New CTJ Report: Congress Should Require Inverting Corporations to Pay Up Taxes They Owe on Profits Held Offshore

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A new report from Citizens for Tax Justice explains that Congress should change our tax laws to require inverting corporations to pay the taxes they owe, but have deferred paying, on profits they accumulated offshore before inverting. As the report explains, requiring inverting corporations to pay taxes they have deferred on offshore profits would be akin to the existing rule that individuals who renounce their citizenship must pay taxes they have deferred on unrealized capital gains (on appreciation of assets they have not sold). This reform would complement others that have been introduced in Congress to address inversions.

Americans and their lawmakers are increasingly alarmed by corporate inversions, in which an American corporation merges with a smaller foreign one and then claims the foreign country as its address for tax purposes even though little or nothing has changed about where the business is conducted or managed. Burger King’s plans to declare itself Canadian and Pfizer’s stated commitment to pursuing an inversion are only the latest evidence of the crisis.

Under current law, both individuals and corporations are allowed to defer paying U.S. taxes on key parts of their income, but wealthy individuals are required to give up this benefit when they renounce their American citizenship, while corporations are not. Individuals are allowed to defer paying income taxes on capital gains until they sell their assets. But upon renouncing their U.S. citizenship, wealthy individuals are required to give up that benefit and must pay tax on their unrealized capital gains.

Corporations, on the other hand, are allowed to defer paying income taxes on their offshore profits until those profits are officially brought to the United States, and continue to enjoy this benefit even after renouncing their U.S. citizenship. After becoming a foreign company for tax purposes, a corporation is likely to use accounting tricks to ensure those profits are never subject to U.S. taxes.

The CTJ report explains there is no reason to continue granting this tax break to corporations that declare they are no longer American. This is especially true given that after inverting a corporation can often route these offshore profits through its new foreign parent company to get them into the hands of U.S. shareholders without triggering the U.S. taxes that would normally be due upon repatriation.

The most straightforward solution is to change the tax code so that these offshore profits are taxed as if they are repatriated at the point when the company inverts.

This is the one part of the inversion crisis that, so far, is not addressed by any legislation before Congress. A bill introduced in May by Rep. Sander Levin and Sen. Carl Levin would stop inverted companies from being treated as foreign for tax purposes. Legislation introduced this week by Sens. Charles Schumer and Richard Durbin would prevent inverted companies from dodging taxes on future profits through the practice called earnings stripping.

Left unaddressed is the part of the problem described in CTJ’s report — the ability of inverted companies to avoid taxes on the profits they have already earned and hold (at least as an accounting matter) offshore. Edward Kleinbard, former chief of staff to the Joint Committee on Taxation, argues that avoiding U.S. taxes on these profits is one of the major reasons why corporations invert.

Wisconsin Contemplates Property Tax Shift from Business to Homeowners

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No one would describe Wisconsin’s homeowner property taxes as low. So it would likely come as a surprise to many Wisconsinites that state policymakers are now considering a plan that would cut business property taxes in a way that would force homeowner’s taxes even higher. The plan was the focus of a hearing before the Wisconsin legislature’s “Steering Committee for Personal Property Tax” last week at which ITEP staff testified.

The committee hearing focused on whether Wisconsin’s local property tax should continue to apply to business machinery and equipment, as it currently does, or should be narrowed or even repealed. Wisconsin is one of more than 30 states in which the property tax base is defined to include not just “real property” such as buildings and land, but at least some of the “personal property”—potentially including motor vehicles, machinery, office furniture, and more generally any property that can be moved—owned by individuals and businesses.

It might come as news to most Americans that personal property is even taxable. This is because almost every state moved away from taxing the personal property owned by individuals (with the notable exception of motor vehicles) long ago. This gradual contraction generally makes sense—having an assessor evaluate the value of every homeowner’s paper-clip collection would impose a huge administrative burden. But, as ITEP staff testified last week, what remains of the personal property tax in most states—a tax on machinery and equipment owned by businesses—is actually pretty sensible. The property tax was originally envisioned as a fairly universal levy on wealth used to generate income, and the expensive machinery used in manufacturing certainly fits that description. As last year’s tragic explosion at a Texas fertilizer plan reminds us, business personal property imposes its own substantial costs on local governments’ fire-protection and police-protection infrastructure, and the businesses that own this property should help to defray the public costs of maintaining this infrastructure.

Moreover, cutting business personal property taxes would impose a pretty direct cost on homeowners: the Wisconsin Legislative Fiscal Bureau estimates that simply repealing the tax would result in close to a 3 percent increase in Wisconsin homeowner property taxes. And as the experience of Ohio reminds us, state legislative pledges to “hold harmless” local governments for state-imposed property taxes tend to be pie-crust promises: easily made and easily broken. There are certainly sensible ways of reforming the personal property tax where it exists: allowing a de minimis exemption, so that the first $25,000 or $50,000 of personal property is exempt, can sharply reduce the compliance costs associated with the tax. But business personal property taxes are, at the end of the day, worth keeping. 

Burger King Reduced Worldwide Tax Rate by 60 Percent After Private Equity Takeover

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Burger King’s recent decision to pursue a corporate inversion to Canada is the culmination of years of maneuvering to dodge paying its fair share in corporate taxes. In fact, Burger King was able to cut its average worldwide effective tax rate by more than 60 percent over the past few years likely through complex accounting maneuvers.

How did Burger King accomplish such a substantial tax cut? The first key point to know is that Burger King only owns a small percentage of its thousands of restaurants worldwide, with the overwhelming majority of its restaurants owned by franchisees who pay Burger King for use of its intellectual property. From the beginning of 2010 (when private equity firm 3G Capital purchased the company) through the end of 2013, Burger King went from owning about 12 percent of its worldwide restaurants (1,422), to owning less than half a single percent of its worldwide restaurants (52).

Unlike physical properties such as restaurants, stores or even factories, it’s relatively easy to shift the location of income-generating intellectual property from one jurisdiction to a different low- or no-tax jurisdiction. This may explain why, after its purchase by 3G Capital, Burger King reorganized its business structure by shedding ownership of nearly all the individual restaurants that it owned.

Because a substantial portion of Burger King’s income is generated through rents and fees that it charges these franchisees for use of its intellectual property, much of its business structure is akin to infamous tax-dodging companies like Apple and Google.

A 2012 investigation by Tom Bergin confirmed that Burger King had been following in Apple and Google’s footsteps by shifting the income it generates across Europe to a low-tax subsidiary (in this case in Switzerland), instead of allowing it to flow back to the United States where its income-generating intellectual property was created in the first place. While the rest of its international tax structure has not been publicly disclosed, the company does admit to having subsidiaries not only in the infamous tax haven of Switzerland, but also in Singapore, Luxembourg, Hong Kong and the Netherlands.

Burger King’s strategy of profit-shifting and relying more heavily on intellectual property came to fruition in 2013, when it was able to lower its worldwide effective tax rate to a mere 11 percent. For purpose of comparison, the company’s average worldwide effective tax in the three years before it embarked on its aggressive tax dodging maneuvers was nearly 28 percent, meaning that company was able to lower its tax rate by 60 percent over just a few years.

The company’s decision to merge with Canadian coffee and donut chain Tim Hortons would allow the company to continue its tax avoidance strategy by never having to pay U.S. taxes on income that it has shifted to its offshore tax haven subsidiaries and providing it even more opportunities for profit shifting in the future because Canada has a territorial tax system, which does not require companies to pay taxes on their foreign earnings.

Burger King is one of several U.S.-based companies that is under scrutiny for announcing plans to undergo a corporate inversion. These plans have stoked public outrage and even prompted legislative fixes that so far have gone no where.

At a minimum, Congress needs to enact legislation proposed by Sen. Carl Levin and Rep. Sander Levin to stop Burger King and more than a dozen other companies with plans this year to take advantage of the corporate inversion loophole. In addition to the Levin legislation, several other proposals described in a recent CTJ report would ensure the tax code does not reward companies like Burger King for inverting. 

Republican National Committee Wants to Abolish the IRS

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abolishtheirs.jpgWith the 2014 election season in full swing, the Republican National Committee (RNC) has found its new fundraising campaign: calling for outright abolishment of the Internal Revenue Service (IRS). While the RNC’s new fundraising campaign is not surprising given the IRS’s unpopularity and recent controversies, it does promote the deeply irresponsible idea that the IRS is not a critical component of a properly functioning government.

The RNC’s campaign depends on its potential donors who will embrace their anger at the IRS and contribute to a campaign that claims it will abolish it, but ignores the fact that there is no viable way to have a functioning federal government without the IRS or some agency performing its exact function. Needless to say, the IRS collects nearly all the money that pays for the federal government, so those calling for its abolition would still need a way to collect the trillions of dollars necessary to fund Social Security, Medicare, the military, highways and the myriad of other crucial services that they support.

Even accepting the fact that this fundraising campaign is just overblown rhetoric, the underlying point that the IRS should be punished through “abolishment” or even just significant spending cuts is destructive. In fact, recent cuts in the IRS’s budget have already hamstrung the organization’s ability to respond to taxpayers’ needs and directly contributed to poor training and procedures that fueled the agency’s recent controversies in the first place. In addition, cutting the IRS’s budget actually increases the national deficit because every dollar spent on tax enforcement generates at least $10 in return.

While many GOP candidates have shied away from the irresponsible rhetoric of the RNC, Iowa senatorial candidate Joni Ernst has embraced the RNC’s messaging saying that “closing the door” at the IRS would be a wonderful start to fixing the federal government. Similarly, anti-tax conservatives like Sens. Rand Paul and Ted Cruz have long established their conservative bonafides by calling for the abolishment of the IRS. Perhaps more disconcerting than all this rhetoric is the fact that the House GOP has voted to exacerbate problems at the agency by using the IRS’s recent unpopularity to push deep cuts to the agency’s budget, including a particularly short-sighted cut of a quarter of the IRS’s enforcement budget.

Rather than demagoguing about abolishing the IRS, national political parties and their members in Congress should call for a substantial increase in the agency’s budget and consider the multitude of thoughtful reforms proposed by groups like the non-partisan National Taxpayer Advocate.

State Rundown, 9/5: Gun Holiday in Mississippi, Shortfall in Wisconsin, and a Showdown in Washington

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Elmer-fudd-pictures.jpgAdd Mississippi to the list of states adopting shortsighted and impractical sales tax holidays. This week marks the state’s first tax-free weekend for sportsmen, also touted as the “Second Amendment Sales Tax Holiday.” Individual sales of ammunition, firearms, archery equipment and rifle scopes, among other hunting gear, will be exempt from the state sales tax, presumably to help working hunters afford basic necessities. In what is surely no coincidence, Mississippi’s tax-free weekend is the same week as that of neighboring state Louisiana. The two states have long used fiscal policy to compete for jobs and economic development.

In an unsurprising development, Wisconsin’s state tax collections fell short of projections by $281 million last year after Gov. Scott Walker and the state legislature enacted irresponsible tax cuts. Walker and Republican legislators enacted a $320 million tax cut in July 2013, another $100 million property tax reduction last October, and yet another $500 million tax cut in March of this year. Also unsurprising is that the majority of the tax cuts went to the state’s wealthiest residents. According to Wisconsin Budget Project, Wisconsin workers making $14,000 or less got an average tax cut of $48, while those making above $1.1 million got an average tax cut of $2,518. 

In Kansas, another state run into the ground with ruinous tax cuts, Democrats and Republicans are fighting over the definition of what a tax increase is. Republicans claim that gubernatorial candidate Paul Davis (D) wants to raise taxes on low-income families because Davis has proposed freezing income tax rates at current levels to increase school funding, rather than letting the rates fall lower under a plan pushed by Gov. Sam Brownback. The accusation by Republicans is bold, particularly since Brownback actually raised taxes on low-income families when he raised the state sales tax rate, cut the standard deduction, and eliminated several low-income credits (the sales tax rebate was reinstated as non-refundable credit in 2013).

Washington state’s Supreme Court heard arguments from lawyers representing the state’s legislature this week in the ongoing saga over the McCleary school funding case. In 2012, the court ruled in McCleary v. State of Washington that state lawmakers are violating the constitutional rights of schoolchildren by failing to provide them a basic education, as required by the state constitution. The court called for the hearing this past April after legislators failed to craft a funding plan by the end of the legislative session. If the court finds the legislature in contempt, lawmakers could face fines, defunding of non-educational programs, or even the sale of state property. According to ITEP’s Who Pays report, Washington has the most regressive tax structure in the nation, and the need for education funding is severe.

Tax Policy and the Race for the Governor’s Mansion: Florida Edition

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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Florida.

florida.JPGIt’s back to the future in the Sunshine State, where voters have the choice of keeping current Gov. Rick Scott (R) or reelecting former Gov. Charlie Crist (D). Crist, who left the Republican Party in 2010 and became a Democrat in 2012, is attempting to pull a Grover Cleveland and become only the second Florida governor to serve two non-consecutive terms.

Taxes have been front and center in this election, which has grown increasingly negative. Scott, who delivered on his promise to cut $500 million in taxes this year, is pledging another $1 billion tax cut if reelected. The 2014 cuts were mostly comprised of a repealed motorist fee increase approved by Crist and the state legislature in 2009, saving motorists an average of $25 per vehicle and costing the state $395 million in revenue. The other $105 million in cuts came from a so-called “patchwork of awesomeness,” and features three sales tax holidays, the elimination of taxes on college meal plans, therapeutic pet food, cement mixers, child car seats and a hodgepodge of other giveaways. Sales tax holidays are notoriously gimmicky, as reported many times on this very blog; it should also be noted that Florida already had two of the holidays in place, so those cuts were not exactly new.

Scott’s proposed $1 billion tax cut is far more ambitious. He wants a constitutional amendment to keep property taxes from rising if the value of a home stays steady or declines. The state constitution already prevents annual property tax increases over 3 percent, hampering the ability of local governments to fund schools and pay for infrastructure projects. Scott would also seek a permanent tax cut for manufacturing machinery, additional sales tax holidays, cuts on vehicle registration fees and cellphones, and would phase out the sales tax on commercial leases. His goal is to contrast his enthusiasm for tax cuts with Crist’s record of raising taxes (mostly on cigarettes and car registrations) during the economic downturn. Recent budget forecasts bring into question whether Scott’s plans are even financially feasible. 

Crist, meanwhile, charges Scott with advocating tax policies that help special interests and lobbyists at the expense of small-business owners and Florida families. He’s running on his record of tax cuts from his previous term, arguing that he cut property taxes for seniors and the middle class when he approved an increase in the homestead exemption in 2008. Republicans counter that Crist increased taxes by $2.2 billion the very next year to address budget shortfalls during the recession (like almost every other governor in the country). Crist has alleged that Gov. Scott raised property taxes, but his claims have been thoroughly debunked

Tax Policy and the Race for the Governor’s Mansion: Arizona Edition

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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Arizona.

The dust has temporarily settled in Arizona where a Republican gubernatorial candidate emerged last week out of a crowded field of six people vying for the top job in the Grand Canyon State.  Doug Ducey, currently Arizona’s state treasurer and the former CEO of Cold Stone Creamery, will be facing Fred DuVal(D) in November’s election. 

Tax policy was a key issue in the run-up to the primary with four of the six candidates promising significant tax cuts if elected and will continue to play a central role in the months leading to November.  The state budget will likely end the year $300 million short of needed revenues and a court-ruling issued last month on K-12 school financing means lawmakers will need to come up with $316 million in additional education funding next year and more than $1.6 billion over the next five years. It goes without saying that Arizona’s fiscal situation is not very pretty and whoever is elected will have his hands full from the start.

Despite this backdrop of spending and revenue pressures, Ducey wants to gradually eliminate Arizona’s personal and corporate income taxes, but has yet to say how or if he would replace the more than $4 billion the state would lose if his plan is enacted or how he would raise the needed revenues for the education court mandate. Duval says the idea of repealing the state’s income taxes is not realistic given the needs in the state and intends to make Ducey divulge more details about his tax cutting plan. 

If Ducey wins in November, he will likely lead Arizona in the direction of Kansas and North Carolina where significant tax cuts are coming up short.  In fact, revenue in both states has come in far under projections and bond rating agencies think Kansas’ poor recent fiscal management makes the state less credit-worthy. Standard and Poor’s downgraded the state’s credit rating last month, meaning that every time the state chooses to borrow money to fund long-term capital investments such as roads and bridges, it will cost the state more to do so. 

State Rundown, Sept. 2: Big Oil Wins In Alaska, Hollywood Wins in California

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Palindrillcollage.jpgOil companies won big in Alaska with a narrow defeat of Ballot Measure 1, which would have repealed the generous regime of tax breaks the legislature gave to oil companies last year. The measure’s defeat was narrow even though those who oppose the measure outspent its proponents by 25 to 1, with BP alone contributing more than $3.5 million to defeat the measure. While the effort to repeal the tax was largely spearheaded by state Democrats, Ballot Measure 1 earned the strong endorsement of former Alaska Gov. Sarah Palin (R), who advocated returning to the oil tax regime that was set in place while she was governor.

Lawmakers in California have brokered a deal that would more than triple the state’s film tax credits from $100 million to $330 million annually, thus providing a massive windfall to the state film industry. The move comes in spite of warnings from the state’s non-partisan Legislative Analyst Office that it would only further aggravate the race to bottom among states vying for film production and recent studies showing that the economic and fiscal benefit of film production credits have been substantially overstated.  Rather than expanding the state’s film tax credit, California should follow the lead of states such as North Carolina, Florida, New Mexico and others that have been backing off their credits. 

Policy Matters Ohio released a report last week that calls the state’s recent expansion of the EITC inadequate and “out of step with nearly all other state EITCs.” Only 3 percent of Ohio’s poorest workers will benefit from the expansion, which raises the state’s capped EITC from 5 percent to 10 percent of the federal EITC, and average additional saving is just $5. Ohio’s EITC credit is also non-refundable, meaning that it can only reduce tax liability, not be put toward a tax refund. Meanwhile, Ohio Governor John Kasich (R) has pledged to use the state’s budget surplus to enact more income tax cuts, rather than increasing support for working families.

In Iowa, gubernatorial candidate Jack Hatch continues to push for an increase in the gas tax to address funding shortfalls for improvements and repairs on the state’s roads and bridges. Under Hatch’s plan, the state gas tax would increase by 2 cents a year for five years. According to an ITEP report, the purchasing power of Iowa’s gas tax (adjusted for inflation) hit an all-time low this year. 

Finally, a new report from 12billion.org reveals that “airlines get state tax breaks on more than 12 billion gallons of jet fuel through obscure tax codes,” costing states over $1 billion in revenues every year. Thanks to the tax breaks, airlines pay effective fuel tax rates that are far lower than those paid by motorists; in California, car drivers pay an average of 50 cents in taxes per gallon of fuel, while airlines pay about 27 cents.