Month: March 2014

Less than a year after enacting a significant (and progressive) revenue raising tax package, Minnesota Governor Mark Dayton signed off last week on more than $400 million of tax cuts. The new legislation repeals several changes put into place last year including removing warehouse storage and 2 other primarily business services from the sales tax base and eliminating a new gift tax. The tax cuts also include reductions in the personal income tax via aligning the state’s tax code more closely to federal rules. Low- and moderate-income working families will also see a small benefit from two changes made to the state’s Working Families Credit (Minnesota’s version of a state Earned Income Tax credit (EITC).

A mother of two in Kentucky has made an impassioned plea to her state legislators to support the creation of a state Earned Income Tax Credit (EITC). More than half of all states have enacted such a credit, which is proven to increase workforce participation and improve health outcomes for children. As Jeanie Smith writes in her op-ed, “I know that we could have put that tax credit to good use. We could have used it toward the textbooks for my husband, or to take the stress out of a month’s bills.” There are lots of strong arguments for adding a state EITC to Kentucky’s quite regressive tax code (PDF), and the Governor has proposed establishing a state EITC as part of his tax reform plan. Hopefully, Jeanie’s articulation of what a state EITC would mean for her and other families like hers will persuade those not yet on board.

The Montgomery Advertiser recently ran a very powerful editorial about the problems with low taxes. Lawmakers should give careful thought to one of the questions the editors pose in the piece: “We don’t pay a lot in taxes in Alabama and historically have taken a perverse pride in that. But is this really a bargain, or is it a fine example of false economy, of short-changing public investment to the detriment of our people?”

Our colleagues at the Institute on Taxation and Economic Policy (ITEP) have long been critical of gimmicky sales tax holidays that provide little help to the poor or the economy. But Florida lawmakers don’t appear to have gotten the message, as the state House’s tax-writing committee recently advanced four “super-sized” sales tax holidays for purchases as varied as school supplies and gym memberships. Altogether, the package would drain $141 million from the state’s budget that could otherwise be been spent on education, infrastructure, and other public investments.

Newspapers in Oregon and North Carolina published editorials using data from ITEP and CTJ’s latest report on state corporate income taxes to highlight the need for corporate tax reform in their states. Check out The Oregonian’s editorial, “Extremes of Corporate Tax System Show Need for Reform” and one from the Greensboro News & Record, “Next to Nothing.”

(Blog Post Originally Appeared in The Hill)

It’s not breaking news that partisanship has gridlocked Congress these last few years, and most policy change has occurred at the state level. State legislatures have debated and enacted laws affecting issues as varied as minimum wage, infrastructure investment, education, environmental protection, and voting rights.

National groups seeking to cut taxes for the wealthy are well aware that policy change in states may be their best bet right now, and they’ve set their sights high. Grover Norquist’s Americans for Tax Reform, as well as Koch brothers-backed Americans for Prosperity and other conservative groups, continue to advocate for full repeal of state income taxes, with an eye toward setting a national trend in motion.

So far, most proposals to do away with state income taxes have run into a brick wall called reality after legislators learned that repeal would mean damaging cuts in public investments and significant tax hikes on the poor and middle-class. Proposals for income tax repeal recently failed in Louisiana, Missouri, Nebraska, North Carolina, and Oklahoma. The only state in U.S. history to repeal its personal income tax is Alaska, which threw out the tax in the 1980s when it was awash in newfound oil tax revenues.

Now it seems anti-tax proponents have found a test case in Tennessee. The Volunteer State has a regressive tax code built mainly around the sales tax. Unlike most states, it doesn’t have a general income tax on salaries and wages. But it does levy the Hall Tax, a modest 6 percent assessment on investment income that largely falls on wealthy Tennesseans with large stock portfolios. In recent months, a number of right-wing groups have spent significant resources backing a bill that would repeal this tax.

These groups are toeing their typical line, saying repeal will make Tennessee “economically competitive.” But the mediocre experiences of states that have recently cut income taxes don’t support that assertion.

Moreover, the vast majority of Tennesseans don’t pay the Hall Tax. The law exempts business income, wages, pensions, Social Security, and most other types of income Tennesseans earn. Only people with more than $2,500 in dividends, interest, and certain capital gains pay anything at all. Low- and moderate-income residents over age 65 are entirely exempt.

Given the Hall Tax’s limited scope, it generates only about 1 percent of the state’s revenue, making it low-hanging fruit for tax repeal advocates who have met with failure in states where personal income taxes generate significantly more revenue. 

While repealing the Hall Tax could yield fruit for the no-tax agenda, it’s not in Tennesseans’ best interest. My colleagues and I at the Institute on Taxation and Economic Policy produced an analysis that found the top 5 percent of earners would receive a whopping 63 percent of the benefits of the tax cut. Another 23 would go to the federal government because residents who pay the tax would no longer be able to write-off those payments on their federal tax returns. The remaining 14 percent of revenue lost by the cut would be spread thinly among the bottom 95 percent of households.

Although most ordinary working Tennesseans would see no benefit to their pocketbooks, they certainly would see the effect on state and local budgets. The $260 million revenue loss resulting from Hall Tax repeal would require Tennessee to scale back investments in education, infrastructure, and other services vitally important to the state’s success. Local communities would be hit particularly hard since more than one out of every three dollars generated by the tax goes to local government budgets. And if communities respond to this revenue loss by increasing property taxes, many Tennesseans could see their overall tax bills rise under this so-called “tax cut.”

The vagaries of Tennessee legislation may seem inconsequential for people outside the Volunteer State. But anyone concerned about how states and local governments fund basic services should be worried that national anti-tax groups have set their sights on repealing the Hall Tax. Tennessee isn’t this train’s first stop, and it won’t be the last.

A new web tool, the Corporate Tax Explorer, from Citizens for Tax Justice (CTJ) and the Institute on Taxation and Economic Policy (ITEP), is a one-stop shop for the state and federal data we analyze on corporate taxes. Just search for a company by name or browse the list of companies to get detailed information on what the company paid in federal, state and foreign corporate income taxes, as well as information about offshore holdings and various tax breaks. This database includes all of the data from our recent corporate studies, The Sorry State of Corporate Taxes and 90 Reasons We Need State Corporate Tax Reform, which analyzed data from 2008-2012.

Tax cuts for corporations and wealthy individuals were on the table in Idaho this year, but lawmakers ultimately decided that adequately funding education is more important.  Governor Butch Otter started the year by trying to couple income and property tax cuts with an increase in education funding, but the legislature opted to drop the tax cuts entirely and double his education funding proposal.  Far from being upset at the development, Otter conceded that “I think that they found a better use for the money than tax relief this year.”

Idaho’s big business lobby reacted very differently, complaining that lawmakers didn’t “truly do what’s right for business.”  In their eyes, it’s more important to eliminate the property tax on large businesses’ equipment and machinery, despite the fact that the largest beneficiary of that plan (IDACorp) is already managing to avoid paying anything in state corporate income taxes.

The other major tax cut ideas under discussion were reducing the state’s corporate income tax rate, as well as its top personal income tax rate.  But in a report we issued last week, we showed that many companies are already paying very little in state corporate income tax thanks to “copious loopholes, lavish giveaways and crafty accounting.”  And when the Institute on Taxation and Economic Policy (ITEP) analyzed the impact of an earlier cut in the state’s top personal income tax rate, we found that most of the tax cuts flowed to the state’s top 1 percent of earners, and that the vast majority of Idahoans received no benefit.

Idahoans should feel relieved that none of these regressive ideas were enacted into law this year.

A battle over New York Governor Andrew Cuomo’s proposed property tax cuts is heating up, with protesters pouring into the New York State Capitol in Albany last week, a new TV ad hitting the airwaves, and the introduction of alternative tax cut plans from the Assembly and Senate. The governor’s plan would “freeze” property tax increases over the next two years by giving a refundable tax credit to homeowners for the amount of any increase in taxes over the prior year (and only to those living in jurisdictions complying with a 2 percent property tax cap and showing an effort to consolidate services with neighboring jurisdictions). In the third year, the freeze would be replaced with an expanded homeowner circuit breaker property tax credit and new renter’s tax credit. State legislators and many local leaders have voiced unease with the proposal. The Assembly’s plan would skip the freeze altogether and simply offer the homeowner and renter circuit breaker credits with less restrictions.

Illinois House Speaker Michael Madigan has called for a state constitutional amendment (PDF) to charge millionaires a tax surcharge and use the resulting $1 billion in revenue to fund public education. The proposal is likely the first of many attempts by both political parties to define the electoral turf prior to the gubernatorial election in November, which the Chicago Tribune has dubbed the “governor’s race of a generation.” Current Governor Pat Quinn is running for re-election against Republican Bruce Rauner, who happens to be a multimillionaire. Even if the constitutional amendment doesn’t make it on the ballot (it would first have to be approved by supermajorities in the House and Senate), voters will face a stark choice on taxes: the state’s temporary income tax rate increase is set to decrease in 2015, and the two candidates will likely have different views on how to make up the lost revenue.

Most Oklahomans don’t want lawmakers to enact the income tax cut approved by the state Senate last month. A new poll reveals that when voters are told about the Institute on Taxation and Economic Policy’s finding that much of the tax cut will flow to the state’s wealthiest residents, 61 percent of voters oppose the plan compared to just 29 percent in support. Even among voters who aren’t told about this lopsided impact, less than half support the rate cut, and fewer people support the cut than did so last year.

Colorado spends roughly $2 billion per year on special tax breaks and a new law just signed by Governor John Hickenlooper (backed by the Colorado Fiscal Institute, among others) ensures that basic information about those breaks will continue to be made public going forward. Colorado’s Department of Revenue published the state’s first comprehensive tax expenditure report in 2012, and now the department is required to update that information every two years. Our partners at the Institute on Taxation and Economic Policy (ITEP) explain that “a high-quality tax expenditure report is a bare minimum requirement for even beginning to bring tax expenditures on a more even footing with other areas of state budgets.”

Last week, Ohio Governor John Kasich released his “Transforming Ohio for Jobs + Growth” tax cut package. As we predicted, the plan includes an 8.5 percent across the board income tax rate reduction which would drop the top tax rate from 5.33 to 4.88 percent. The proposal also slightly increases the state’s small non-refundable Earned Income Tax Credit (EITC), introduces an extra exemption for low income families, and raises the cigarette tax. Institute on Taxation and Economic Policy (ITEP) staff quickly produced an analysis of the proposal’s main provisions. Policy Matters Ohio (PMO) published this analysis in their brief “Kasich Tax Plan: Advantage, Top 1 Percent” and concluded that better off Ohioans would do much better under the Kasich plan. In fact, the plan delivers annual tax cuts on average worth $2,847 to the top 1 percent of Ohio taxpayers while taxpayers in the bottom two-fifths on average would pay more than they do now.

Though increases in the EITC and the new personal exemption are small steps toward tax fairness, increasing tobacco taxes and cutting income tax rates would would be a step backward. PMO research director Zach Schiller says, “Boosting the EITC and personal exemptions for the least affluent are positive steps that would help low- and moderate-income Ohioans. But these measures do not change the fundamental math of the proposal:  It is an additional tax shift from those most able to pay to poor and moderate-income Ohioans.”

There is no guarantee that the proposal will actually become law. The anti-tax group headed by Grover Norquist called the proposal “less than inspiring.” Some lawmakers have already asked the fiscally irresponsible question about what it would cost to preserve the revenue cuts while removing the tax hikes from the plan, other lawmakers are asking for evidence that tax cuts actually create jobs. For those interested in political theatre this is a state to watch.  A recent editorial in the Toledo Blade predicts that the proposal “will dominate the legislative and campaign debates.” Stay tuned.

*This post was updated on April 2, 2014 to address news that “bonus depreciation,” the biggest and most inefficient break among the “tax extenders” will be included in the legislation before the Senate Finance Committee this week.*

Congress appears likely to enact legislation that Capitol Hill insiders call the “tax extenders” because it extends several tax breaks that are technically temporary. These tax breaks, which mostly benefit corporations, are effectively permanent because Congress extends them every couple of years with almost no debate or oversight.

Here are four reasons why that should change this year and Congress should reject the tax extenders unless dramatic modifications are made to the legislation.

1. The tax extenders are deficit-financed tax cuts for corporations, breaking all the “fiscally responsible” rules that Congress applies to benefits for the unemployed, low-wage workers, and children.

In the past several weeks, Congress made clear that it will not enact an extension of emergency unemployment benefits (which have never been allowed to expire while the unemployment rate was as high as today’s level) unless the costs are offset to prevent an increase in the budget deficit.

Congress has also, in the last several years, enacted automatic spending cuts of about $109 billion a year known as “sequestration” in order to address an alleged budget crisis. Even popular public investments like Head Start and medical research were slashed. The chairman of the House and Senate Budget Committees (Republican Paul Ryan and Democrat Patty Murray) struck a deal in December that undoes some of that damage but leaves in place most of the sequestration for 2014 and barely touches it in 2015.

Meanwhile, lawmakers have expressed almost no concern that the “tax extenders” are enacted every two years without any provisions to offset the costs. According to figures from the Congressional Budget Office, if Congress continues to extend these breaks every couple years, they will reduce revenue by at least $700 billion over a decade.

2. “Bonus depreciation,” the most costly of the tax extenders, is supposed to encourage businesses to invest, but there is little evidence that it has this effect.

Bonus depreciation is a significant expansion of existing breaks for business investment. Congress does not seem to understand that business people make decisions about investing and expanding their operations based on whether or not there are customers who want to buy whatever product or service they provide. A tax break subsidizing investment will benefit those businesses that would have invested anyway but is unlikely to result in much new investment.

Companies are allowed to deduct from their taxable income the expenses of running the business, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time.

Bonus depreciation is a temporary expansion of the existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale.

We believed bonus depreciation to be truly temporary until recently because there was very little talk in Congress of extending this particular break. The fact that it is included in the legislative package before the Senate Finance Committee is startling.  

A report from the Congressional Research Service reviews efforts to quantify the impact of bonus depreciation and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”

3. The second most costly of the tax extenders is the research credit, which is supposed to encourage research but actually subsidizes activities no one would call research, and activities that companies would do in the absence of any subsidy.

A report from Citizens for Tax Justice explains that the research credit needs to be reformed dramatically or allowed to expire. One aspect of the credit that needs to be reformed is the definition of research. As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law and often cross them.

Another aspect of the credit that needs to be reformed is the rules governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns, because the credit cannot possibly be said to encourage research if the claimant did not even know about the credit until after the research was conducted.

As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit obviously does not accomplish the goal of increasing the amount of research conducted by businesses.

4. Another costly provision among the tax extenders would extend a break called the “active finance exception,” which should be called the “G.E. Loophole.”

In a famous story reported in the New York Times in 2011, the director of General Electric’s 1,000-person tax department literally got on his knees in the office of the House Ways and Means Committee as he begged for an extension of the “active finance exception,” which allows G.E. to “defer” (indefinitely delay) paying any U.S. taxes on offshore profits from financing loans.

The general rule is that American corporations are allowed to “defer” U.S. taxes on offshore profits that take the form of “active” income (what most of us think of as payment for selling a good or service) as long as those profits are officially offshore. The general rule also is that American corporations cannot defer U.S. taxes on “passive” income like dividends or interest on loans, because passive income is extremely easy to shift from one country to another for the purpose of tax avoidance.

G.E. managed to get Congress to enact an exception, so that it can defer paying U.S. taxes on offshore financial income that it calls “active finance” income — which is ridiculous because these profits are the ultimate example of the sort of passive income that can be easily shifted between countries. G.E. publicly acknowledges (in the information it provides to shareholders by filing with the Securities and Exchange Commission) that the company relies on the active finance exception to reduce its taxes. 

Congress should eliminate deferral or further restrict it to prevent corporations from making their U.S. profits appear to be earned in offshore tax havens, but this break actually expands deferral.

Congress Should Reject “Tax Extenders” Legislation that Mostly Benefits Corporations Unless Corporate Tax Loopholes Are Closed to Offset the Costs

The Senate committee with jurisdiction over taxes has announced that it will take up legislation called the “tax extenders” (legislation extending several tax breaks mostly benefiting corporations) that could undo half of the savings achieved through the much-debated “sequestration,” or automatic spending cuts.

This comes just weeks after the Senate failed to provide any extension of emergency unemployment benefits until it was agreed that the costs would be fully offset to avoid any increase in the deficit.

The package of provisions that Capitol Hill insiders call the “tax extenders,” which the Senate Finance Committee will take up the week of March 31, includes tax breaks that are officially temporary (mostly in effect for two years) but are effectively permanent because Congress routinely extends them without any debate or oversight whatsoever.

The last extension of these breaks was tucked into the deal that Congress approved on New Year’s Day of 2013 to address the “fiscal cliff” of expiring tax breaks. Before that it was tucked into the legislation enacted in late 2010 to extend all the Bush-era tax breaks for two years. Before that it was tucked into the legislation that created TARP (the bank bailout), which was signed into law by President George W. Bush in 2008. Congress has never offset the costs of these tax breaks.

While Congress has been generous in providing subsidies to corporations through the tax code, it has taken a very different approach to providing subsidies in the form of direct spending, especially when it would benefit working people. 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 (automatic spending cuts) of about $109 billion each year for a decade.

The resulting cuts in public investments like Head Start and medical research caused widespread public outcry. But even the deal that Rep. Paul Ryan and Senator Patty Murray struck in December to undo some of the damage eliminates less than half of the sequestration for 2014 and a much smaller portion in 2015.

The Ryan-Murray deal undid $63 billion of sequestration over two years. The last time Congress enacted the tax extenders (extending tax breaks for two years) the cost was over $71 billion. Figures from the Congressional Budget Office show that if the tax extenders are never allowed to expire, they will cost at least $450 billion over the next decade (and over $700 billion if the package includes more recent breaks for writing off business equipment).

In this deficit-obsessed environment, it would be logical for Congress to refuse to enact any corporate tax breaks unless they can also offset the costs by ending other corporate tax breaks or tax loopholes. Otherwise, Congress should do something it has never done — vote down the tax extenders.

Tax Extenders Legislation Provides More Harm than Help to the Economy

It would be different if the tax breaks included in this legislation were helpful to the economy. But they are mostly wasteful subsidies for businesses with no obvious benefit to America.

The most costly provision among the “tax extenders” would extend the research credit. As a report from CTJ explains, this break is supposed to encourage companies to perform research but appears to subsidize activities that are not what any normal person would call research (like redesigning packaging for food). It also subsidizes activities that businesses would carry out in the absence of any tax break — including activities that businesses performed years before claiming the credit.

The third most costly provision among the tax extenders would extend the seemingly arcane “active financing exception,” which expands the ability of corporations to avoid taxes on their “offshore” profits and which General Electric publicly acknowledges as one of the ways it avoids federal taxes.

Next in line is the deduction for state and local sales taxes. Lawmakers from states without an income tax are especially keen to extend this provision so that their constituents will be able to deduct their sales taxes on their federal income tax returns. But, as CTJ has explained, most of those constituents do not itemize their deductions and therefore receive no help from this provision. Most of the benefits go to relatively well-off people in those states.

Even those few provisions that seem like they would help ordinary families are mostly bad policy. For example, the deduction for postsecondary tuition and related fees seems, on its surface, like a nice idea, but CTJ has explained that it’s actually the most regressive of all the tax breaks for postsecondary education. In other words, this break is targeted more to the well-off than any other education tax break, as illustrated in the graph below.

There simply is no provision among the “tax extenders” that justifies Congress enacting this enormous, costly package once again without asking corporations to pay for it.

Last week, the Congressional Progressive Caucus released its budget proposal, the Better Off Budget, which eliminates the automatic spending cuts (the “sequestration” that has slashed public investments and harmed the economy) while also increasing employment by 8.8 million jobs and cutting the deficit by $4 trillion over a decade.

The Better Off Budget is able to accomplish all of this partly because it is willing to do the one thing that Congressional majorities have refused to do: raise revenue. Estimates for the revenue provisions in the Better Off Budget were provided by Citizens for Tax Justice and the Economic Policy Institute.

The budget proposes returning to the tax rules that applied at the end of the Clinton years for Americans with incomes exceeding $250,000 and taxing investment income at the same rates as income from work. The budget also incorporates a proposal from Congresswoman Jan Schakowsky to provide additional income tax brackets (with rates of 45 percent and higher) for those with incomes exceeding $1 million.

A tax credit similar to the Making Work Pay Credit (which was provided temporarily under the recovery act enacted in 2009) would be available in 2015 and 2016, and in a scaled back form in 2017. Citizens for Tax Justice has explained that the Making Work Pay Credit was more targeted towards families struggling to get by, and therefore more effective in stimulating the economy, than other tax breaks.

The Better Off Budget also makes some important changes to the corporate income tax, including doing away with the rule allowing American corporations to “defer” paying U.S. taxes on profits that are officially “offshore.” CTJ has long argued that deferral encourages corporations to use accounting tricks to make their U.S. profits appear to be earned in countries where they won’t be taxed (offshore tax havens). While the administration and members of Congress have proposed complicated rules to crack down on this type of tax avoidance, the most straightforward and effective solution is to stop rewarding these games by ending deferral.

Because the Congressional Progressive Caucus is willing to take on the corporate interests and others that the rest of Congress tiptoes around, it is able to put forward a plan that actually provides more deficit reduction with less pain for working Americans. The Better Off Budget would reduce the deficit to 1.4 percent of gross domestic product (1.4 percent of economic output) within a decade, as illustrated by the chart from the Caucus below. The President’s budget would leave a larger deficit, 1.6 percent of GDP, while under the current law the deficit would be 4 percent of GDP.

Reuters reports that state lawmakers shouldn’t expect Congress to act anytime soon to close the enormous hole in their sales tax bases created by online shopping. Sales tax enforcement on purchases made over the Internet is a messy patchwork right now because states can only require retailers with a store or other “physical presence” within their borders to collect the tax. (Amazon, for example, is only required to collect the tax in 20 states). This uneven treatment of online retailers versus brick-and-mortar stores is nothing new, but the chairman of the House Judiciary Committee insists that more debate is needed before his chamber will act on the bipartisan bill passed by the Senate last spring.

Hawaii lawmakers are giving serious consideration to enhancing a number of tax credits for low-income working families, but the state’s worsening revenue outlook is going to make paying for the credits a bit more difficult. Moreover, Honolulu Civil Beat reports that lawmakers are also debating whether to give out more tax credits for things like charter school donations, backup generators, and building renovations. But reducing the very high state and local tax rate being paid by Hawaii’s poor should be a higher priority than these initiatives.

Last year’s trend toward raising state gasoline taxes seems to be continuing this year. In just the last week, the Kentucky House approved a 1.5 cent per gallon increase and the New Hampshire Senate gave preliminary approval to a 4 cent increase. These increases would allow for valuable investments in both states’ infrastructure, and would reduce the likelihood that lawmakers will eventually cut other areas of the budget to fund those investments.

This week the Wisconsin General Assembly approved Governor Scott Walker’s tax cut proposal which includes $404 million in across-the-board property tax cuts and $133 million in income tax cuts that result from lowering the bottom income tax rate from 4.4 to 4.0 percent and reducing the Alternative Minimum Tax. The legislation is now sent to Governor Walker’s desk where it is all but guaranteed he will sign the bill into law. For more on the flaws of this bill check out this Wisconsin Budget Project’s blog post.