Month: November 2014

New data out of Kansas shows local property tax rates falling after an infusion of state cash for struggling school districts. After the Kansas Supreme Court ruled that cuts in state aid to schools created “unconstitutional, wealth-based disparities” between districts, $134 million in funding was restored, with the greatest relief going to those districts most in need. The case, Gannon v. State, began with a lawsuit brought by a coalition of Kansas school boards. A portion of the lawsuit, concerning general aid to schools, is still pending.

The United States Supreme Court heard arguments today in a case that could have ramifications for states’ ability to tax income earned outside their borders. The case, Comptroller of the Treasury of Maryland v. Brian Wynne, will determine if state residents are entitled to tax credits on certain income earned outside the state. Right now, Maryland taxpayers can deduct taxes paid in other states from their Maryland state income tax, but the rule doesn’t apply to portion of state income tax collected on behalf of counties. The Maryland Court of Appeals ruled that this is unconstitutional under the Commerce Clause because it discriminates against interstate commerce.

A coalition of school districts, parents and civil rights advocates sued top officials in Pennsylvania this week, alleging that state funding for K-12 education underfunds public schools and denies students in poor districts equal educational opportunities. They want the state’s Commonwealth Court to strike down the funding formula as unconstitutional and require a more equitable replacement. According to the plaintiffs, some districts are underfunded by as much as $4,000 per student and the disparities in per-pupil spending between low-income and high-income districts is almost $20,000. In 2011, state officials reduced state education funding by $860 million, leaving districts to rely on inequitable property tax revenues to close the gap.

On November 5, the International Consortium of Investigative Journalists revealed leaked documents demonstrating that Pepsi, IKEA, FedEx and 340 other multinational corporations received special deals from the government of Luxembourg allowing them to use the country as a tax haven.

The documents are private tax rulings from Luxembourg’s Ministry of Finance to specific corporations pledging to respect complex arrangements that shift profits from normal tax systems into Luxembourg and, in some cases, then shift those profits on to zero-tax countries like Bermuda. The deals were negotiated by PricewaterhouseCoopers, the big accounting firm with a history of facilitating tax avoidance and defending corporations against attempts to change the system.

The European Union is already investigating whether such deals made between Luxembourg’s government and Amazon and Fiat violate EU rules barring state aid that unfairly benefits some companies over others.

There are many ways such private rulings can benefit specific corporations that make their profits appear to be earned in a country where they won’t be taxed. The ruling might bless a scheme involving loans from one part of a company to another, which results in interest payments paid into the country where they won’t be taxed. This type of earning stripping is an accounting gimmick given that the parties involved are really all part of the same company. Or a ruling might bless a particular approach to transfer pricing, for example by allowing a company to “sell” a patent or copyright at a very low price to its subsidiary in a zero-tax country and then pay large royalties to that subsidiary to make it appear that profits are all earned in the tax haven.

Luxembourg apparently provides several breaks that take this sort of tax dodging to a whole different level. The article explains that the country exempts 80 percent of royalty income earned on intellectual property.

It also allows hybrid debt instruments, meaning a corporation in a normal tax jurisdiction might make a payment that is considered a deductible interest payment there, but it’s received by a subsidiary in Luxembourg where it’s considered a dividend paid out of offshore profits. The latter would not be taxed at all under Luxembourg’s territorial system.

It is therefore no surprise that many corporations set up subsidiaries in Luxembourg that are only mailboxes. They do no real business but accounting tricks make it appear, to tax authorities, that profits are earned there.

“Office buildings throughout the city are filled with brand-name corporate nameplates and little else. Some have offices and no visible employees. One building at 5 Rue Guillaume Kroll is home to more than 1,600 companies; another at 2 Avenue Charles de Gaulle houses roughly 1,450; and a building at 46A Avenue J.F. Kennedy is home to at least 1,300…”

Even if the EU is successful in cracking down on this nonsense, there may always be countries willing to facilitate this type of corporate tax dodging. As we have argued before, the only way to really stop American corporations from exploiting such offshore tax havens is to make sure corporate profits are taxed at the same rate whether they are earned domestically or offshore.

A story that made few waves earlier this week due to the focus on the election reminds me of Leona Helmsley’s infamous “only the little people pay taxes” comment. If you missed it, a Bloomberg report on Monday exposed billionaire John Malone, chairman of Liberty Global, as a world-class tax dodger.

The detailed story is jaw-dropping because Malone’s crafty maneuvers that allowed his company to dodge millions in taxes and allowed him to avoid millions in personal income taxes were all arguably legal.  

Here’s how he did it: Last year Malone’s Liberty Global, the largest international cable company, “moved” from Colorado to London through a merger with Virgin Media. The merger was structured as a corporate inversion, a tax-dodging gambit much in the news lately. Although Liberty gives its London office top billing on its website, the company didn’t actually move its headquarters to London—it’s still run primarily out of the company’s office in Colorado.

As my colleagues and I at Citizens for Tax Justice have noted repeatedly, corporate inversions are often a farce that allow companies to claim they are headquartered elsewhere, while they reap all the benefits of operating in the United States and avoid paying their fair share.

Aside from Liberty Global’s current and future tax savings expected from the paper move, Malone is estimated to have personally escaped $200 million in income taxes in the inversion deal which generally subjects the shareholders to income taxes on their capital gain. He did that by transferring $600 million of his stake in the company to a charitable trust the day before his company announced the inversion deal and by twisting Treasury regulations into a pretzel to avoid tax on the remaining $260 million piece.

The greed that says Malone—whose estimated net worth exceeds $7.5 billion—can’t even pay 20 percent in capital gains tax (compared to a 35 percent rate on wages) on his $860 million dollar gain is truly unimaginable to me. And that we have laws that allow tax avoidance on this scale is deplorable.

If what Helmsley said more than two decades ago is true, that only the little people pay taxes, then perhaps only the “little people” should get the benefits of the public services that taxes pay for: roads, airports, the courts, the Coast Guard (Malone has two yachts), military and police protection—to name just a few. 

Senate Republican leader Mitch McConnell of Kentucky, who will lead the chamber as majority leader starting in January said Wednesday that tax reform is one priority he could pursue. But it’s unclear how the caucus he leads could possibly produce a tax reform that the public would support, given exit polling that indicates little interest among voters in the sort or revenue-neutral, rate-reducing tax overhaul that Republicans support.

Hart Research Associates conducted an exit poll for the AFL-CIO in states with key Senate races (Alaska, Arkansas, Colorado, Georgia, Iowa, Kansas, Kentucky, Louisiana, Michigan, North Carolina, New Hampshire).

Voters were asked, “Which one of the following do you think should be the higher priority for the president and Congress right now–(A) reducing taxes on businesses and individuals or (B) investing in key priorities like education, healthcare, and job creation?” A solid 67 percent said “investing in key priorities” and only 29 percent said “reducing taxes.”

It seems public opinion is particularly set against the idea tax reform that is revenue-neutral for corporations (which many Republicans and Democrats, including President Obama, have proposed).

To the question “What should revenue from closing corporate tax loopholes be used for?” 66 percent chose “reduce budget deficit and invest” while only 22 percent chose “reduce tax rate on corporations.”

And the public supports a worldwide tax system, which would subject American corporations’ profits to the same tax rates regardless of whether they are earned domestically or offshore. This is the very opposite of a territorial tax system, which would exempt the offshore profits of American corporations from U.S. taxes and which is the basis of Republican tax reform proposals.

A whopping 73 percent of voters said they would support “increasing taxes on the profits that American corporations make overseas, to ensure they pay as much on foreign profits as they do on profits made in the United States,” while only 21 percent said they would oppose this.

It’s not immediately obvious how pursuing his party’s unpopular positions on taxes could possibly be appealing for McConnell. But he may have no choice. In the House of Representatives, Paul Ryan will likely chair the Ways and Means Committee and could demand action on tax reform and force his hand.

Keep in mind that the tax reform proposal from the outgoing chairman, Dave Camp of Michigan, turned out to be a regressive $1.7 trillion tax cut and was abandoned by his caucus because it was thought to not cut taxes enough. Apparently House Republicans are determined to give away even more revenue and it’s unclear whether they would allow something as trivial as public opposition to change their plans. 

The outcome of Tuesday’s election surely will shape the direction of state tax policy in 2015 as tax shift proposals appear to be looming in a number of states. In states with budget shortfalls, it may be difficult for elected officials who campaigned on tax-cutting platforms  to balance that rhetoric with the realities and priorities of governing.

As a recent Standard & Poor’s study revealed, worsening income inequality makes it harder for states to pay for needed services (e.g. education, roads and bridges, public safety and public health) over time. Campaigns consist of soaring rhetoric on what candidate will do for the people. Governing puts that rhetoric to the test. State lawmakers, regardless of party affiliation, should focus on reckoning the reality of their constituents’–ordinary working people–daily lives rather than claim the outcome of the Tuesday’s election is license to impart policies that overwhelming benefit corporations and the wealthy at the expense of everyone else.

In coming weeks, ITEP will provide a comprehensive overview of state tax policy trends to anticipate in 2015 as well as a look at other states where tax policy will be a dominant issue.  For now, here’s a glance at some of the most important states to watch where the outcome of Tuesday’s election will surely shape tax policy decisions next year:

Arizona: Former ice cream magnate Doug Ducey cruised to victory over opponent Fred DuVal on a promise to eliminate the personal and corporate income tax. Ducey appeared to back away from his tax pledge in the waning days of the campaign, but it is likely that he will claim a mandate to push an anti-tax agenda, financed with drastic spending cuts. “If anyone needs to cut back,” he declared in his victory speech, “it will be government.” The state’s anemic economy and yawning budget gap could prove an obstacle to his plans.

Arkansas: Former Congressman Asa Hutchinson was elected governor besting former U.S. Rep. Mike Ross. This means that both the Arkansas legislative and executive branches will now be under one-party control. Hutchinson campaigned on a costly plan to cut the personal income tax by lowering tax rates for all but low-income households. News outlets have  quoted him saying that income tax reduction would be his “top and possibly only tax cutting priority.” Given one party control in Arkansas government, legislators will likely feel more inclined to push through tax cuts and potentially pursue more aggressive tax shift legislation (which has been on their agenda for years) that would eliminate income taxes and replace the lost revenue with regressive sales taxes.

Georgia: Gov. Nathan Deal won his campaign for reelection over challenger Jason Carter. Given that Republicans will continue to control both the House and the Senate, top state lawmakers are expected to pursue a tax-cutting agenda that will likely include extreme tax shift proposals.  Late last year, the Georgia Budget and Policy Institute published  a report (using ITEP data) showing that as many as four in five taxpayers would pay more in taxes if the state eliminated its income tax and replaced the revenue with sales taxes.  Georgia voters also approved the “Income Tax Straightjacket” a ballot initiative that amends the state’s constitution to keep the top income tax rate at 6 percent.

Illinois: Gov. Pat Quinn lost his bid for reelection to businessman Bruce Rauner. Taxes were a big issue in this campaign. Rauner’s position on how to handle the state’s temporary 5 percent income tax rate changed through the campaign. (The state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in January). Initially he proposed allowing the temporary income tax hike to immediately expire, but he changed his position once the reality set in that as governor he would need to fill the $2 billion budget hole created by allowing the tax rate to fall. More recently, Rauner has said that he will allow the temporary tax increase to expire over four years and will keep property taxes at their current level. Rauner would make up $600 million of lost income tax revenue by broadening the sales tax base to include many business services such as advertising, printing and attorney fees. The Illinois House and Senate, which remain under Democratic control, may tackle the temporary income tax rate before Rauner takes office. Regardless, Illionois will be a state to watch in 2015 given the governor’s stand on taxes, divided government and  overwhelming voter approval of a referendum showing support for a millionaire’s tax.

Kansas – Given Kansas’s recent fiscal woes, the race between  Gov. Sam Brownback and House Minority Leader Paul Davis was thought to be a toss-up right until the polls closed. Ultimately, Gov. Brownback prevailed. Gov. Brownback’s record on taxes has made national headlines and the race was largely viewed as a referendum on his controversial tax cuts that benefited wealthy Kansans disproportionately, resulted in a bond rating downgrade, and left the state with a huge budget shortfall. Now that Kansans have re-elected Gov. Brownback,  he’ll be forced to deal with a budget shortfall through rolling back his tax cuts, raising other taxes, or reducing services. All eyes will continue to be on Kansas into 2015.

Maryland: Larry Hogan’s stunning upset over Lt. Gov. Anthony Brown in the gubernatorial race will likely result in gridlock rather than significant changes on tax policy. Hogan used outgoing Gov. Martin O’Malley’s tax increases as an effective cudgel against Brown, hammering away at his support among Democrats. Though Hogan has pledged to repeal as many of O’Malley’s tax policies as possible, he is unlikely to find support for his agenda in the Maryland state legislature, which remains overwhelmingly Democratic. A similar dynamic plagued his former boss, Republican Gov. Bob Erlich (2002-2006), who found himself stymied by a combative General Assembly. The likely result of divided government is gridlock.

Pennsylvania: Tom Wolf unseated Pennsylvania’s incumbent governor, Tom Corbett, in Tuesday’s election.  Corbett’s unpopularity stemmed from a number of his policy choices including cutting more than $1 billion in education spending and allowing a significant budget shortfall to develop in the state.  So, the top job of the newly elected governor will be determining how to close the budget gap (estimated to be between $1.7-$2 billion) while reinvesting state dollars in public education.  Look to Wolf to put forth several revenue raising ideas he first proposed on the campaign trail.  For starters, Wolf promised to enact a 5 percent severance tax on natural gas drilling to help fund education (Corbett opposed such a tax).  Wolf also wants to raise revenue through changes to the personal income tax which will also improve the fairness of the state’s tax system. Pennsylvania has a flat income tax rate of 3.07 percent and the Pennsylvania Supreme Court has ruled that the constitution bars the adoption of a graduated income tax. Wolf’s plan would raise the income tax rate but exempt income below a certain level. Wolf has said he intends  to use the extra revenue generated by his tax reform to increase the level of state aid to public schools and reduce Pennsylvanians’ property taxes.  While Wolf may face opposition to his progressive personal income tax plan, many Republican lawmakers could get on board with the idea of the state taking on a greater share of school funding if it would result in lower property taxes.

Wisconsin: Wisconsin Gov. Scott Walker won reelection by besting Trek Bicycle Executive Mary Burke. Gov. Walker ran on his record of cutting taxes. (During his time in office Governor Walker passed three rounds of property and personal income tax cuts). As a candidate Gov. Walker pledged that property taxes wouldn’t increase through 2018. Even more worrisome, Gov. Walker has said he wants to discuss income tax elimination. While telling voters that he’d like to eliminate their state income tax bills may sound good on the campaign trail, Wisconsinites should know that most taxpayers, especially middle- and low-income households, would likely pay more under his plan. An ITEP analysis found that if all revenue lost from income tax repeal were replaced with sales tax revenue the state’s sales tax rate would have to increase from 5 to 13.5 percent.  ITEP also found that the bottom 80 percent of state taxpayers would likely see a net tax hike if the sales tax were raised to offset the huge revenue loss associated with income tax elimination.