Month: October 2014

Looking for a good scare this Halloween? Right-wing film producer John Sullivan will have you hiding under your covers with his portrayal of jack-booted IRS thugs going door to door looking for any Christian, veteran or true freedom-loving American that they can squash.

Pulling no punches, Lori Marcus, a commentator in the recently released documentary “Unfair: Exposing the IRS,” says that if the IRS is not stopped then the next boxcar will be coming for you, an allusion to the boxcars used to carry Jews to Nazi concentration camps. Nazi allusions are part and parcel of Sullivan, whose right-wing propagandist films such as”2016: Obama’s America” and “Expelled: No Intelligence Allowed,” are chock full of factual errors and hyperbole in service of perpetuating a sense of mortal fear of all things Obama or progressive.

With Unfair, Sullivan uses the IRS’s recent scandals as a jumping off point to argue that the IRS is an inherently criminal organization at the forefront of turning America into a “fascist state.” In reality, the real scandal is how years of woefully underfunding the IRS has seriously hamstrung the agency’s ability to perform its even its most basic tax collection duties. The lack of adequate funds for computer infrastructure, staff and training is more the cause of the scandals than any fake conspiracy dreamed up by Sullivan.

Rather than pushing for adequately funding the IRS, the film calls for  abolishing the agency through the enactment of the so-called “Fair Tax,” which is a proposal that would essentially replace all federal taxes with a national sales tax. The film fails to mention that a realistic version of the Fair Tax would be extremely regressive, increasing taxes on the bottom 80 percent of taxpayers by an average of $3,200 annually, while cutting taxes for the top 1 percent of taxpayers by an average of $225,000 annually. In addition, the assertion that a Fair Tax system would “Abolish the IRS” is misleading in that it leaves out that fact that the IRS would simply need to be replaced by a complicated system of mini-IRS’s at the state level.

In other words, the Fair Tax plan promoted by the movie is really just a bait and switch, promising low taxes and the end of any tax collection issues, but delivering higher taxes for most taxpayers and a whole new set of state tax collection issues.

Unfortunately, the push to abolish the IRS and/or enacting the Fair Tax is not just the province of right-wing filmmakers. The Fair Tax Act, for example, has actually gained some legislative traction, earning as many as 76 sponsors in the House of Representatives and 9 sponsors in the Senate. Even scarier, the Republican National Committee is now parroting the Fair Tax playbook by fundraising on the promise to “Abolish the IRS,” though they did not exactly explain how they would go about doing this.

Rather than believing spun up stories about the ghouls and goblins having taken over the IRS this October, Congress should instead take its role seriously by substantially increasing the IRS’s budget, so the agency can more effectively collect critically needed revenue and provide better service to U.S. taxpayers. 

The Irish government’s announced plans to  phase out the infamous “Double Irish” loophole represents a significant victory for tax justice advocates worldwide who have sought to end this practice, but also leaves an opening for corporations to find new tax avoidance schemes.

The loophole — used by companies like Apple and Google to dodge billions in taxes — allows multinational corporations to route international profits to Irish subsidiaries and then tell Irish authorities that these subsidiaries actually have tax residence in a tax haven such as Bermuda or, in the case of Apple, have no tax residence at all. Irish lawmakers have proposed requiring corporations registered in Ireland to also be tax residents of the country.

The move comes just two weeks after the European Commission ratcheted up pressure on the country by announcing that the special tax deal that Apple cut with Ireland could violate the European Union’s trade rules. This crackdown came on top of last year’s blockbuster U.S. Senate hearing, where Sen. Carl Levin laid out the breathtaking audacity of Apple’s tax avoidance scheme, including its use of Irish subsidiaries to pay nothing in taxes on tens of billions in profits.

The use of Irish subsidiaries to dodge taxes is widespread. A joint 2014 report by CTJ and U.S. PIRG found that more than 30 percent of Fortune 500 companies had at least one Irish subsidiary. While not every company with an Irish subsidiary is necessarily using it to dodge taxes, IRS data indicates that the amount of income being reported as earned in Ireland by U.S. companies is laughably implausible considering that it would constitute as much as 42 percent of the country’s overall GDP.

While Ireland’s current move appears to be more substantive than the empty gesture it proposed last year in an effort to assuage critics, there is still much to be desired about the proposal. To start, it keeps the loophole in place for all companies currently using it until 2020, which leaves plenty of time for companies to find new tax avoidance schemes or for the country to reinstate the loophole. In addition, Ireland’s announced plans to close the loophole coincided with Irish lawmakers announcing they would enact a new “patent box” tax break, which, depending on the details, could mean creating a substantial new loophole for companies to use.

Though Ireland’s decision to close its most egregious tax loophole shows that international pressure can push tax haven countries to change course, such reforms do not fundamentally change the incentive for U.S. multinational corporations to find other offshore tax loopholes to exploit. The way to end this incentive once and for all would be to end the rule allowing corporations to indefinitely defer U.S. taxes on their offshore profits. Short of ending deferral entirely, Congress should pass the Stop Tax Haven Abuse Act, which takes aim at the worst abuses of deferral. At the very least, Congress should not expand deferral by renewing the active financing exception and CFC look-through rule as part of the tax extenders package.

By Wesley Tharpe, Policy Analyst
Georgia Budget and Policy Institute (GBPI)

Georgians will vote Nov. 4 whether to permanently enshrine the state’s top income tax rate of 6 percent in the state constitution.

The so-called “tax-cap” amendment sounds American as apple pie. No one looks forward to the day their income tax bill comes due, and the prospect of capping the rate understandably sounds appealing at first. But Georgia voters who take a second look at the proposal will see it for what it truly is:  an attempt to keep taxes for the wealthiest Georgians low and to block future generations from meeting the needs of a rapidly growing state.

States across the country face questions of how to raise enough revenue to meet basic needs, from infrastructure to education and health care. It’s a public policy question that, unfortunately, all too often becomes a political question. Georgia would be the first state to cap income taxes through its constitution, if voters approve. But states like California, Colorado and Illinois have passed other restrictive tax measures in the past and come to regret it later. State governments need flexibility to make course corrections when their needs outweigh available funds. Georgia’s proposed amendment is one example of efforts to prevent states from doing so by tying their hands for the future. 

In the 2014 legislative session, Georgia lawmakers placed Senate Resolution 415 on the ballot for voters to decide in November. The ballot question asks, “Shall the Constitution of Georgia be amended to prohibit the General Assembly from increasing the maximum state income tax rate?” If voters approve, Georgia’s top income tax rate will never surpass its current 6 percent, barring the unlikely removal of the cap in a future vote.

Here’s the problem. Income taxes are one of the main tools for state lawmakers to meet taxpayers’ needs, and Georgia’s needs have exploded in recent decades. The state’s population more than doubled in the past half century, rising from 15th most populous in 1970 to 8th most today. If Georgia’s growth continues apace, it could break into the top five by the middle of this century. Georgia is no longer a small, sleepy, agricultural corner of the South. It is a complex modern economy that needs a qualified workforce, world-class transportation and adequate health infrastructure to compete.

Meeting these challenges requires public investments with an eye on the future, and those investments require tax revenue. Georgia’s current leadership is unwilling to confront that essential truth, choosing instead to further erode the state budget through new tax cuts and business tax breaks. Lack of public investment has consequences. Georgia today is plagued by overcrowded classrooms, congested roads and one of the most underfunded health systems in the country. That trifecta scares away high-wage businesses and makes Georgia less attractive for workers, families and entrepreneurs.

Future generations of Georgians might be willing to forge a better path. Twenty, 50 or 100 years from now, state lawmakers might want to consider, say, adding a 7 percent top rate to fund universal pre-kindergarten or a modern transportation system. They might want to temporarily raise income taxes to confront some extraordinary need like a natural disaster or deep recession. If the amendment is approved, making those choices will be off the table.

That raises the second problem. Georgia will inevitably need a way to raise more revenue in the future, but capping the state’s income tax will shield the wealthiest Georgians from paying their fair share. Other sources of revenue, such as sales taxes and fees, fall disproportionately on low-wage and middle-class workers, whereas income taxes fall more on the wealthy. That means deemphasizing income taxes will likely raise taxes on most Georgia families long-term.

It could also worsen the growing gap between the wealthiest Georgians and regular working families. The share of Georgia’s yearly income taken home by the top 1 percent nearly doubled to 18.7 percent in 2007 from 9.5 percent in 1979. And evidence already suggests that rising inequality makes it harder for states to fund the people’s business, since the wealthy are often able to shield much of their income from taxes.

Georgia voters will soon make a pivotal choice. Voting to cap the state income tax might seem like a no brainer to many. But if voters gave it more thought, they’d realize capping Georgia’s income tax does nothing to clear a path to prosperity for Georgia businesses or families. Instead, it will put future generations in a financial straightjacket, unable to solve our most pressing problems. It is a shortsighted and unnecessary restriction that could haunt Georgia down the road. 

After announcing Ohio-based Steris Co.’s plans to become British for tax purposes on Monday, CEO Walter Rosenbrough later said on a conference call, “We’re not typically users of aggressive tax policies and I don’t think we are here.”

That’s his story, and he’s sticking to it. But even a cursory look at the company’s financial reports tells another story. Like so many other U.S.-based multinational companies, Steris pays nowhere near the 35 percent statutory federal rate. But early coverage has pointed to Steris’s potential financial benefits due to Britain’s lower 21 percent statutory tax rate.

A Bloomberg story estimates that Steris “set aside about 32 percent of its pretax earnings to pay taxes” over the past three years, and the Wall Street Journal pegs the company’s most recent tax rate at 31.3 percent. This, of course, provides much fodder for anti-corporate tax advocates who argue inversions and other tax shenanigans are justified because the U.S. corporate tax is too high and is what’s driving Steris (and other poor, defenseless health care giants and multinationals) to abandon their U.S. citizenship.

But Steris isn’t writing a check for 32 percent of its profits to the U.S. government. The Bloomberg and Wall Street Journal numbers are both worldwide tax rates. This means the figure includes income earned in other nations, and the foreign taxes the company paid on those earnings. It also includes not just the current taxes the company actually pays in each year, but also deferred taxes, which the company does not pay.

The tax rates that actually matter in the debate over corporate inversions—the current federal taxes, as a share of pretax U.S. profits, that Steris reports each year— paint a starkly different story. Steris’s average tax rate for the last three years was 16.3 percent, less than half the 35 percent statutory federal income tax rate that the company presumably uses at least some of its lobbying muscle to complain about.

In fact, over the same three-year period, Steris reported a foreign tax rate of 28.5 percent, which is well above its 16.3 percent U.S. tax rate. All of this suggests that Steris’s activities in developed nations with real tax systems around the world are generally being taxed at rates at or above those it faces in the U.S.

As we noted Tuesday, it’s clear that prior to its announced inversion, Steris already engaged in foreign tax hijinks, contrary to its CEO’s claims that the company doesn’t aggressively exploit tax policies to its maximum benefit.

Even though about 75 percent of the company’s profits and revenues are earned in the United States, and roughly 90 percent of its assets are stateside as well, the company discloses, in a Houdini-esque flourish, that fully 94 percent of its worldwide cash somehow now resides outside the country, possibly in its tax-haven subsidiaries in the British Virgin Islands and Mauritius.

And that’s probably what Steris’ inversion is all about: the company has gradually accumulated $222 million in offshore cash, much of which is likely U.S. profits in disguise, on which it would prefer to not pay any U.S. tax.

More than three weeks ago, the U.S. Treasury Department announced regulations intended to crack down on corporations seeking to invert to dodge U.S. taxes. But the Obama Administration can only do so much through regulatory action. Congress should take steps to make sure that Steris’s offshore profits—much of which may be untaxed—and offshore profits of other companies seeking to renounce their citizenship are brought back to the United States and fairly taxed.  

As we mentioned a couple weeks ago, the Treasury Department cannot fix the inversion crisis by itself. Only weeks after the Obama Administration announced that Treasury will take important regulatory steps to help prevent U.S. -based companies from inverting to foreign havens as a tax-dodging strategy, the Ohio-based Steris Corporation announced its plan to purchase a British health care firm and reincorporate in the United Kingdom.

While Treasury’s new efforts appear to have dissuaded at least one company from going forward with previously-announced inversion attempts, all it appears to have done in this case is to make Steris’s leadership deny that inversion was their idea: Steris’ CEO, Walt Rosebrough, said in a press conference that “[i]t was only our advisers that brought [the tax advantages] to us. It’s not naturally something we would think of.”

This is a little hard to swallow given the company’s recent history. Steris has subsidiaries in a wide range of tax havens, from the British Virgin Islands and Barbados to Mauritius and Luxembourg. Despite consistently earning more than two-thirds of its revenue in the United States and holding about 90 percent of its assets domestically, the company discloses that, somehow, 94 percent of its cash is currently being held (at least on paper) outside the United States.  Steris now holds a total $222 million in “permanently reinvested earnings” abroad—profits that have never been taxed by the U.S., and after a successful inversion may never be subject to our federal income tax. It’s impossible to know just how much of this cash is sitting in beach-island tax havens, but it seems unlikely that Steris owns a Virgin Islands subsidiary because of that country’s lucrative market for hand hygiene compliance programs (that’s one of the things Steris sells). 

As recently as 2012, the company reported a large cut in its U.S. taxes as the result of what it cryptically describes as “the rationalization of operations in Switzerland.”

So when it comes to tax avoidance, this is emphatically not Steris’s first rodeo.

Even more interesting, it appears that Steris is currently paying lower income tax rates to the federal government than it is to the other nations in which it does business. Over the past three years, the company has faced a current federal tax rate averaging 16.3 percent—well below the 28.5 percent foreign tax rate Steris paid on its overseas profits over the same period.

If Steris’ inversion is a naked attempt to avoid paying any taxes on its offshore cash, will the Treasury Department’s new regulatory strategy prevent it? No. As CTJ’s Rebecca Wilkins points out, the Treasury “can make getting at that offshore cash a longer and more complicated process, but ultimately cannot stop Steris from dodging taxes—they can only slow them down.”

All the more reason why the next Congress should do what this Congress couldn’t find the courage to—enact legislative fixes that will stop inversions in their tracks.

In a development sure to shock you, the Oklahoma State Lottery has not fixed Oklahoma’s education funding woes (in other news, water is wet). The Oklahoma Policy Institute reports that the combination of the economic downturn and ill-advised tax cuts has reduced education funding by more dollars than the lottery, created in 2003, has raised. For example, last year the lottery brought in $70.1 million, while the Legislature passed an income tax cut projected to cost $237 million. The kicker is that the bottom 60 percent of Oklahoma families will get just 9 percent of the benefits from this tax cut, while lotteries have a notoriously regressive impact.

For the fourth time in six months, tax collections in Kansas fell way short of revenue projections — $21 million short, according to state officials. The shortfall would have been twice as large if not for a big increase in corporate income tax receipts, as individual income tax receipts were $42.4 million less than estimated. The report is a blow for Gov. Sam Brownback’s administration after July and August revenue met official estimates, suggesting that the worst was over. The Topeka Capital-Journal reports that “the state could burn more rapidly through cash reserves and force the 2015 Legislature to take a scythe to the budget in January.”  The governor said his tax cuts were “like going through surgery. It takes a while to heal and get growing afterwards.” It looks like the patient is back on life support.

A music industry lobbying group is pushing the New York state legislature to pass a tax incentives bill similar to the state’s film credits program, according to The New York Times. If the group, New York Is Music, gets its way, $60 million in tax breaks will be available to studios, record companies and other firms involved in creating music. Businesses would be entitled to a 20 percent credit on expenses related to music production. Supporters claim that high rents in New York City and the attraction of incentives in other states mean the measure is vital to the health of New York’s music industry. The truth, however, is that incentives merely subsidize already-planned economic activity rather than promoting new business, and that they rarely pay for themselves. For more, check out this ITEP report on state tax incentives.

California Democrats hope to use the upcoming 2016 election to advocate for the extension of sales and income tax increases, according to The Sacramento Bee. Proposition 30, which increased the sales and income tax for the state’s highest earners, was passed in 2012 as a temporary measure. Supporters of extending the tax increases, including state superintendent Tom Torlakson and the California Federation of Teachers, argue the revenue will be critical to maintaining investments in education and the social safety net. Critics argue that lawmakers would be acting in bad faith if they sought to extend Proposition 30, which was sold as a temporary measure, and that the measure has hurt the state’s business climate. Gov. Jerry Brown, who supported Proposition 30 when it was introduced, has not taken a position on its extension. 

Got a great state tax story you want to share? Send it to Sebastian at sdpjohnson@itep.org for the next Rundown! 

The European Commission’s recent action to crack down on special deals some European Union governments offer to corporations could be a blow to multinational corporations’ tax-dodging strategies.

As we noted in a report earlier this year, three European countries (Ireland, Luxembourg and the Netherlands) are among the top twelve tax haven countries for U.S.-based multinationals. Corporations use these and other tax havens to artificially shift their profits to foreign jurisdictions and avoid U.S. tax.

Now it seems these European tax havens are offering additional tax deals to corporations that may amount to unfair competition, according to the European Commission. During the past week, The EC notified several multinational corporations that some of the special tax deals they have made with EU member states may not survive. The EC has characterized the arrangements as illegal “state aid” to the companies.

European Union rules do not prohibit member states from offering lower tax rates to lure companies. But they do prohibit countries from making special deals that aren’t available to all companies. The Commission’s investigations appear to focus on transfer pricing – the way multinational corporations price goods and services transferred between members of the affiliated group of companies. According to the EC, tax authorities in Ireland, Luxembourg, and the Netherlands (so far) have agreed to transfer-pricing practices that improperly allow certain multinationals to reduce their tax rate.

Apple. Last Tuesday the EC released to the public a letter sent to the Irish government in June regarding the country’s tax agreements with Apple. If the Commission’s decision stands, the company could owe billions in back taxes to Ireland and possibly other countries.

The EC is challenging what is, in effect, an advance pricing agreement between the Irish tax authority and Apple that allows the company to shift profits to subsidiaries that are not taxable in Ireland—in fact, taxable nowhere in the world. Apple has avoided billions in tax through these arrangements.

Amazon: Discover Anything Any Way to Avoid Tax. This Tuesday the EC revealed that it is investigating Amazon’s deal with Luxembourg. Joaquín Almunia, the Commission’s vice president responsible for competition issues, said the investigation involves a web of Luxembourg subsidiaries and an agreement that capped Amazon’s Luxembourg tax regardless of the amount of its European profits.

Starbucks. The EC has also opened an investigation into Starbucks’ agreements with Netherlands. The company’s Dutch subsidiary charges other subsidiaries for use of  intellectual property it holds, such as the “coffee roasting process,” the recipes, and the Starbucks brand. These payments move earnings from high-tax jurisdictions to the Netherlands where they are taxed at a very low rate.

A New Era. The EC’s actions are potentially quite a blow to multinational corporations’ European tax-dodging strategies. Multinational corporations can’t avoid the EC crackdown by simply moving headquarters outside the European Union. For many reasons, including tax, trade, and currency issues, it’s important for companies to have  European operations headquartered in an EU country. If the EC is successful in undoing the tax agreements, it will severely hamper multinationals’ ability to shift profits out of the EU to low-tax jurisdictions.

The Commission’s actions may signal the beginning of the end for this kind of tax competition among member states. But Congress will have to act to solve profit-shifting out of the U.S.  

Ah, fall. The season marks the countdown to that quintessential American holiday, where childish figures go door-to-door, asking for favors under false pretenses. I am of course talking about election season, which traditionally kicks into high gear in October.

This year, voters in states across the nation will have the opportunity to make their voices heard on a number of ballot initiatives regarding taxes. In some states, ballot initiative supporters are seeking to limit tax policy choices available to lawmakers, while ballot initiatives in other states would raise revenue to boost school funding. We’ve compiled a few of them here, along with links to the best resources, to help voters understand the issues and make their decision this November.

Georgia voters will decide the fate of a constitutional amendment that would prohibit the state from increasing the top marginal income tax rate above the rate in effect on Jan. 1, 2015. While the legislature is now adjourned until 2015, a special session could theoretically be called to lower the top rate (now at 6 percent) before Jan.1. Supporters of the measure argue that its passage would make the state more competitive and reduce uncertainty over fiscal policy for businesses interested in investing in Georgia. Opponents say the uncertainty argument is bogus since the state hasn’t raised the income tax since the 1980s, and that businesses and residents choose where to locate based on a number of factors other than income tax rates. They further note that states that have passed similar measures have faced fiscal challenges down the road; Illinois and California, both of which have restrictive tax amendments in their constitutions, have been hamstrung by budget deficits and an inability to raise revenue during economic downturns.

Massachusetts voters have the option of repealing a 2013 law that ties the gas tax to inflation, allowing for automatic gas tax increases each year. The law also includes a minimum cap on the state gas tax, to prevent gas tax decreases due to deflation. Supporters of repeal argue that the law is a slippery slope that could lead to the linkage of other taxes to inflation, and that it unfairly allows legislators to raise taxes “through the back door” without having to answer to voters. They also argue that the state has a spending problem, not a revenue problem; the last time the state raised the gas tax for road repairs, the money was diverted to other purposes. Opponents of the ballot measure say it would jeopardize transportation projects across the state, threatening the safety of Massachusetts drivers and contributing to the deterioration of many roads and bridges. 53 percent of the state’s bridges are structurally deficient or functionally obsolete, and bad roads cost Massachusetts drivers $2.3 billion a year in car repairs. In the past, ITEP has argued that gas tax indexing is good policy since it maintains a state’s purchasing power and creates a stable funding source – read more in our comprehensive gas tax report.

Tennessee voters could enshrine the state’s current lack of a broad-based personal income tax in the state constitution. A ballot question would permanently ban the legislature from enacting a general income tax on wages and salaries by state or local governments. Supporters argue that the measure would make the state more attractive to businesses by reducing uncertainty and locking in Tennessee’s status as a low-tax state. Opponents argue the measure will make it harder for future Tennesseans to deal with economic downturns and that the state’s political climate makes the imposition of an income tax unlikely in any event. For more on Tennessee, check out this recent blog post.

Nevada voters could implement a new 2 percent margins tax on businesses with over $1,000,000 in revenue to support public schools. Supporters argue that Nevada is 49th in per-pupil spending while also maintaining the lowest state corporate taxes in the nation; since 2009, the state has cut education spending by $700 million. The also maintain that 87 percent of businesses would be unaffected by the measure, and that revenues raised would go solely to education spending. Opponents claim the measure would increase the cost of doing business in the state, would hurt thousands of small businesses, and that the revenue raised would go to county bureaucrats instead of classrooms. The AFL-CIO, which initially supported the measure, now opposes it on the grounds that it could cost some Nevadans their jobs and raise the cost of living if businesses cut costs or pass the tax on to consumers.

Illinois voters will decide whether to support an additional 3 percent surtax on income over $1,000,000 to provide more funding for school districts based on student population. The ballot measure is an advisory question, so it will not be legally binding. Supporters argue that the best-off Illinoisans should do more to support the public schools, which are chronically underfunded. Opponents argue that the measure is an election-year gimmick meant to boost the performance of Democratic candidates rather than a serious proposal. They also argue that the state raised taxes substantially just a few years ago and still cut education funding, and that the tax will lead to tax flight by the wealthy. For the record, tax flight is a myth. 

The Cleveland Plain Dealer has a new series on Ohio Gov. John Kasich’s ambitions to eliminate the state’s income tax, and the findings aren’t great for tax cut supporters.

The paper notes that eliminating the state’s second largest source of revenue could affect services, like education, and prompt local governments to raise taxes to offset the loss in money from the state; Ohio’s budget director “estimates that 85 percent of the state budget goes to education, local governments and counties.”

Kasich and his supporters (usual suspects The Heritage Foundation and Art Laffer) argue that eliminating the income tax will improve the business climate in the state and bring in new residents. Kasich, however, is careful to contend that the benefits won’t come overnight: “It’s like putting seeds in the ground. You don’t get the harvest until later.” That’s because far from attracting businesses and new residents, as supporters dubiously claim, eliminating the income tax will just bankrupt Ohio. One need look no further than Kansas, where Sam Brownback’s ALEC-tested, Laffer-approved tax breaks have the state staring down gargantuan budget deficits.

Ironically, eliminating the income tax would force Ohio to rely on taxes that hinder business (like the severance tax) and unfairly burden working Ohio families (like the sales tax). A report by Policy Matters Ohio, using data provided by ITEP, found that the state would have to almost double its sales tax to pay for income tax elimination, leaving Ohio’s middle class with a tax increase rather than a cut.

Meanwhile, the biggest benefits would go to the state’s top 1 percent, who would save “more than $31,000 a year in taxes.” In the words of our own Matt Gardner: “When people talk about repealing the income tax in Ohio and other states, they generally don’t like to talk about these things.” Any wonder why?