”  This website is a resource for education advocacy organizations, grassroots groups, and others who are interested in undertaking a statewide campaign to raise revenue for public education.  It provides information on options for raising adequate revenues for education in progressive ways so that every child can have the opportunity to learn.

If you’re looking for a short explanation of the Earned Income Tax Credit (EITC) and a summary of how states differ in their EITC policies, look no further than the Institute on Taxation and Economic Policy’s (ITEP) recently updated policy brief.  Short primers on more than 40 tax policy topics are available in ITEP’s full library of policy briefs.

Here’s a great piece by the Associated Press about the perils of not modernizing state tax structures.  Missouri’s income tax brackets haven’t been changed since the Great Depression, and now updating those brackets would cost the state billions in revenue.  For more on the importance of indexing to maintaining a modern tax structure, check out ITEP’s policy brief.

Say it ain’t so… An Ohio Senator is proposing a sales tax holiday to help “lure Kentucky shoppers” to the Buckeye State.  Read why this is a horrible idea in ITEP’s brief, Sales Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform.