Month: January 2015

Since the start of the year, House Democratic leadership and President Barack Obama have proposed bold new tax plans based on the central idea that wealthy investors are not paying their fair share in taxes.

For their part, House Democratic leaders have proposed to finance a substantial portion of their $1.2 trillion middle-class tax-cut plan by imposing a financial transactions tax (FTT) at an unspecified rate. Obama has proposed to curb preferential treatment of capital gains and to impose a fee on large banks, to raise about $320 billion over 10 years. While both proposals would primarily hit wealthy investors, Obama’s proposal is better targeted and does not include the flaws of a financial transactions tax.

How does the FTT work? Basically, it is an excise tax applied to sales of securities such as stocks and bonds. Because these securities are often traded, the proposed tax rate applied to each sale would be very low, yet the tax has the potential to raise a substantial amount of revenue. A FTT proposal from Rep. Peter DeFazio (D-OR), for example, would set a rate of only three hundredths of one percent and would raise about $352 billion over 10 years. Thus, a tiny tax imposed over and over again ends up yielding substantial revenue.

A major problem with the FTT is that it is not based  on taxpayers’ ability to pay. It taxes transactions regardless of whether  investors earned income from the sale. A person could purchase a stock for $100, sell it for $90, and still have to pay the tax even though he or she lost money on the transaction. In contrast, the capital gains tax is applied to profit, if any, from the sale.

An advantage of the FTT that is often touted by proponents is that it could reduce short-term trading, in particular the split-second back-and-forth trading that computer technology has allowed some wily traders to engage in (which can amount to insider trading). But such trading could be outlawed directly.

On the other hand, the fact that securities are frequently traded improves the liquidity of the stock market (making it easy for shareholders to sell their stocks) and reduces the volatility of stock prices somewhat. In fact, many studies have found that the FTT’s increased transaction costs could reduce liquidity and increase volatility by discouraging transactions not only by unprincipled speculators, but also the everyday transactions that are a necessity for pension plans and other normal investors.

Obama’s proposed bank fee would apply a very low variable rate structure (with a higher rate for riskier liabilities) to firms with more than $50 billion in assets. Unlike the FTT, the bank fee’s variable rate structure would discourage excessive risk taking by financial firms, and thus would help avoid a future financial crisis. The fee could raise as much as $110 billion over 10 years.

Obama’s proposals to increase taxes on capital gains and big banks appear to be better targeted at wealthy investors than a FTT, while reducing excessive financial speculation by big banks. In addition, Obama’s proposals could raise roughly the same amount of revenue as a FTT, depending on the details of the latter ($320 billion under Obama vs. $352 billion using the DeFazio FTT proposal mentioned above). 

Despite its throwback name, Adobe Products is a cutting-edge technology company whose products—notably, PDF files—are used by millions of Americans every day. As it turns out, Adobe’s tax-avoidance technology is pretty 21st century too. 

The company’s newest annual financial report, released earlier this week, discloses that Adobe is currently holding more than $3 billion of its profits abroad in the form of “permanently reinvested” foreign earnings, and it has paid very little tax on these profits to any country—a clear indication that much of these profits are likely in foreign tax havens.

Accounting standards require publicly held companies to disclose the U.S. tax they would pay upon repatriation of “permanently reinvested” profits. But these standards also provide a loophole allowing companies to claim they can’t calculate this tax because it is “not practicable.” In other words, companies must report the tax they would owe on this offshore income, but if they claim it’s too difficult then they don’t have to worry about doing so. 

As we have previously documented, the vast majority of Fortune 500 corporations disclosing offshore cash use this egregious loophole to avoid reporting their likely tax rates upon repatriation, even though these companies almost certainly have the capacity to estimate these liabilities.

Refreshingly, Adobe is one of only a few dozen companies that actually admits how much tax it would owe if it repatriated its foreign cash. The latest report says it would owe $900 million, which equates to roughly a 27 percent tax rate. Since the tax it would pay on repatriation is equal to the 35 percent U.S. tax rate minus any foreign taxes paid, the clear implication is that Adobe’s $3 billion offshore stash is largely being held, for tax purposes anyway, in a tax haven country with a tax rate in the single-digits.

While a 2013 investigation by the Financial Times uncovered evidence that the company was using subsidiaries in Ireland (which has a 12.5 percent corporate tax rate) to reduce its effective tax rate, this doesn’t explain how the company has managed to pay an even lower rate on its offshore profits to date. Mysteriously, Adobe’s annual report doesn’t disclose the existence of any foreign subsidiaries in countries with tax rates lower than Ireland—even though it is supposed to publish a list of all its “significant” subsidiaries.

When the hubbub over President Barack Obama’s recently announced plan for reforming capital gains taxes dies down, tax reform talk in Congress this year likely will refocus on the hot topic of corporations that move their profits (or corporate address) offshore for tax purposes. The new Adobe data illustrate perfectly the difficulty Congress faces. Members are under immense pressure from corporate-backed lobbyists and their allies to lower the 35 percent corporate tax rate. But all manner of loopholes and offshore profit shifting enable corporations to substantially lower and in many cases erase their U.S. tax liability. It shouldn’t be too much to ask for these companies to disclose where they’re stashing their offshore profits and whether they’re paying any taxes.   

Much of the fireworks surrounding President Barack Obama’s latest tax reform proposals focus on his aggressive (and laudable) proposal to pare back tax breaks for the capital gains income enjoyed by the wealthiest Americans.

But those interested in a fairer and more sustainable tax system should question the president’s plan to use some of the added revenue from these capital gains hikes to pay for a tax credit for two-earner couples.

The idea is straightforward: married couples in which both spouses work would be able to claim a tax credit equal to 5 percent of the first $10,000 of earnings for the lower-earning spouse.  White House materials note only that the credit is designed to “help cover the additional costs faced by families in which both spouses work.”

On the surface, this sounds reasonable. But in practice, it’s not a sound plan. There are already tax law provisions designed to help offset child-care costs that two-earner couples (among others) incur. The dependent care credit sensibly allows middle-income families to take a tax break for a certain percentage of their child care expenses, if they actually spend money on child care—and Obama’s plan would increase the value of this credit for many parents. There is no need to  pile another tax break—one that gives second-earners tax breaks even if they don’t have children to put in day care—on top of this.

I’m sure the idea of a tax-credit for second earners polls well, and it’s possible that is the entire reason why this proposal was included in the president’s plan. But if the goal is to reduce the cost of living for families in which with both spouses are in the workplace, there’s already a tax credit that does a great job achieving this.  Adding a second credit that does a less-good job will needlessly complicate the task of filing income tax returns.  And, of course, at a time when the federal government continues to run routine budget deficits, with no prospects for returning to the black anytime soon, the most obvious thing to do with any new revenues from closing capital gains tax loopholes is to pay down the deficit and fund vital public investments. 

Legislators in Montana have a full plate this week, including several proposals to cut taxes. One plan would cut state income taxes by 5 percent across the board at a cost of $79 million in lost revenue, while a more modest proposal would cut income tax rates at a cost of $26 million. An ITEP analysis found that the rate cuts in both plans would overwhelmingly benefit high-income taxpayers; in each case, the top 20 percent of taxpayers would receive roughly two-thirds of the tax cut.

Two proposals in the New Hampshire Senate would lower the business enterprise and business profits taxes. Sponsors of the proposals have argued that the state’s corporate tax rates deter investment, but as the New Hampshire Fiscal Policy Institute points out business tax cuts are an ineffective economic development strategy. One bill proposes a reduction in the business profits tax rate from 8.5 to 8 percent. The profits tax falls on businesses with gross receipts over $50,000, though only one percent of filers actually pay it after credits are applied. The other bill would reduce the business enterprise tax, which is levied on businesses’ wages, dividends and interest, from a rate of 0.75 percent to 0.675 percent. Combined, the two measures could cost $35 million in lost revenue each year. Opponents of the cuts complain the lost revenue would mean fewer services and worse infrastructure.

New York Gov. Andrew Cuomo will address state legislators and interested citizens in a joint State of the State and budget address this Wednesday. A key element of his budget proposal is a $1.7 billion property tax circuit breaker credit that would be available to homeowners and renters if their property tax payments exceed 6 percent of income. The circuit breaker would phase out for homeowners with $250,000 or more of income and for renters at $150,000 (13.75 percent of their rent would be considered property taxes). The governor estimates that over 1.3 million New Yorkers would receive an average credit of $950 if his plan is fully implemented. The governor may also express his support for a bill that offers tax credits to individuals and corporations who donate money to public schools or scholarship programs for poor and minority students to attend private schools. The bill is contentious, as some see it as a way to divert state money to private education.

Things We Missed:

States Starting Session This Week:
Alaska
Hawaii
New Mexico

State of the State Addresses This Week:
Michigan Gov. Rick Snyder (watch here)
New Mexico Gov. Susana Martinez (watch here)
Alaska Gov. Bill Walker (Wednesday)
Missouri Gov. Jay Nixon (Wednesday)
New York Gov. Andrew Cuomo (Wednesday)
South Carolina Gov. Nikki Haley (Wednesday)
Delaware Gov. Jack Markell (Thursday)
Nebraska Gov. Pete Ricketts (Thursday)

Governor’s Budget’s Released This Week:
Kansas Gov. Sam Brownback (Monday)
Maryland Gov. Larry Hogan (Wednesday)
New York Gov. Andrew Cuomo (Wednesday)

Last week, the Institute on Taxation and Economic Policy released Who Pays?, a report that examines the state and local tax system in all 50 states. The analysis concludes that every state’s tax system is regressive, meaning the lower one’s income, the higher one’s tax rate.

Not surprisingly, the report ruffled a few feathers. It’s about taxes, after all. A few critics cried foul because the study, which made clear it’s an analysis of state and local tax systems, only discussed state and local tax systems. Such a focus doesn’t paint a complete picture of all taxes people pay, they argue. Well, no kidding. Proponents of progressive taxes made a similar argument in 2012 when Mitt Romney made his widely disproven, notoriously wrong remark that 47 percent of the population doesn’t pay any taxes, based on a narrow analysis of federal income taxes.

State governors and lawmakers have a clear set of policies they can control. Federal tax laws are not among them. State and local tax systems fund all manner of public services that benefit all state residents, including public education, public health and safety, and infrastructure. How states fund these vital services and who the responsibility falls on to pay for them are precisely the questions state policymakers should be debating.  

It is indisputable that states are raising revenue in a regressive way that demands a greater share of income from those who have the least. When state lawmakers are forced to deal with difficult fiscal circumstances that may require tax hikes, what they need to know is who’s getting hit hardest to begin with. And that’s exactly what the Who Pays? report shows.

If it is easy to conclude from Who Pays? that states seeking to increase taxes should not look first to low- and middle-income families, including federal taxes makes this conclusion even more obvious. An April 2014 report from Citizens for Tax Justice shows that the lion’s share of taxes paid by low- and middle-income people are state and local. Yes, our collective federal and state tax system is somewhat progressive overall, but that doesn’t mean states should be absolved from imposing an unconscionably high tax rate on Americans living at or below the poverty line. If our tax system is indirectly contributing to income inequality, state and local taxes are the main reason why.

For those who would argue that regressive state taxes are just fine because the federal system makes taxes more progressive, well, please make that argument to the low-income families in Washington state who pay an effective state tax rate of 16.8 percent while the richest 1 percent pay only 2.4 percent. And while you’re at it, make your case to the residents of Kansas who are dealing with the fallout from Gov. Sam Brownback’s failed supply-side experiment that cut state taxes for businesses and the very rich – and raised taxes on lower-income residents. It’s well documented that Kansas’s irresponsible tax cuts have left the state struggling to raise enough revenue to adequately fund basic public services.

These kinds of facts should be the starting point for tax reform debate in the states—not nuanced ideological arguments that seek to justify regressive state and local taxes because the federal system is comparatively progressive.

Those of us who advocate for just, progressive tax policies are accustomed to anti-tax advocates dangling shiny objects and trying to detract from big picture questions about how to raise revenue in a fair way. But criticizing a 50-state analysis for analyzing 50 states, not the federal system, is an obvious red herring.

A new brief from Citizens for Tax Justice explains how Rep. John Delaney’s (D-MD) new repatriation bill let’s companies escape paying their fair share in taxes:

“On Dec. 12, 2014, Rep. John Delaney (D-MD) proposed a new version of his “repatriation holiday” tax plan. The latest version would require multinational corporations to pay a token amount of taxes on their accumulated offshore profits and exempt those profits from any further U.S. income tax.

Delaney’s new plan differs from his previous proposal, which would have allowed corporations to choose to pay a small tax on their offshore profits in exchange for tax-exemption in the future.

The biggest problem with Delaney’s repatriation proposal is that it would allow companies such as Apple and Microsoft, which have parked hundreds of billions of dollars of U.S. profits in offshore tax havens, to pay a U.S. tax rate of no more than of 8.75 percent, instead of the more than 30 percent tax they should pay on these profits.”

Read the Full Brief

Who said tax reform was a dead letter in the nation’s capital? With President Barack Obama’s State of the Union address still a day away, it’s already clear that the President will make income tax reform a major talking point. A preliminary description released to the media over the weekend gives the broad outlines of a tax plan that would take important steps towards eliminating the special capital gains tax breaks currently enjoyed by the best-off Americans, while imposing a new tax on the assets of the largest, “too big to fail” financial institutions. Initial indications are that Obama proposes to use most, but not all, of the resulting new revenues to cut income taxes for middle- and low-income families. While some additional details will likely emerge in the wake of tomorrow night’s speech, the emerging picture is of a tax plan that would take a moderate step toward deficit reduction, and a major and welcome move toward greater fairness in our federal tax system.

Twin Capital Gains Tax Reforms Would Mean Major Tax Fairness Gains

The centerpiece of Obama’s plan is a proposal to raise substantial new revenues by closing the long-lamented, and rarely defended, “stepped up basis” rule for capital gains. Stepped up basis means that when stocks and bonds (among other assets) are not sold during the owner’s lifetime, no income tax will ever be paid on the (unrealized) capital gains income created during the owner’s lifetime. When the heirs who are gifted these capital assets sell them, they will pay not a dime of tax on the often-huge capital gains that accrued prior to the time they inherit.

Obama’s proposal would treat the transfer of these untaxed capital assets to heirs as a potentially taxable event. This sensible step would remove what is called the “lock-in effect” of the current system, which encourages wealthy owners of capital assets to hold on to them until death to avoid paying tax on their (unrealized) capital gains. Notably, the proposal would actually leave stepped-up basis intact for many heirs of smaller estates, since it would allow capital gains of up to $200,000 to be passed on tax-free for a married couple (half that for a single taxpayer). On top of this, the proposal would allow a $500,000 exemption for the value of homes passed on to heirs. While complete elimination of stepped-up basis would be a more straightforward and welcome reform, the half-step toward reform taken in Obama’s draft plan would sharply curtail one of the least justified tax dodges in existence today.

Taken on its own, ending stepped-up basis is only a starting point toward the laudable goal of taxing wealth like work. This is because even repealing stepped up basis would leave intact the stark difference in the top income tax rate on wages (currently 39.6 percent) and capital gains (20 percent). Happily, Obama’s draft proposal would mitigate (but not eliminate) this tax break by increasing the top tax rate on capital gains and dividends to 28 percent.

Tax on “Too Big to Fail” Financial Institutions

The President’s plan includes one other substantial revenue raiser: a low-rate tax on the value of the assets of a handful of the biggest financial institutions.  This idea, like a similar plan included in Obama’s budget proposal from last year, would serve the twofold purpose of recovering taxpayer money used by the Bush administration to bail out financial institutions and reducing the excessive risk-taking that necessitated the bailout.

Achieving Vital Anti-Poverty Goals

The President’s plan would use some of the new revenues from these tax hikes to fund needed expansions of two targeted tax credits for working families: the Earned Income Tax Credit and the $1,000-per-child tax credit (CTC).  Both the EITC and CTC are set to be reduced at the end of 2017, as temporary expansions pushed through by President Obama will expire at that time. Obama proposes to make these tax cuts permanent, and reiterates his proposal to expand the EITC for the childless workers who currently benefit least from the credit. Each of these steps, which Congress has discussed ad nauseam in the past year but has refused to enact, would provide needed relief to working families below or near the poverty line: collectively, these changes would mean a real victory for those seeking to use the tax code to help end poverty.

Other Middle-Income Tax Cuts

Obama’s plan would also create a tax credit available only to two-earner couples in which both spouses work. The credit would equal 5 percent of the lower-paid spouse’s first $10,000 of earnings, for a total tax break of up to $500, and would be unavailable to those couples earning over $210,000. Obama would also increase tax credits for families with dependent care expenses, and would simplify the array of tax breaks available to offset families’ higher education expenses.

The President’s tax proposal, as outlined this weekend, appears less ambitious than some would have hoped– after a year in which shameless corporate tax avoidance was constantly in the headlines, loophole-closing corporate tax reforms should be a centerpiece of any tax reform plan–but in the current political context, it’s certainly more than many observers expected.

Newly-elected Arkansas Gov. Asa Hutchinson continued a well-established tradition in the Natural State by beginning the legislative session with a proposed tax cut. Hutchinson’s plan would cut personal income tax rates by one percent for those making $21,000 to $75,000 a year, and would cost $137.8 million once fully implemented (according to Hutchinson’s office). The governor has yet to outline how he will pay for his tax cut. His plan will offer virtually no relief to the 40 percent of Arkansans who make less than $22,600 and currently pay a percentage of their income in state in local taxes that is twice as high as that paid by the wealthiest Arkansans, according to the most recent edition of ITEP’s Who Pays report. Legislators predicted that the cuts would receive broad bipartisan support.

North Carolina lawmakers began their legislative session yesterday with the usual pledges of bipartisanship meant to muffle the sharpening of knives. The state’s Republican legislature could face a showdown with Gov. Pat McCrory over Medicaid expansion, a policy that the governor now says he is open to considering. At their traditional press conference, the leaders of the House and Senate reiterated their opposition to expanding Medicaid to cover 500,000 additional North Carolinians, but were non-committal on other issues likely to dominate the session – business incentives, teacher pay and local taxes, among others. Senate President Pro Tem Phil Berger defended previously enacted corporate and personal income tax cuts, saying they are contributing to an improving economic environment despite revenue collections falling $190 million below state projections. This is after state projections were already adjusted downward by close to the same amount last year, so the state is actually bringing in $400 million less than originally anticipated.

Georgia Gov. Nathan Deal urged lawmakers to find money to invest in the state’s transportation system, saying $1 billion was needed to simply maintain the current system. While the governor did not specify where the funding should from, he highlighted the inadequacy of the state’s gasoline excise tax, signaling his openness to a tax increase. Georgia’s excise tax has not increased since 1971, while fuel efficiency has almost doubled. The prospect of a transportation plan passing the legislature is dicey; Republicans are likely to oppose increasing taxes or fees, while Democrats could balk at a plan that doesn’t include funding for mass transit. Democrats enjoy leverage on the issue since their votes could be necessary to overcome Republican opposition.

Following Up:

Arizona – A judge ordered lawyers for the Legislature, governor and Arizona public schools to enter into settlement talks over a lawsuit brought by the schools against the state. Gov. Ducey previously called for a resolution in his State of the State address.

New Jersey – Gov. Chris Christie’s State of the State address received mixed reviews for being light on details (the governor did not mention his state’s transportation crisis and punted on unfunded pension liabilities) and targeted toward a national audience. Christie did, however offer dissonant platitudes about the need to make investments and also cut taxes. Perhaps next he will boldly declare his intention to rub his tummy and pat his head at the same time.

Nebraska – The Nebraska Cattlemen Association is monitoring the property tax cut proposals emerging in the legislature after Gov. Pete Rickett’s pledge to offer Nebraskans property tax relief in his State of the State address. They have shown particular interest in Sen. Al Davis’ plan to pay for property tax relief through new local income taxes.

Tennessee – As predicted, plenty of legislators hate Gov. Bill Haslam’s plan to expand Medicaid coverage to 200,000 Tennesseans. House Republican leader Gerald McCormick is particularly unenthused, saying he would sponsor the governor’s bill but only because it’s his job (cue heavy sighing and eye-rolling).

Things We Missed: 

New Mexico’s Legislative Finance Committee and Gov. Susana Martinez both released their budget proposals this week. State revenues are expected to continue sliding due to falling oil prices, and less generous spending is expected. (Thanks to Ellen Pinnes for the tip!) 

Welcome to the State Rundown, your source for the latest in state tax policy! This week, 21 states begin their legislative sessions, including a number of states where newly-elected conservative governors will have to grapple with big budget deficits. Presidential contenders Scott Walker and Chris Christie will deliver highly-anticipated State of the State addresses as well. Here are the top stories we’ll be following this week:

Arizona Gov. Doug Ducey, who campaigned on a pledge to cut income taxes, will likely shift his focus from tax cuts to spending cuts in his State of the State address today. His pledge last week not to raise taxes in his inaugural address was widely seen as a concession that promised tax cuts were untenable given the state’s $500 million deficit this fiscal year and projected $1 billion shortfall in FY 2016. Ducey will instead announce a statewide hiring freeze and his intention to push for a resolution to a long-standing school funding dispute.

New Jersey Gov. Chris Christie will attempt to use his State of the State address to stop his recent slide in the polls and seize the initiative on two issues that threaten his legacy – public employee pension reform and transportation funding. So far the governor has been mum about the contents of his speech, but New Jersey political watchers anticipate Christie will defend his decision to cut back on promised payments to state pension plans. A bipartisan commission appointed by the governor has yet to release recommendations on how to deal with tens of billions of dollars in unfunded health benefits and pension liabilities. Christie must also contend with a nearly insolvent transportation fund that will go broke in July without additional funding. Some observers speculate that the governor will call for a state gas tax increase, which, after adjusting for inflation, is currently at its lowest level in history.

Gov. Pete Ricketts of Nebraska, who identified property tax cuts as his first priority in his inaugural address last week, may also welcom efforts in the legislature to push for income tax cuts as well. Business leaders in the state have made it clear that income tax cuts are their main concern, and the state’s projected budget shortfall makes it unlikely Nebraska could afford both property tax cuts and income tax cuts. The release of the Governor’s budget this week will provide more details on his vision for tax cuts. Proposals already circulating in the legislature include reducing the taxable value of agricultural land, capping property taxes, taxing land based on profit generated instead of market value, or increasing the size of the state’s property tax credit fund.            

Tennessee Gov. Bill Haslam could be a victim of his party’s success in the last election, as conservative state lawmakers could push the governor farther to the right than he would like during the legislative session that starts this week. Republicans enjoy supermajorities in both houses of the state legislature, and some lawmakers plan to push to cut or eliminate the Hall Tax over the governor’s objections. The Hall Tax is a six percent tax on income from dividends, interest and capital gains – and a rare progressive feature in a tax system that leans overwhelmingly on the poor. Haslam has repeatedly rebuffed calls from conservative groups to push for repeal, arguing that the $300 million in revenue gained from the tax each year would be difficult to replace. His stance could be complicated, however, by his push to have Tennessee accept Medicaid expansion under his Insure Tennessee plan. Expansion could bring $1.14 billion in new spending and 15,000 jobs to Tennessee, but is a lightning rod among conservatives who oppose the Affordable Care Act. The governor could decide that he lacks the political capital to fight for Insure Tennessee and the Hall Tax at the same time.

States Starting Session This Week:
Arkansas
Arizona
Colorado
Delaware
Georgia
Idaho
Illinois
Iowa
Kansas
Maryland
Minnesota
North Carolina
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wyoming

State of the State Addresses This Week:
Arizona Gov. Doug Ducey (watch here)
Idaho Gov. Butch Otter (watch here)
Indiana Gov. Mike Pence (Tuesday)
Iowa Gov. Terry Branstad (Tuesday)
New Jersey Gov. Chris Christie (Tuesday)
South Dakota Gov. Dennis Daugaard (Tuesday)
Washington Gov. Jay Inslee (Tuesday)
Wisconsin Gov. Scott Walker (Tuesday)
Georgia Gov. Nathan Deal (Wednesday)
West Virginia Gov. Earl Ray Tomblin (Wednesday)
Wyoming Gov. Matt Mead (Wednesday)
Colorado Gov. John Hickenlooper (Thursday)
Kansas Gov. Sam Brownback (Thursday)
Nevada Gov. Brian Sandoval (Thursday)
Vermont Gov. Peter Shumlin (Thursday) 

Governor’s Budgets Released This Week:
Idaho Gov. Butch Otter (Monday)
West Virginia Gov. Earl Ray Tomblin (Wednesday)
Nebraska Gov. Pete Ricketts (Thursday)
Nevada Gov. Brian Sandoval (Thursday)
Rhode Island Gov. Gina Raimondo (Thursday)
Vermont Gov. Peter Shumlin (Thursday)
Arizona Gov. Doug Ducey (Friday)