Facebook’s Record-Setting Stock-Option Tax Break

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Facebook reduced its federal and state taxes by a record-breaking $1.87 billion in 2014 by granting lavish stock options to its executives.

The company has used this tax break in the past to zero out its federal and state income-tax bills. But this year it set a record, claiming hundreds of millions more than any other Fortune 500 company has previously disclosed receiving from this tax break.

In 2014, Facebook enjoyed U.S. pretax profits of $4.9 billion and paid federal income taxes of just $260 million, for a federal income tax rate of just 5.3 percent. The stock option tax break explains basically all of the difference between the company’s single-digit tax rate and the 35 percent statutory tax rate.

As we have previously documented, Facebook is hardly alone in using this tax giveaway. Between 2010 and 2012, 280 companies in the Fortune 500 disclosed reducing their tax rates using this dubious loophole. More than 20 companies, including Facebook, managed to cut their taxes by a quarter billion dollars or more during this period.

But none of these corporations enjoyed tax breaks even approaching what Facebook’s newest report discloses.  Even Apple, the previous king of the stock option tax break, has never received more than $1.1 billion a year in stock option tax cuts.

Stock options are rights to buy stock at a set price. Corporations sometimes compensate employees (particularly top executives) with these options. The employee can wait to exercise the option until the value of the stock has increased beyond that price, thus enjoying a substantial benefit.

The problem is that poorly designed tax rules allow corporations to deduct the difference between the market value of the stock and the amount paid when the stock option is exercised. For example if a company gives an employee the option to purchase stock at $10 a share but it’s actually worth $18 a share when the employee buys the shares, the corporation can deduct the $8 difference.

In practice, corporations are often able to deduct more for tax purposes for stock options than they report to shareholders as their cost.

Lawmakers on both sides of the aisle have opposed this loophole. 2013 Legislation sponsored by Democratic Sen. Sheldon Whitehouse would have pared back the stock option tax break. The Cut Loopholes Act would address situations in which corporations take tax deductions for stock options that exceed the cost they report to their shareholders. It would also remove the loophole that exempts compensation paid in stock options from the existing rule capping companies’ deductions for compensation at $1 million per executive. And retired Republican Sen. Tom Coburn called for closing this loophole.

The defenders of this tax break sometimes argue that when companies pay their employees, it shouldn’t matter whether the pay takes the form of salaries and wages or stock options. But this argument glosses over the fact that while paying salaries imposes a dollar-for-dollar cost on employers, issuing stock options simply does not. As we have argued elsewhere, a sensible analogy is airlines giving employees the opportunity to fly free on flights that aren’t full, which costs the airlines nothing. It would be ludicrous to argue that airlines should be able to deduct the retail value of these tickets.

Allowing high-profile tech companies to zero out or substantially lower their taxes to single-digit rates their taxes using phantom costs erodes the public’s faith in the tax system; any meaningful attempt to reform our corporate tax should remedy this situation.


Happy EITC Awareness Day!

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family.jpgThe year was 1975, when bellbottoms were king, everyone’s favorite pet was a small rock, and no one would go to the beach thanks to Stephen Spielberg. But the most momentous occasion that year – outshining even the birth of the Kool-Aid man, an American icon and hero to hyperactive children everywhere – was the passage of The Tax Reduction Act of 1975 and, with it, the Earned Income Tax Credit (EITC).

Signed into law by President Gerald Ford, the EITC is the one of the largest and most successful anti-poverty programs ever enacted in the United States; in 2013 the program lifted 6.2 million people out of poverty, and was more effective that both welfare reform and a strong economy in encouraging work during the 1990s. The EITC doesn’t just boost income for working families; according to Professor Kathryn Edin, co-author of It’s Not Like I’m Poor, the credit helps families “pay off old debts, repair their credit, put away savings, and make investments in assets like education, vehicles for work, and even first home down payments.”

The EITC is a refundable income tax credit equal to a percentage of earnings (which varies by family composition) up to a maximum amount, and it is phased out at higher income levels. The federal EITC is refundable, which means that if it exceeds a worker’s tax liability then the IRS will refund the balance to that worker. As of today, 25 states and the District of Columbia have enacted their own EITCs to help struggling families get ahead.

Sadly, the EITC is undergoing a midlife crisis as it turns 40, because many misguided policymakers want to cut the EITC in order to pay for tax cuts for the well-off. There have been a few positive developments – last year, the District of Columbia expanded their EITC to include childless workers, the governor of Mississippi has proposed a new (non-refundable) EITC for his state, and many states are trying to expand their existing credits. But today, more than ever, we need to fight to keep this crucial anti-poverty measure intact at the federal and state level.

To celebrate EITC Awareness Day, follow the links below to learn more about the credit, and follow our work here at ITEP to help states implement or strengthen the EITC for their residents:

Multi-State: “Improving Tax Fairness with a State Earned Income Tax Credit,” May 2014 (read here)

Multi-State: “State Tax Codes as Poverty Fighting Tools,” September 2014 (read here)

Multi-State: “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” January 2015 (read here)

California: “A State EITC: Making California’s Tax System Work Better for Working Families,” December 2014 (read here)

Indiana: “The Status of Working Families in Indiana: 2015 Report,” January 2015 (read here)

Mississippi: “Policy Brief: A State Earned Income Tax Credit: A Boost for Mississippi Families,” January 2015 (read here)

New Jersey: “Tax Increase to Fund Transportation Should Be Combined With Credit to Help Low-Income Families,” January 2015 (read here)

New Mexico: “Expanding New Mexico’s Working Families Tax Credit Would Generate Economic Activity and Help Hardworking Families,” October 2014 (read here)

Ohio: “Out of Step: More Needed to Make Ohio EITC a Credit That Counts,” August 2014 (read here)

Rhode Island: “Making Work Pay for Working Families: Increasing the State’s Earned Income Tax Credit,” January 2015 (read here)

ITEP is also working with partner organizations in Colorado, Georgia, Illinois, Iowa, Louisiana, Michigan, Pennsylvania, Virginia and Washington, among others, on EITC proposals.

Press Statement: Boxer-Paul Repatriation Proposal Would Reward Corporate Tax Scofflaws

January 29, 2015 05:15 PM | | Bookmark and Share

Following is a statement by Robert McIntyre, director of Citizens for Tax Justice, regarding the announcement by U.S. Senators Barbara Boxer (D-CA) and Rand Paul (R-KY) of a proposed “repatriation holiday” that would reward companies currently holding large amount of cash in foreign countries, including tax havens.

“A repatriation tax holiday was a bad idea when Congress last enacted one in 2004. The only difference now is that it’s a bad idea with a track record. The plan would reward companies that have hidden their U.S. profits in offshore tax havens by letting them pay a 6.5 percent tax rate on those profits, less than a quarter of the 35 percent tax rate that should apply.

“Sens.  Boxer and Paul say their tax holiday will help pay for transportation infrastructure. But it’s ludicrous to argue that a tax holiday can be used to pay for anything since repatriation holidays don’t raise revenue—they lose it. The Joint Committee on Taxation has consistently found that repatriation holidays raise some revenue in the very short term, but lose revenue over the long term.

“If Congress acts on the Boxer-Paul plan, the next sensible step for big multinationals will be to shift even more profits offshore on paper and wait for Congress to enact the next tax holiday. At a time when Congress should be taking steps to discourage corporations from hiding their profits in offshore tax havens, the Boxer-Paul plan would give these companies an incentive to stash even more profits abroad.”

See CTJ’s report on the pitfalls of repatriation tax holidays for more information.


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State Rundown 1/29: You Put a Tax Cut In, You Take a Tax Cut Out

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In the latest twist out of Arkansas, a House committee stripped Gov. Asa Hutchinson’s proposed middle-class tax cut of a capital gains tax measure added just last week in the Senate. The governor’s proposal as passed by the Senate would have reduced the exemption on capital gains from the 50 percent exclusion passed in 2013 to the 30 percent exclusion in effect previously. The House bill would restore the 50 percent exclusion for one year, and then allow the exclusion to fall to 40 percent after that. The House version of the governor’s bill will cost $9 million more each year than the Senate bill. The move is likely to further alienate progressive groups in Arkansas, who previously offered tepid support for the governor’s plan while criticizing its omission of the working poor. Progressives were further angered by the governor’s budget proposal, which did not include promised increases in funding for pre-kindergarten. Arkansas Advocates for Children and Families notes that “Even before the 2013 capital gains tax cut, Arkansas already had one of the most generous capital gains structures in the nation.”

While many politicians and businesspeople decry inverted companies as unpatriotic for avoiding their US tax liability while taking advantage of all our country has to offer, a legislator in Virginia has other ideas. Sen. Ryan McDougle recently introduced a bill that would create a $5 million corporate income tax exemption for companies that have used an inversion to lower their US tax liability. Qualifying companies would need to make a $5 million capital investment in Virginia to open a facility or other business operation, and would be eligible for the exemption each year for five years. It’s just the latest move in the depressing race to the bottom on corporate taxes.

A Maryland state senator has offered a bill that would repeal a stormwater fee he once supported. Sen. James Brochin wants to get rid of the so-called “rain tax,” a hot issue in the last gubernatorial campaign, because he claims local jurisdictions have applied the fee unevenly and put businesses at a competitive disadvantage (this aspect of the law was a part of the bill at the time the senator voted for it). Brochin also regrets supporting a bill that indexed the state’s gas tax to the Consumer Price Index (CPI), saying, “If you took the CPI idea and you had passed it in 1993, 21 years later the gas tax would be $1.86 [per gallon].” His math is a little fuzzy. Indexing MD’s gas tax to inflation (CPI) since 1993 would mean the base rate would go from 23.5 cents to 38.5 cents.  On top of that, there’s a 5 percent sales tax on gas phasing-in that would add about 12 cents a gallon to the gas tax at today’s prices, for a total gas tax of 50.5 cents, not $1.86.  For the tax rate to hit $1.86, gas prices would have to be $29.50 per gallon – which won’t happen anytime soon.

Maine Gov. Paul LePage is expected to push his tax cut package in next week’s state of the state address. Under the governor’s proposed budget, individual and corporate income tax rates would be cut, the estate tax would be eliminated, and the sales tax would be broadened and increased. The governor described his plan as a way to move the state from an income-based tax system to a “pay-as-you-go” consumption-based tax system. In other words, the state would shift the way it funds public investments from relying on a progressive personal income tax to a broad- based sales tax which falls disproportionately on low- and middle-income families.

A bill to enact a property tax circuit breaker credit in Nebraska received a hearing in the state legislature today. The proposal, offered by Sen. Kate Bolz, would offer property tax rebates up to $1,200 to couples who make under $116,000 a year or individuals making under $58,000.  It is designed to target relief to residents whose property taxes or rents are high relative to their incomes. ITEP analyzed the bill and found that two-thirds of the benefits of the property tax circuit breaker credit would go to the bottom 40 percent of Nebraskan taxpayers.

Following Up:

  • North Carolina: NC Policy Watch drew attention to a new Berkeley study that shows the federal capital gains tax cuts under President George W. Bush failed to stimulate the economy. State leaders are pushing to eliminate North Carolina’s capital gains tax to increase investment.
  • Minnesota: A Senate committee voted to consider proposals to phase out the state’s tax on Social Security benefits as part of a larger tax package yesterday. Seniors and the Minnesota AARP voiced support for the measures, while some legislators balked at the price tag.
  • Mississippi: Gov. Phil Bryant’s plan to cut taxes drew more opposition, most recently in a Clarion-Ledger op-ed: “Bryant exuded optimism that the state’s economy was in the best financial condition ever. He didn’t dare mention that the primary source of income for Mississippians is transfer funds–namely federal funds.”

Things We Missed:



12 States Could Raise Gas Taxes This Year

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When it comes to paying for infrastructure, the gasoline tax is the single most important source of revenue collected at both the state and federal levels.  As a result, funding large scale improvements, or maintenance, to transportation networks usually means that the gas tax rate has to go up.  In 2013, six states enacted gas tax increases or reforms (Maryland, Massachusetts, Pennsylvania, Vermont, Virginia, and Wyoming).  In 2014, two more states followed suit (New Hampshire and Rhode Island).  Now, with lower gas prices freeing up some room in drivers’ budgets, there are 12 states seriously considering  gas tax increases in 2015: Georgia, Idaho, Iowa, Michigan, Minnesota, Missouri, New Jersey, South Carolina, South Dakota, Tennessee, Utah, and Washington State.

Georgia: Georgia House Speaker David Ralston says that a gas tax increase is possible this year and lawmakers in his chamber recently introduced a bill that would do exactly that by allowing the tax rate to growth alongside improvements in vehicle fuel-efficiency.  Gov. Nathan Deal has been dropping hints that he’s open to the idea and even went so far as to call the bill a “positive step forward.”  Business leaders in the state are strong supporters of boosting funding for infrastructure and the governor has been adamant that he intends to find a way to secure that funding.

Idaho: Gov. Butch Otter has yet to propose a gas tax increase this year, but he has supported increases in the past, and there is rampant speculation that a gas tax hike could be floated soon.  Encouragingly, the governor made very clear in his State of the State address that he is not interested in taking money away from education to fund the state’s infrastructure, so it appears that additional revenues will have to be raised to satisfy the governor’s call for larger investments in transportation.

Iowa: Gov. Terry Branstad has been open to a gas tax increase for the last few years, but he has shown increased urgency this year on the need for additional infrastructure funding.  Now, even early in the legislative session, the governor is already in serious talks with legislative leaders aimed at hammering out the specifics of how a gas tax hike could be structured—including possibly allowing local governments to raise the tax.  Legislation raising the tax could be introduced within days.  Such an increase is clearly needed since, after adjusting for inflation, Iowa’s current gas tax rate is at its lowest level in the state’s history.

Michigan: This May, Michiganders will vote on a package of tax changes that would raise roughly $1.3 billion in new revenue for transportation and $300 million for education each year.  Most of the revenue would come through a 1 percentage point increase in the sales tax, though gasoline and diesel taxes would also be reformed in a way that would initially raise their rates by approximately 12 cents per gallon.  Under the reforms, vehicle registration fees would also rise.  But the package also includes an important tax cut as low-income families would see some of the gas, sales, and registration tax hikes offset by an expansion in the state’s Earned Income Tax Credit (EITC) from 6 to 20 percent of the federal credit.  Michigan legislators approved this package of changes in December and Gov. Rick Snyder signed them earlier this month, saying, “Most of you know, I’m a fairly frugal CPA. This is a smart investment to make by the citizens of the state of Michigan to invest more in the roads, schools and local government.”

Minnesota: Gov. Mark Dayton and state Senate leaders have proposed applying a 6.5 percent tax to the wholesale price of gasoline.  That reform would initially raise the gas tax rate by about 16 cents per gallon, and would put revenues on a more sustainable path by allowing for further increases in the future once gas prices begin to rise.  Opponents of the plan criticized the fact that it will “disproportionately impact poor and middle class families.”  But lawmakers don’t need to look very far for a solution to this problem.  Following the deadly I-35W bridge collapse, Minnesota lawmakers enacted a gas tax increase in 2008 that included a “low-income motor fuels tax credit” dealing with this exact issue.  Unfortunately, that credit was repealed after being in effect for only one year in order to help close a budget gap arising from the Great Recession.  But if concerns about regressivity have returned to lawmakers’ minds, a similar credit could be implemented again—ideally on a permanent basis this time.

Missouri: Gov. Jay Nixon used part of his State of the State speech to argue that a gas tax hike “is worth a very close look.”  Nixon said that “Missourians believe it’s only fair that folks who use the roads also pay for them” but explained that the state has unwisely moved away from this model as “Missouri’s gas tax hasn’t gone up a penny in nearly 20 years. It’s the fifth-lowest in the nation.”   

New Jersey: State Transportation Commissioner Jamie Fox announced that he is ramping up inspections of the state’s aging bridges as they continue to deteriorate in the face of inadequate funding.  New Jersey’s gas tax rate is the second lowest in the country and hasn’t been raised in almost a quarter century.  Legislators in both chambers have proposed raising the tax, and Gov. Chris Christie is less hostile to the idea than might be expected, saying that “I’ve made it very clear that everything is on the table.”  If a gas tax hike passes in the Garden State, there’s talk of offsetting it (in full or in part) with cuts in a different tax.  One sensible option comes from New Jersey Policy Perspective, which proposed that the state’s Earned Income Tax Credit (EITC) be expanded to offset the impact of gas taxes on low-income families.  A much less sensible alternative would involve eliminating the state’s estate tax, presumably to make it a little easier for heirs to large fortunes to afford the gas tax.

South Carolina: Gov. Nikki Haley surprised many people when she recently proposed a 10 cent increase in the gas tax after having repeatedly threatened to veto any such increase.  Unfortunately, her proposal comes with a major condition: cutting the state’s top income tax rate from 7 to 5 percent.  That change would make South Carolina’s already lopsided tax system significantly more unfair, and has been called unaffordable by The State’s editorial board.  Nonetheless, talk of raising South Carolina’s historically low gas tax rate seems to be reaching a critical mass as House lawmakers debate a plan to tax gasoline based on its price, and even the South Carolina Chamber of Commerce is backing a higher gas tax.

South Dakota: Gov. Dennis Daugaard recently proposed raising the state’s gas tax by 2 cents per gallon, per year, in order to put revenues on a more sustainable path that could keep pace with the growing cost of infrastructure maintenance and construction.  Gas taxes are on legislators’ minds as well, as the first bill filed in the South Dakota Senate this year would hike the tax by roughly 6 cents per gallon.

Tennessee: Gov. Bill Haslam is giving serious thought to proposing what would be Tennessee’s first gas tax hike in over a quarter century.  While the governor hasn’t come out with a plan yet, he seems to understand that twenty five years of gas tax procrastination have put the state on an unsustainable course, noting that “There’s no way the state can continue on the path we’re on now. The math just doesn’t work.”  State legislative leaders and local governments are reportedly interested in the idea of a gas tax hike and the Farm Bureau has softened its long-running opposition to an increase.  Add to that a new report from the comptroller outlining the benefits of the gas tax, and it appears a gas tax hike is a real possibility in the Volunteer State.

Utah: Gov. Gary Herbert says that “now is the time” to raise Utah’s gas tax, and leaders in the state House and Senate are reportedly in agreement.  Now the debate has shifted to whether the state should simply increase its fixed-rate gas tax (stuck at 24.5 cents since 1997 and currently at its lowest level ever, adjusted for inflation), or whether a long-term reform should be enacted with a more sustainable, variable-rate gas tax.  The latter option is better policy, but either could generate significant revenues for infrastructure and allow for the roll-back of raids on education money enacted in recent years.  Encouragingly, Governor Herbert supports both of these goals.

Washington State: The legislature has been debating a gas tax increase in Washington State for at least two years.  The House passed a 10.5 cent increase in 2013 and the Senate seriously considered an 11.5 cent increase in 2014, but neither of those plans ever made it to the governor’s desk.  This year, Senate transportation leaders say that a gas tax hike is still on the table, and House leaders say that bills debated over the last two years are a good starting point for further negotiations.  Gov. Jay Inslee, for his part, is well aware that more revenues are needed.

Other States: The twelve states listed above are hardly the only ones with gas taxes in need of reform.  We’re also hearing gas tax talk from legislators in Montana and Nebraska, task forces in Louisiana, research groups in Oklahoma, and media in states such as Colorado and Wisconsin.  Of course, there’s plenty of bipartisan chatter about raising the federal gas tax as well.  We’ll be following all of these stories closely as they develop, but for the moment, the twelve states listed above seem the most likely to act.

Tax Rate for Richest 400 People at Its Second Lowest Level Since 1992

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New IRS data released this month reveal that the nation’s 400 richest people paid their second-lowest average tax rate in the past quarter century.

These tax filers paid just 16.7 percent of their adjusted gross income (AGI) in federal income taxes in 2012, the latest year data are available. This means the nation’s wealthiest paid, on average, less than half the top statutory federal income tax rate of 35 percent that was in effect in that year. Since the IRS began tabulating these data in 1992, the only other year the wealthiest paid a lower tax rate was in 2007.

How the very richest paid such a low rate is no mystery. These individuals derived about 70 percent of their income from capital gains and dividends, which in 2012 were taxed at just 15 percent, a fraction of the top statutory rate to which those who get their income from working a 9 to 5 are subject.

Fortunately, tax changes enacted at the end of 2012 as part of the “fiscal cliff” deal, and as part of the legislation enabling the Affordable Care Act, increased top income tax rates on both wages and capital gains starting in 2013, so it’s likely that effective tax rates on the top 400 taxpayers will increase in 2013 to reflect this.

But federal income tax rules still allow a gigantic tax preference for capital gains relative to salaries and wages. The top tax rate on capital gains is now 23.8 percent, well below the 39.6 percent top tax rate now applicable to wages. This means that the best-off Americans still can reduce their effective tax rates well below those facing many middle-income Americans going forward.

For this reason, it makes perfect sense that President Obama’s new budget proposal would scale back tax breaks for capital gains. During his State of the Union address, the president proposed increasing the top capital gains rate to 28 percent for wealthy investors, restoring the rate to where it was through the Bush I Administration and until 1997. But even if Obama’s proposal is enacted, the best-off Americans would still enjoy a double-digit tax break on their capital gains.

Of course hackneyed talking points prevailed among anti-tax proponents after the president announced his proposal: Stifling investment, slowing economic growth, etcetera, etcetera. The fact is these doomsday scenarios have not proven to be true in the wake of previous tax increases, and we should be debating tax policy within the broader context of how to raise enough revenue to fund the nation’s priorities.

As much as some would like to delink tax policy from, say, the condition of roads and bridges or the quality of our public health system, schools, and the quality of public safety services, it’s all intertwined.  And make no mistake, the tax breaks available to just 400 of the best-off Americans absolutely make a difference in our ability to provide these important services. Astonishingly, these 400 individuals enjoyed almost 12 percent of all capital gains income nationwide in 2012—meaning that roughly one in every nine dollars of capital gains tax breaks went to these 400 individuals in that year.

Most Americans no longer need to be reminded that wealth has been concentrating more and more at the top, or that ordinary working people have been economically standing still. But the IRS’s data on the top 400 taxpayers has not lost its capacity to shock, and remains an important reminder that our political institutions, and especially our tax laws, often act to make inequality worse, not better.

Congress Should Pass the Stop Tax Haven Abuse Act to Combat International Tax Avoidance

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Each year U.S. multinational corporations avoid an astounding $90 billion in corporate income taxes by booking their profits on paper through international tax havens. At a time of growing inequality and budget austerity, it is outrageous that we allow the world’s richest companies to get away with not paying their fair share in taxes.

What can be done to combat this flagrant abuse of our tax system? One new approach would be the passage of Sen. Sheldon Whitehouse (D-RI) and Rep. Lloyd Doggett’s (D-TX) Stop Tax Haven Abuse Act, recently reintroduced legislation that would significantly curb rampant tax avoidance by many multinational corporations. Tightening offshore tax rules and enforcement as the act proposes could generate an estimated $278 billion over the next decade in much-needed revenue.

While the Stop Haven Abuse Act would significantly improve our international tax system, it does not go quite as far as proposals that would “end deferral” of taxes on foreign profits, which would end international income shifting by corporations full stop by ensuring that U.S. companies pay the same tax rate at the same time on their foreign and domestic profits.

In previous Congresses, the Stop Haven Abuse Act has been very closely associated with tax fairness champion Sen. Carl Levin, who retired at the end of the last Congress. While the new legislation is largely the same as the previous bill of the same name, the latest version includes significant new provisions to curb corporate inversions (which have also been proposed separately as part of the Stop Corporation Inversions Act) and earnings stripping.

The key provisions of the Stop Tax Haven Abuse Act include:

  • The act would take aim at corporate inversions by treating the corporation resulting from the merger of a U.S and foreign company as a domestic corporation if shareholders of the original U.S. corporation own more than 50 percent (rather than 20 percent under current rules) of the new company or if the company continues to be managed and controlled in the United States and engaged in significant domestic business activities (meaning it employs more than 25 percent of its workforce in the United States).
  • The act would disallow the interest deduction for U.S. subsidiaries that have been loaded up with a disproportionate amount of the debt of the entire multinational corporation. This provision would curb so-called “earnings stripping,” a practice in which a U.S. subsidiary borrows from and makes large interest payments to a foreign subsidiary of the same corporation in order to wipeout U.S. income for tax purposes.
  • The act would require multinational corporations to report their employees, sales, finances, tax obligations and tax payments on a country-by-country basis as part of their Securities and Exchange Commission (SEC) filings. Such disclosures would provide crucial insights into how companies are gaming the international tax system and would provide more transparency to investors generally.
  • The act would deny companies the ability to deduct the expenses of earning foreign income from their U.S. taxable profits until those foreign profits are subject to U.S. tax.
  • The act would limit the ability of corporations to apply excess foreign tax credits from high tax jurisdictions to offset taxes in tax haven jurisdictions.
  • The act would repeal the “check-the-box” rule and the “CFC look-through rules” that allow companies to shift profits to tax havens by letting them tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist.

State Rundown 1/27: All Tax Cuts Are Not Created Equal

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Some North Carolina lawmakers may push to eliminate the state’s capital gains tax under the guise of promoting economic growth, according to a recent report by the North Carolina Budget and Tax Center. The tax is levied on income from the sale of stocks, artwork, vacation homes, and other fancy items – so this isn’t a middle class tax cut we’re talking about. ITEP crunched the numbers for the report and found that eliminating taxes on capital gains would reduce state revenue by $520 million, and 60 percent of the benefits would accrue to taxpayers making $1 million or more – just one percent of North Carolina’s taxpayer base. The idea is even more appalling when you consider that all income growth in the state between 2009 and 2012 went to these same earners, according to the Economic Policy Institute.

Leaders of both parties unveiled tax cut plans last week in Minnesota, but the beneficiaries of these plans would differ greatly. Gov. Mark Dayton wants to introduce a tax credit for child care expenses that would expand an already existing program to cover families making up to $124,000 a year. Under the plan, which would cost $100 million over two years, the maximum credit would be $2,100, and the governor predicts that the typical family would receive a credit of $481. Meanwhile, state Sen. David Senjem has sponsored a bill to phase out Minnesota’s tax on some Social Security benefits over the next decade.   The lion’s share of this tax cut would go to better-off elderly taxpayers, since social security is already fully exempt from Minnesota tax for seniors with income below $25,000 ($32,000 for married couples) and partially exempt for all seniors. His plan would cost $127 million over two years..

Mississippi Gov. Phil Bryant pledged to consider any tax cut proposal that reaches his desk in last week’s state of the state address, saying “In short, put a tax cut on my desk, and I will sign it.” The governor has proposed a nonrefundable earned income tax credit for working families with income limits that match the federal EITC.. The governor claims the credit would give Mississippians a tax break of $100-400 a year, would cost $79 million, and would only be available in years where revenue growth is sufficient and the state’s rainy day fund is full. An ITEP analysis found that the governor’s nonrefundable EITC proposal would give a tax break to only 9 percent of the poorest Mississippians, but a refundable credit would reach 45 percent of low-income people. Not everyone in the state is enthused by the governor’s plan; one legislator called the cuts “political hogwash” and blasted the governor for not investing more in infrastructure. The Sun Herald criticized the governor for unfounded optimism in his speech, writing “At the risk of reveling in the bad, as Bryant put it, we believe no honest State of the State at this point in its history should sugarcoat this state’s miserable rankings in the education of its children, the health of its residents and the income level of its work force.”


State of the State Addresses This Week:
Hawaii Gov. David Ige (watch here)
Montana Gov. Steve Bullock (Wednesday)
Utah Gov. Gary Herbert (Wednesday)

Governors’ Budgets Released This Week
Arkansas Gov. Asa Hutchinson (Tuesday)
Minnesota Gov. Mark Dayton (Tuesday)
Wisconsin Gov. Scott Walker (Tuesday)
Massachusetts Gov. Charlie Baker (Wednesday)

Sam Brownback’s White Whale

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Little did Kansas voters know that in reelecting Sam Brownback they were actually voting for a vengeful old sea captain obsessed with one issue above all others – eliminating the state’s personal income tax.

How else to explain the governor’s insistence on continuing his ruinous path, despite the dictates of reality and reason? His zeal for cutting the personal income tax will cost Kansas $5 billion in lost revenue over the next seven years. The governor’s recent budget proposes cutting K-12 operational spending by $127.4 million this year alone, to say nothing of the draconian cuts he implemented over his first term. Per-pupil spending in the state is $861 less than it was in 2008, according to a recent study from the Center on Budget and Policy Priorities. The governor has already been forced to reduce spending by  4 percent across the board for state agencies this year (on top of other cuts), and he has raided the highway fund to the tune of $421 million. The reserve fund is almost empty. The state’s credit is in tatters.

Brownback has been forced to delay further income tax cuts planned for this year. He has also been forced to raise taxes, though not the ones you would think: his budget proposal would increase the excise tax on cigarettes by nearly 300 percent, from $0.79 to $2.29 per pack, and taxes on liquor would rise from 8 percent to 12 percent. As former Kansas Gov. Kathleen Sebelius said recently, “I’m not sure there’s enough smokers and drinkers in Kansas to balance these enormous cuts.” Furthermore, the governor’s regressive tax hikes would increase the burden on the same Kansans hurt the most by his economic stewardship.

The governor’s plan has succeeded in uniting state lawmakers in opposition. “These changes to tax policy proposed by Governor Brownback do nothing to address the systematic problem created by his irresponsible tax polices and fiscal mismanagement,” House Minority Leader Tom Borroughs complained. Sen. Laura Kelly groused that “People are being asked to take politically difficult votes on proposals that don’t solve the problem.”

Faced with this reality, Brownback and his first mate, supply-side Svengali and economist-for-hire Art Laffer, have resorted to the time-honored strategy of obfuscation. When a reporter pointed out that the governor’s plan to delay income taxes was a copy of his opponent’s plan from the gubernatorial election – a proposal that Brownback’s campaign derided as “appalling” – Brownback’s revenue secretary testily responded that, while Davis’s plan would have halted tax cuts forever, the governor’s proposal would still allow for tax cuts to go forward if growth in state tax receipts exceeded 103 percent of tax receipts in the previous fiscal year. Since the state is forecasting budget deficits through 2019, this is disingenuous at best.     

The governor’s budget director has tried to claim that the governor has not cut spending at all. “I know many people have different words for efficiencies. I do not believe these to be cuts,” he said, referring to the $1.38 billion in spending reductions in the governor’s proposed budget. Somehow I don’t think the kids in overcrowed classrooms and pensioners uncertain about their retirement plans would agree.

Laffer, in a recent interview, said that while he was not surprised by the state’s yawning deficits, he was at a loss as to why they occurred – this, despite a PhD in economics from Stanford University. He does feel bad, however – not for the Kansans hurt by budget cuts, but for Brownback. “I feel sorry for the governor,” he lamented, “but he did the right thing.”

Brownback, confronted with terrible revenue projections soon after his reelection, denied having any advanced knowledge that things were so bad. “I knew what the public knew,” he claimed, which is quite a troubling admission.

And let’s not forget Orwellian attempts to distort reality with misleading information. For example, the graph below looks great for Kansas job growth, until you look at the y-axis and see the state has added about 60,000 jobs in the last four years, trailing job growth in neighboring Missouri, Iowa, Oklahoma and Colorado. 


In his state of the state speech, Gov. Brownback vowed to continue the “march toward zero,” referring to his quest to eliminate state income taxes. But maybe the march is toward zero money for crucial state services, zero new jobs created through his austerity economy, and zero prospects for Kansas schoolchildren.

A wise public servant would acknowledge his error and reverse the policies that have led to so much economic harm. But Sam Brownback has become a 19th century salty dog chasing the white whale of eliminating his state’s income tax. No matter that he has lost his leg and thousands of kids have lost their shot at a decent future. He and Art Laffer, say “Damn the torpedoes, full speed ahead.” 

State Rundown 1/22: Twists, Turns and Intrigue

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Although it significantly cut income taxes over each of the last three legislative sessions, the North Dakota Legislative Assembly heard the first of 30 bills this week aimed at income tax cuts, One proposal would reduce all personal income tax rates to zero and collapse the state’s current five income brackets to one. The governor’s income tax plan would reduce personal income tax rates by 10 percent and corporate income tax rates by 4.8 percent across the board. Another proposal currently before Senate would reduce the income tax rate on the bottom income bracket from 1.22 percent to 0 percent, eliminating the tax liability for 170,000 North Dakotans. The tax cut would cost $151 million a year and expire after two years. Sponsors of the bill argue that the tax cut would provide relief to renters, who have seen rents skyrocket as a result of the oil boom. Other legislators have suggested a more targeted approach, through an income tax credit for renters. 

South Carolina Gov. Nikki Haley endorsed an increase in the state’s gas tax in her state of the state Wednesday. Previously, the governor pledged to veto any increase in the state’s gas tax, which has not changed since 1987. The catch (and there’s always a catch) is that Haley will not support a gas tax increase without an income tax cut for top earners (from 7 to 5 percent).  Hiking gas taxes while cutting the top income tax rate would result in a tax shift from well-off South Carolinians to middle income and working families. State legislators had varied reactions to the governor’s plan; while Republicans were enthusiastic, Democrats pointed out that the plan would result in a net revenue loss of $117 million.

A state Senate committee approved Arkansas Gov. Asa Hutchinson’s tax plan Wednesday  with an amendment that would eliminate a planned capital gains tax cut. The amendment, offered by Sen. Bill Sample, would reverse a measure passed in 2013 to increase the exemption on capital gains from 30 percent to 50 percent and eliminate the tax on capital gains above $10 million. The amendment reduces the total cost of the governor’s tax plan to $93.4 million, according to the state’s Department of Finance and Administration. Local political prognosticators have noted the unorthodox nature of a Republican governor and legislature introducing a bill with tax increases.

Michigan Governor Rick Snyder signed a package of bills last week related to a ballot question that voters will decide on in May.  If approved, the package will generate $1.2 billion per year for roads and $300 million per year for schools by raising sales taxes, gas taxes, and vehicle registration fees.  In sharp contrast to Governor Haley’s proposal for South Carolina (described above), this package includes an income tax cut targeted toward low-income taxpayers, rather than the wealthy.  If approved, the state’s Earned Income Tax Credit (EITC) would rise to equal 20 percent of the federal credit.


Following Up:

MontanaDebate over tax cut measures continues in the legislature, and Gov. Steve Bullock’s budget director opposed the measures in committee hearings, saying they would endanger the state’s surplus. The Montana Budget and Policy Center, citing ITEP numbers, said that the top 1 percent of Montana taxpayers would see a tax cut of $2,200, while low-income Montanans would see a cut of just $12.

New Hampshire – Gov. Maggie Hassan has announced she opposes  proposed corporate tax cuts, saying that the bills currently before the state senate would create a significant budget hole. It is uncertain if Hassan will veto the bills should they reach her desk.

New York – In a stunning turn of events, state assembly speaker and Cuomo ally Sheldon Silver was arrested this morning on corruption charges. The charges stem from investigations related to the Moreland Commission, which the governor shut down prematurely last year amid controversy. Needless to say, this development will have an impact on Gov. Cuomo’s legislative agenda.