Month: January 2014

Much like their colleagues to the north, District of Columbia lawmakers are giving serious thought to cutting taxes now that an election is approaching.  According to the Washington Post, “10 of the council’s 13 members [are] running for re-election or higher office this year.”  It should come as little surprise, then, that the Council recently voiced unanimous support for a generous (but ill-conceived) property tax break for one of the city’s most politically popular groups—its senior citizens.  More encouraging, however, was the Council’s decision to delay action on an even more problematic bill that would have showered most of its benefits on owners of the city’s most valuable homes.

The first bill, introduced by Councilmember Anita Bonds, completely eliminates the property tax for any long-term DC resident over age 75 as long as they earn less than $60,000 per year.  But as Ed Lazere of the DC Fiscal Policy Institute (DCFPI) points out: “If you’re 74, you get nothing … If you’re 75, you have your taxes entirely limited.”  While it’s true that some senior citizens struggle with their property tax liabilities because they are “house-rich” but “cash-poor,” this isn’t a problem limited to taxpayers over age 75.

Rather than wiping out property taxes altogether for those taxpayers fortunate enough to have lived a long life, the District is better off providing this kind of relief more broadly through its property tax “circuit breaker” credit.  The credit, which is currently being expanded, will soon be available to both renters and homeowners of all ages earning up to $50,000 per year.  It also uses a more sophisticated formula than Bonds’ proposal to ensure that Washingtonians’ property tax bills do not exceed the income they have available to pay those bills.  An expert commission created by the Council recently recommended making no further changes to DC’s property tax system, but if the Council nonetheless wants to charge ahead with property tax cuts, the city’s circuit breaker credit is the better tool for the job.

The second bill, introduced by Councilmember (and current mayoral candidate) Jack Evans, would have tightened the District’s existing property tax cap to prevent tax increases of more than 5 percent per year.  As the Institute on Taxation and Economic Policy (ITEP) explains, these kinds of tax caps are poorly targeted, extremely costly, and often grossly inequitable.  Most of the tax breaks doled out under such a cap would flow to owners of expensive homes.  For example, DCFPI estimates that nearly two-thirds of the benefits of Evans’ proposal would go to owners of homes worth over $550,000, despite the fact that this group makes up just 31 percent of all DC homeowners.  Further inequity arises when, for example, a resident who has owned their current home for a number of years (and racked up substantial tax cap benefits over that time) ends up enjoying a significantly lower tax bill than the first-time homebuyer in an identical rowhouse next door.

Mayor Vince Gray opposes the 5 percent property tax cap because of its “negative financial impact on the District’s revenues, its inequitable treatment of District homeowners and because it does not increase the District’s competitiveness regionally.”  These objections are well stated, though all of them also apply, to a lesser extent, to the over-75 giveaway sought by Councilmember Bonds.

Wisconsin Governor Scott Walker wants 2014 to be a year of discussion about the pros and cons of eliminating Wisconsin’s most progressive revenue sources—the corporate and personal income taxes.  But Wisconsinites may not need a full year to see the folly of this approach.

It took mere months for Louisiana and Nebraska to abandon their misguided efforts toward income tax elimination. And the Institute on Taxation and Economic Policy (ITEP) recently found that if Wisconsin were to go this route, the state sales tax rate would need to rise to a whopping (highest in the nation) 13.5 percent if cuts in public investments are to be avoided. Wisconsin taxpayers will likely come to the conclusion rather quickly that nearly tripling their sales tax rate isn’t in their best interest.

In terms of how this sort of shift would affect real Wisconsinites, this post from the Wisconsin Budget Project sums it up: “Governor Walker’s Tax Shift Plan Would Raise Taxes for Most.” In fact, ITEP found that the bottom 80 percent of the income distribution would likely see a net tax hike if the sales tax were raised to offset the huge revenue loss associated with income tax elimination.

Almost every American would agree that education is a fundamental right. Any serious commitment to the notion of “equal opportunity” means ensuring that kids have an opportunity for a quality education—and that this opportunity should be as available to the very poor as it always has been to the very rich. As it happens, every state’s constitution includes a provision guaranteeing a basic education to its residents. But as an excellent op-ed in today’s New York Times notes, if some Kansas policymakers have their way, that state’s constitutional guarantees may be the latest victim of Governor Sam Brownback’s income tax cuts.

It’s worth reviewing how Kansas lawmakers found themselves talking about jettisoning fundamental constitutional rights. In 2012, Governor Brownback pushed through huge tax cuts for the affluent based, in part, on the argument that these tax cuts would be largely self-financing. (Brownback was apparently influenced heavily by the half-baked supply-side claims of Arthur Laffer that cutting income taxes will automatically spur economic growth.) Rather than requiring harmful cuts in state and local public investments, Brownback argued, his tax cuts would be “a shot of adrenaline into the heart of the Kansas economy,” generating new economic activity that would actually boost tax collections.  But as the Center on Budget and Policy Priorities notes, it hasn’t worked out that way. State lawmakers were forced to enact substantial spending cuts across the board, and per-pupil funding plummeted from nearly $4,500 less than a decade ago to $3,838 last year. After a group of Kansas parents brought suit against the state, a lower state court ruled (PDF) that these cuts were an unconstitutional violation of the state’s basic education guarantees—and prescribed a remedy that returns per-pupil funding to the levels achieved in the last decade.

In response to the court’s finding (which is now being reviewed by the state Supreme Court), policymakers in the Brownback administration have argued that the court’s mandate for more school spending prevents them from adjusting spending levels to reflect economic downturns. As the state’s solicitor general argued last year, “The Legislature has to deal with the real world…the constitution shouldn’t be a suicide pact.” But this argument is ludicrous: as the court sensibly pointed out in its ruling, state lawmakers gutted education spending at the same time that they were pushing through huge tax cuts, making it “completely illogical” to argue that the unconstitutional education cuts are anything other than “self-inflicted.” Notwithstanding this, some policymakers have called for amending the state constitution to modify or even eliminate the guarantee of a basic education in response to this ruling. In other words, when the state constitution conflicts with supply-side tax cuts, it must be the constitution’s fault.  

The good news is that most other states have, so far, resisted the siren call of Laffer’s calls for huge income tax cuts. But in Kansas, some policymakers are so enamored with the Brownback tax cuts that they appear to be willing to write off their most basic constitutional guarantees. 

2014 is just a few days old, and already it’s not off to such a happy start in terms of tax fairness:

This editorial in the Kansas City Star predicts that in Missouri, “[m]any state lawmakers, and their constituents, found 2013 to be a taxing legislative session. But it may pale in comparison to what’s ahead in 2014.” Republican legislators aren’t going to give up on “tax reform” after their failure to override Governor Jay Nixon’s veto of an extreme tax plan last year. Instead, those lawmakers are pledging to propose another round of income tax cuts and potentially a ballot initiative if the tax cuts can’t be passed through the legislative process.

The proliferation of state film tax incentives among states seeking to siphon off Hollywood production spending has been widely criticized. But the fact that some in California are now contemplating enacting film tax breaks to prevent a home-grown industry from leaving the state is a stark reminder that the “race to the bottom” in state corporate income taxes will leave every state poorer.

January 1st marked the beginning of a new, highly regressive era in North Carolina tax policy.  An array of tax changes went into effect which will further shift the responsibility for paying for North Carolina’s public investments away from wealthy households and profitable corporations onto the backs of middle- and low-income families.  Most notable among the changes includes the collapse of the state’s graduated personal income tax structure which was replaced with a flat rate of just 5.8% and allowing the state’s Earned Income Tax Credit to expire. Lawmakers who championed the tax package have falsely claimed for months that every North Carolina taxpayer will benefit from the changes.  As  ITEP and the NC Budget and Tax Center have repeatedly pointed out (and NC fact-checking reporters and the NC Fiscal Research division have substantiated), many families will pay more.  

This week, the Small Business Development Committee in the Wisconsin Assembly heard a bill about two proposed sales tax holidays. The first two-day holiday would be held in early August and would suspend the state’s 5 percent sales tax on computers and back-to-school items. The other two-day holiday would take place in November and be available for Energy Star products. Thankfully the proposal seems to be getting mixed reviews. Senate Majority Leader Scott Fitzgerald views the proposal as a gimmick and he couldn’t be more right. For more information read ITEP’s Policy Brief.

General Electric has long been a flashpoint in corporate tax reform debates. As long ago as 1984, CTJ’s revelation that GE and other large companies had managed to avoid paying even a dime of tax on billions in US profits prompted President Ronald Reagan to push for loophole-closing tax reform. And as our more recent research has shown, GE remains a topflight tax avoider, paying about two percent of its profits in US federal income taxes over the decade between 2002 and 2011.

So anytime one of the biggest tax dodges available to GE disappears, it should be seen as a victory for tax reform.

Why, then, is there so little excitement about the expiration, on December 31 of 2013, of the “active financing exception” that GE relies so heavily on to reduce its tax bill? Perhaps it’s because its expiration was an accidental byproduct of lawmakers’ inaction, and because Congressional tax writers have every intention of bringing this lamentable tax loophole back from the dead, as they have multiple times in the past decade. Repealed as part of the loophole-closing Tax Reform Act of 1986, the active financing loophole was temporarily reinstated in 1997 after fierce lobbying by GE and other multinational companies, and has been extended numerous times since them, usually for one or two years at a time.

The active financing exception is usually extended as part of the so-called “extenders,” the legislation that Congress enacts every couple of years to extend a package of (ostensibly temporary) tax breaks for business interests. The last extenders package was enacted as part of the fiscal cliff deal at the start of 2013, and it extended the active financing break retroactively into 2012 and prospectively through 2013. The two-year extension cost over $11 billion, making it the third most expensive of the extenders.

American corporations are allowed to indefinitely “defer” paying U.S. taxes on their offshore profits, but there is a general rule (often called “subpart F” in reference to the part of the tax code that spells it out) that corporations cannot defer U.S. taxes on dividends, interest or other types of “passive” income because these types of income are easy to shift around from one country to another to avoid taxes. The “active financing exception” is an exception to subpart F. As a result of this ”exception,” companies like GE can indefinitely avoid paying taxes to any nation on their financing income, simply by claiming that their US-based financing income is actually being earned in offshore tax havens.

GE won’t disclose just how valuable the active financing rule is to their bottom line. But when the tax break was set to expire in 2008, the head of the company’s tax department infamously went down on one knee in the office of the Ways and Means Committee chairman Charles Rangel to beg for its extension. And the company’s 2012 annual report’s discussion of risk factors facing the company’s bottom line says that “[i]f this provision is not extended, we expect our effective tax rate to increase significantly.”

And GE’s not the only company that is chomping at the bit to bring this tax break back. The active financing exception also plays a significant role in the ability of other large U.S.-based financial institutions to pay low effective rates. As a group, the financial industry has one of the lowest effective rates of all industries, averaging only 15.5% for the years 2008-2010.

With the lobbying power of GE and the financial services industry at their doors, it’s sadly no surprise that Congressional lawmakers are likely to ride to the rescue of these low-tax multinationals once again. But the $11.2 billion two-year price tag of the active-financing giveaway should be a good enough reason for Congress to sit on their hands and let this tax giveaway stay dead. 

Another year, another campaign to give even bigger breaks to corporations and claim that this will create jobs. In 2014, the campaign opened with a January 5 op-ed by Laurence Kotlikoff in the New York Times titled, “Abolish the Corporate Income Tax.”

Before getting into Kotlikoff’s argument, let’s just remember a few reasons why we have a corporate income tax.

First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.

This last point deserves emphasis. Proponents of corporate tax breaks 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 investment (and thus jobs) offshore. But 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 (owners of corporate stocks and business assets), who mostly have high incomes. This makes the corporate tax a very progressive tax.

For example, the Department of the Treasury concludes that 82 percent of the corporate tax is borne by the owners of capital. As a result, the richest one percent of Americans pay 43 percent of the tax, and the richest 5 percent pay 58 percent of the tax.

But Kotlikoff argues that our corporate income tax chases investment out of the U.S. and his simplistic answer is to repeal the tax altogether. He writes that, “To avoid our federal corporate tax, they [corporations] can, and often do, move their operations and jobs abroad,” and cites the well-known case of Apple booking profits offshore.

But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens. These gimmicks take advantage of the rule allowing American corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on the profits they claim to earn abroad. Lawmakers will end these abuses when they see that voters’ anger over corporate tax loopholes is even more powerful than the corporate lobby.

Kotlikoff has constructed a computer model that purports to prove that the economy would benefit greatly from cuts in the corporate income tax. But any such model relies on assumptions about how corporations would respond to changes in tax policy. Economists have failed to demonstrate a link between lower corporate taxes and economic growth over the past several decades that would justify the assumptions Kotlikoff uses.

In fact, Kotlikoff’s assumptions are at odds with the historical record. As former Reagan Treasury official, J. Gregory Ballentine, once told Business Week, “It’s very difficult to find much relationship between [corporate tax breaks] and investment. In 1981 manufacturing had its largest tax cut ever and immediately went down the tubes. In 1986 they had their largest tax increase and went gangbusters [on investment].”

In any event, the U.S. corporate tax is effectively already among the lowest in the developed world because of its many loopholes. According to the Department of the Treasury, federal corporate tax revenue in the U.S. was equal to 1.3 percent of our economy in 2010 (1.6 percent if you include state corporate taxes). The average for OECD countries (which include most of the developed countries) besides the U.S. was 2.8 percent.