The Case for Keeping the Medical Device Tax

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In a testament to the power of health industry lobbying, lawmakers on both sides of the aisle have expressed support for repealing the medical device tax, a levy created as part of the Affordable Care Act that is expected to raise $29 billion over the next 10 years to help fund broader access to health care.

The medical device tax is a 2.3% tax that applies to firms selling medical devices including artificial hips and joints, pacemakers, and MRI machines. It excludes items such as eyeglasses, contact lenses, hearing aids and any medical device purchases made by the general public from retail stores for individual use. Exported items are also exempt from the tax.

Health insurance providers, pharmaceutical companies, and the medical device industry are all expected to gain from the ACA by earning greater profits as more people enter the healthcare marketplace. The tax is intended to reciprocate those benefits by tacking on a small flat rate to a firm’s revenue.

Medical device manufacturers have been trying to gut the tax since it passed in 2010. The industry spent more than $200 million successfully lobbying Congress and waging a campaign using the typical anti-tax talking point that claims any new levy is a jobs and innovation killer. But the argument for repealing the medical device tax does not hold up.

A new analysis by the Congressional Research Service (CRS) found that in all predicted scenarios, the tax would have minimal effects on the medical device industry and job loss. The CRS suggests that it could have as much as a 0.2 percent impact on output, and little if any effect on research, development, and innovation. The report attributes this low impact on the fact that the tax is relatively small, exports are exempt from taxation, and consumer demand is relatively inelastic.

At the very least, any repeal of the medical tax should pay for the $29 billion in revenue that would be lost, yet those fighting the tax have not found a politically viable way to replace the lost revenue. In addition, a repeal would set a precedent for the repeal of other taxes used to fund the ACA, creating a dangerous cycle that could weaken the law, which is clearly the intent of some lawmakers.

Other sectors of the healthcare industry have successfully incorporated ACA taxes, and without brouhaha, and we now have the numbers to show that the medical device industry can, too.

Gov. Kasich’s Tax Proposal Promises to Make Ohio’s Tax System Less Fair

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kasich.pngThe tax plan recently proposed by Ohio Gov. John Kasich would be a massive tax shift away from well-off taxpayers to the middle-class and working poor, according to a new report released by Policy Matters Ohio that incorporates ITEP data. His plan follows similar tax shift proposals from Maine and South Carolina and shows that plenty of governors around the country are doubling down on regressive tax “reform,” despite arguments to the contrary.

Taking into account the governor’s proposed changes to income and consumption taxes, the top one percent of Ohio taxpayers will receive an average tax break of $12,010, while the bottom 40 percent of taxpayers will actually see their taxes go up by about $50. Gov. Kasich has touted his plan as a measure to boost small businesses, but in reality his policy will benefit the wealthy and leave working families in Ohio further behind.

Gov. Kasich has proposed slashing income taxes for the second time in his administration. His new plan would cut rates by 23 percent over two years, with an immediate 15 percent cut in 2015. These cuts would cost an estimated $4.6 billion in revenue over the biennium. Kasich also wants to eliminate the income tax for business owners with $2 million or less in annual receipts at a two-year cost of $700 million dollars, and increase the personal exemption allowed for those with $80,000 or less in annual income. The benefits of the governor’s income tax proposals would put, on average, $13,000 back into the pockets of the top one percent of Ohio taxpayers annually, while those at the bottom would see an average $16 tax cut. Those in the middle would see a $219 tax cut on average.

Worse than the lopsided benefits that would accrue to the rich are the regressive tax increases Gov. Kasich proposes to pay for his cuts. The governor wants to increase the sales tax rate from 5.75 to 6.25 percent and broaden the sales tax base to include a number of additional services. He also wants to increase excise taxes on cigarettes and other tobacco products. These measures hit low-income households the hardest and explain why overall tax rates will increase for the bottom 40 percent. While wealthier households will pay a higher dollar amount under the sales tax increase, low-income households will have to pay a larger percentage of their income. Similarly, the cigarette and tobacco tax increase will have a larger impact on low-income households. ITEP’s recent Who Pays report shows that states that rely disproportionately on consumption taxes rather than income taxes are less fair and more unequal in the distribution of tax obligations. 

Kasich’s proposal also includes other measures meant to help pay for his tax cuts or reduce taxes for businesses. He would means test three tax provisions geared toward income earned by senior citizens, raise the rate of the Commercial Activity Tax while reducing the minimum paid by some companies, and increase the severance tax on oil and gas.

A number of legislators have balked at the governor’s plan. Rep. Kevin Boyce argued that the increase in the income tax personal exemption for lower-income taxpayers would be negated by the increase in sales taxes, while Rep. Denise Driehaus questioned whether the measures for business owners would be enough to spur job growth.

The governor could actually help working Ohioans by expanding the state’s Earned Income Tax Credit (EITC). While Gov. Kasich often highlights his expansion of the EITC from 5 to 10 percent, this is not nearly enough to truly make a difference for low-income families – as Policy Matters Ohio and ITEP have previously argued. The bottom 20 percent of tax filers receive an average of just $5 in savings from the EITC, while the next 20 percent receive an average $60 in savings. These meager savings would be wiped out by the governor’s proposed sales tax increases. A truly progressive tax proposal would increase the EITC further and make the credit refundable so that working families would receive the full benefit.

What Ohio needs is a tax policy that will help low-income and working families get a leg up, not reward the well-off with lower taxes. We hope the governor will make fairness a part of his economic agenda. 


Gas Tax Procrastination: 22 States Have Gone a Decade or More Since Last Hike

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gas.jpgWith at least twelve states looking seriously at gas tax increases this year, now is a good time to survey the landscape of state gas tax policies.  Two new briefs from ITEP do exactly that.

While the cost of asphalt, concrete, and machinery has been rising, too many state gas tax rates haven’t budged.  Twenty-two states have gone a decade or more without a gas tax increase, and sixteen of those states have not acted in two decades or more.  Alaska (44.8 years) and Oklahoma (27.8 years) are the top two gas tax procrastinators and it’s unlikely that will change this year.  But Iowa and South Carolina (tied for #3 at 26.1 years each) are seriously considering gas tax increases, as are #6 Tennessee (25.6 years) and #8 New Jersey (24.6 years).

All of these states have one thing in common: a fixed, cents-per-gallon gas tax that is guaranteed to fall short over time as inflation chips away at its “real” value.  Fortunately, our other brief shows that a large, and growing, group of states now levy smarter, variable-rate gas taxes that trend upwards over time.  Eighteen states, home to over half of the county’s population, have this type of gas tax—either with a price-based (sales tax) on gas, or a gas tax rate that’s simply indexed to inflation.  And as we noted recently, more states such as Minnesota, South Dakota, and Utah could join that list soon.

Stagnant gas tax rates that have not been updated in years, or even decades, are not generating enough revenue to cover the growing cost of maintaining and expanding our infrastructure.  To accomplish that goal, outdated gas tax rates need to be increased, and gas taxes need to be set on a more sustainable course by adopting variable-rate structures better geared for long-run growth.

Read the briefs:

How Long Has it Been Since Your State Raised Its Gas Tax?

Most Americans Live In States with Variable-Rate Gas Taxes

State Rundown 2/10: Semi-Encouraging News

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Rumors abound in Springfield that a gas tax increase could be in the works. Though Illinois Gov. Bruce Rauner has downplayed reports that he supports such a measure, in his state of the state address last week he said the state needs to “restructure” its motor fuel tax to pay for infrastructure investments. Leaked documents from Rauner’s business allies detail possible fixes, including a 13-cent increase in the gas excise tax and increasing the cost of registering, titling, and driver’s licenses.

Arkansas Gov. Asa Hutchinson signed his proposed middle-class tax cut into law on Friday after the measure passed both chambers of the legislature by wide margins. The bill passed with a proposed capital gains tax measure intact. The exemption for capital gains will fall to 40 percent from 50 percent – less than the 30 percent proposed in the Senate version of the bill, but still a significant improvement in making the state’s tax system fairer. The tax cuts exclude the 40 percent of Arkansans earning less than $21,000 per year. If no additional changes are made, the disparity between the tax rate paid by low-income workers and other Arkansans will worsen; Arkansas ranks 11th in the Who Pays Inequality Index.

Oklahoma lawmakers have turned their sights on a glut of tax credits and incentives that cost the state more than $1 billion annually. Facing a $300 million shortfall, some legislators argue that many of the incentives, though well-intentioned, do not perform well or live up to their promises. Leaders in the House and Senate have proposed a four-year review process for tax credits and incentives. Meanwhile, policymakers have taken the Kansas lesson to heart and pushed proposals to slash the state’s income tax to the backburner.


Governor’s Budgets Released This Week:
Kentucky Gov. Steve Beshear (Tuesday)
Texas Gov. Greg Abbott (Wednesday)


A First Look at the Best (and Worst) Provisions in President Obama’s FY16 Budget Proposal

February 6, 2015 10:17 AM | | Bookmark and Share

PDF of this report.

Earlier this week, President Barack Obama released details of his proposed federal budget for the fiscal year ending in 2016. While many observers and some members of Congress derided the budget blueprint as an irrelevant exercise in political theatre, the President’s plan includes a number of ideas that are likely to be incorporated into politically viable tax reform proposals in the weeks and months to come. It also includes some proposals that, while politically dead on arrival in the current Congress, have the potential to reshape the Washington tax reform debate moving forward. Here’s a quick overview of the best—and the worst—tax policy ideas in the president’s budget plan.

The President’s proposed budget includes $1.7 trillion in tax increases over the next ten years, almost all of which would fall primarily on the wealthiest individual taxpayers and on corporations. Obama proposes to use $470 billion of those tax hikes to pay for targeted tax cuts, primarily targeted to middle- and low-income families, and would use the rest to pay for needed public investments and reduce the deficit.

Where the Money Comes From

President Obama’s budget would raise about $1.7 trillion in new tax revenues over the next ten years.

Roughly a third of these revenues would come from a variety of proposals designed to pare back tax benefits accruing to wealthy investors. Most notably, the President would increase the top tax rate on capital gains to 28 percent, would end the “stepped up basis” break that allows investors to avoid any tax on some capital gains, and would end the “carried interest” loophole that allows hedge fund managers to characterize income as capital gains.

Another one-third of the revenue-raisers would come from a single provision, known as the “28 percent limitation,” that would reduce itemized deductions and other tax breaks for high-income taxpayers currently paying federal tax rates above 28 percent. (In 2014, this means couples earning more than about $225,000.) This reform is broadly similar to proposals the president has included in previous budgets.

The budget includes two new revenue-raising proposals that would affect corporations: a one-time “transition tax” on U.S.-based corporations holding profits offshore, and a low-rate tax on the liabilities of the very largest financial companies.  

The president’s budget also includes one tax change that would fall primarily on low- and middle-income families: an increase in the federal cigarette tax. This would represent just 5 percent of the tax hikes included in the Obama budget blueprint.

Where the Money Goes

The president’s budget would use about a third of the revenues from his proposed tax increases to cut taxes. Almost all of these tax cuts are designed to benefit middle- and low-income working families.

The biggest single item on the tax-cut side is one that would have no effect until tax year 2018. At that time, temporary expansions of the Earned Income Tax Credit (EITC) and the Child Tax Credit are set to expire. The president’s budget would make these expansions permanent, strengthening bipartisan tax provisions designed to reward work and help at-risk families stay above the poverty line.

The president would also fill one of the most glaring gaps in the structure of the EITC: its low benefits for childless workers. The budget would ensure that the wage subsidy for low-income single workers would approach the tax break already available to those with children.

Sound Tax Reform Ideas in the President’s Budget

The president’s budget includes a healthy dose of progressive tax reform proposals. Some, like the sensible proposal to shift education tax breaks away from the best-off Americans and toward the middle class, have already been abandoned. Others, including the president’s plan to eliminate some tax preferences for capital gains, never stood a chance. But a few, like President Obama’s already enacted (but set to expire in 2017) expansion of two low-income tax credits for working families, are likely to be ratified as part of the annual budgetary give-and-take. And politics aside, these proposals signify a clear and sensible policy shift toward giving middle-income working families the tools they need to get ahead.

  • Ending “stepped up basis” for capital gains: The federal income tax has long had a loophole wealthy investors could drive a truck through: the complete forgiveness of federal income tax liability on the value of stocks and other capital assets passed on from decedents to their heirs. The president’s plan would end this tax break for heirs inheriting more than $200,000 for a married couple ($100,000 for singles). While the tax policy community has long agreed that the so-called “stepped up basis” is absurd, few elected officials have actively sought to repeal it—until now.
  • Taxing wealth more like work: Current law imposes a top tax rate on capital gains that, at 23.8 percent, is well below the 39.6 percent top tax rate on wages. By hiking the top capital gains rate to 28 percent for the very best-off Americans, President Obama’s plan would at least slightly reduce the tax preference for wealth over work. Notably, even if the president’s plan were enacted, the top rate on investment income would remain fully 11.6 percent below the top rate on wages.
  • Shifting education tax breaks down the income ladder: The President proposed to simplify and restructure the hodgepodge of education tax breaks currently allowed, repealing tax breaks used primarily by upper-income families (such as the “529” savings incentive) and expanding the middle-income American Opportunity Tax Credit. Simpler and fairer? Sounds good. Sadly, Obama quickly abandoned the 529 reform in the wake of heated opposition.
  • Tripling the child care credit: Recognizing that dependent care expenses can be unaffordable for working parents, the president proposes to substantially increase an existing tax credit against child care expenses, tripling the potential tax credit for some working families.
  • Boosting wages for low-income working families: the Earned Income Tax Credit provides a needed wage subsidy for workers near or below the poverty line, but generally shortchanges workers without children. The budget blueprint would make permanent an existing, temporary boost to the EITC and make needed new expansions for childless workers.
  • Adequately funding the Internal Revenue Service. With no apparent knowledge of the irony, Congress routinely creates dozens of new tax breaks each year, charges the IRS with the responsibility of administering these tax breaks, and then slashes the agency’s annual administrative budget. President Obama’s budget would reverse that trend: the $2 billion boost in IRS funding the president proposes would help offset the billions in funding cuts the agency has suffered in recent years.

…And the Not-So-Good Ideas

While the president’s outline of individual tax reforms would clearly be a win for tax fairness, some provisions would needlessly complicate the tax code. On the corporate side, President Obama’s efforts are far more timid, offering billions of dollars in tax savings to offshore tax dodgers while continuing to embrace a misguided vision for “revenue-neutral” corporate reform.

  • Low-rate “transition tax” on multinational corporations’ offshore cash. Faced with the prospect of large multinationals such as Apple and Microsoft avoiding U.S. tax by stashing their profits in offshore tax havens, Obama proposes a one-time, 14 percent “transition tax” on these profits, after which they will never be subject to additional U.S. tax. Apparently driven by the philosophy that something is better than nothing, Obama’s plan would, in fact, give $82 billion in tax cuts to just ten of the biggest tax avoiders. A better plan would require these companies to pay the 35 percent tax they have adeptly avoided to date.
  • Reinventing the wheel: We already have a federal income tax credit designed to offset expenses for two-earner couples, and, as previously noted, the President sensibly wants to expand it. So his proposal to to create a new “second earner” credit that doesn’t even require such couples to incur child care expenses is unnecessary and wasteful.
  • Doubling down on “revenue-neutral” corporate tax reform: Our corporate taxes are among the lowest in the developed world as a share of the economy. So the president’s proposal to eliminate wasteful loopholes and give the money right back to corporations in the form of a lower 28 percent tax rate is unwise at a time when the nation’s is struggling to raise adequate revenue.
  • More tax breaks for General Electric and Apple: If you were going to make a list of corporations that need additional tax breaks, GE and Apple would not be high on the list, especially considering their notoriously low and sometimes non-existent corporate tax rates. But by permanently extending the “active financing” loophole and “CFC look-thru rules”, President Obama will be enshrining the pair of temporary tax breaks that allow GE and Apple to escape paying their fair share in taxes.
  • Looking for infrastructure funding in all the wrong places: It’s well documented that the nation is underfunding its transportation infrastructure, and it’s equally obvious that Congress’s failure to increase the gas tax since 1993 is the main culprit. But rather than calling for a long-overdue gas tax hike, the president would use the revenues from his one-time corporate “transition tax” to fund infrastructure improvements. While this plan would certainly put a dent in the nation’s transportation funding deficit, this one-shot solution would do nothing to shore up transportation funding in the long-term. 

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State Rundown 2/5: State of the States

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Maryland Gov. Larry Hogan fleshed out his plans to cut taxes in his state of the state address this Wednesday, vowing to seek reductions for small businesses, some retirees, motorists and the repeal of the so-called “rain tax,” a contentious stormwater management fee. Faced with a significant budget deficit, Hogan was forced to pursue more piecemeal tax cuts than he suggested during the campaign, though the measures face stiff opposition from the Democratic-controlled legislature. Two of the measures particularly rankle environmentalists; Hogan wants to repeal a law indexing the state’s gas tax to inflation, and his attack on the stormwater fee will shortchange efforts to clean up the Chesapeake Bay. Democrats say the governor’s plans will cost $30 million a year in lost revenue, while the governor’s staff says the cost will be closer to $27 million. Additionally, Hogan proposed legislation to make it easier to open charter schools in Maryland, as well as a tax break for people who donate to private and religious schools. ITEP has argued that such tax breaks, also known as “neovouchers,” unfairly divert public money to private education. New York Gov. Andrew Cuomo recently proposed a similar tax credit in his budget.

North Carolina Gov. Pat McCrory used his state of the state speech to tout his “North Carolina plan,” which would expand Medicaid in North Carolina but seek a waiver for some of the Affordable Care Act’s provisions. The governor made sparing references to taxes in his speech, despite the fact that revenues in the Tarheel state have fallen under projection thanks to tax cuts he signed in 2013. Also left unmentioned was the push by some lawmakers to repeal the state’s capital gains tax, a measure that McCrory has partially supported as a way to lure “innovation-related companies” to the state. Some advocates criticized the governor for failing to push for reenactment of the state’s EITC, which expired in 2013.

Wisconsin Gov. Scott Walker further cemented his conservative-warrior persona in his state of the state speech, slashing higher education budgets by $300 million to help solve a $650 million budget deficit over the biennium (which will inevitably mean higher tuition bills). Walker’s budget also includes a property tax cut of $5 per year for the average taxpayer (according the governors’ office) to the tune of $280 million for the state, to be enacted by sending more state aid to local districts but earmarking that aid for tax cuts. K-12 spending, meanwhile, would remain flat. Walker’s budget has earned the governor steep opposition; faculty and students at the University of Wisconsin decried the governor for proposing the deepest higher education cuts in state history while also giving $220 million in state money to the NBA for a new stadium. Some lawmakers point out that many of the cuts would be unnecessary if Walker and his legislative allies had not squandered last year’s $1 billion surplus on property and income tax cuts. Even some conservative lawmakers are worried that Walker’s cuts to higher education will lead to huge tuition spikes, despite the two-year tuition freeze included in the governor’s budget proposal.

Illinois Gov. Bruce Rauner pushed for a property-tax freeze in his state of the state address, arguing that local governments need to cut expenses and waste or consolidate services in order to make it happen. The governor previously called for expanding the sales tax base to include services in order to bring in more revenue and make the state more competitive. Given that the state faces a projected $11 billion shortfall over the next two years, it has left us head scratching as to why the governor avoided talking directly about how to resolve the state’s revenue crisis.


Following Up:

  • Maine: As expected, Gov. Paul LePage used his state of the state address to make a case for his tax reform proposal, arguing that the state should adopt a constitution amendment that commits future revenue growth to income tax cuts. LePage appears to be following a broader national strategy for Republican governors to cut income taxes and raise sales and other taxes on a promised “path to prosperity.”  
  • Ohio: Gov. John Kasich’s budget proposal received pushback from school districts concerned that his new funding plan will unfairly redistribute state resources. The governor and his staff claim the plan will send more money to poorer districts, but school officials have criticized the opacity of his funding formula. Look to the Tax Justice Digest next week for full coverage of the plan, including an analysis of who wins and who loses.
  • Texas: Gov. Greg Abbott vowed to veto any budget that does not include tax cuts for businesses, arguing that cutting or eliminating the state’s franchise tax would stimulate job growth.


    New Analysis: Don’t Scrap Idaho’s Grocery Tax Credit

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    Some lawmakers and advocates in Idaho have been pushing a tax swap under which Idaho’s $100 per person Grocery Credit Refund would be eliminated in favor of exempting all grocery purchases from the sales tax. But a new ITEP report shows that the biggest winners under such a plan would be high-income households.

    Members of Idaho’s top 1 percent would receive an average tax cut of $234 per year under such a swap.  Low-income families, by contrast, would typically see a cut of $15 or less, and some would actually see their taxes increase.

    The impact of this change is so lopsided in part because the state’s existing Grocery Credit Refund can cover most, or sometimes all, of the grocery taxes paid by a low- or moderate-income household.  For a high-income household purchasing premium brands and other high-end foods, however, a blanket exemption for all grocery purchases can be much more lucrative than the current flat credit of $100 per person.

    If cutting grocery taxes is on lawmakers’ minds, ITEP’s report suggests expanding the existing Grocery Credit Refund—a move that could provide larger benefits to most households than the alternative plan to create a grocery tax exemption.

    For more on sales tax exemptions and credits, check out ITEP’s policy brief on the subject.

    The Round-Robin of State Lottery Exploitation

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    lottery.jpgLotteries have been with us since the early years of the Republic. They were corrupt and a poor way to raise revenue then, and today they’re not much better.

    Cohens v. Virgina, an 1821 Supreme Court case, concerns the sordid tale of the National Lottery, passed by Congress to raise funds for the beautification of DC and conducted by the city’s municipal government. The court was forced to intervene when unscrupulous agents sold tickets in Virginia contrary to state law. Even worse, the lottery never paid out after one of the agents absconded with the winnings.

    In a depressing reminder that nothing ever changes, a recent article in Stateline reports that a statistically impossible number of convenience store owners and clerks have hit lottery jackpots. In New Jersey, half of the 20 most frequent lottery winners since 2009 are either retailers or their family members. Store clerks commonly cash winning tickets for a commission for those who owe back taxes or other debts, and some defraud customers (often elderly or unsophisticated) by shortchanging them on their winnings. As Richard Lustig explains in Stateline, “(The clerk) sees a $500 winning ticket, but says you won $20…He gives you $20 and then goes and cashes the ticket.”

    It isn’t just retailers getting in on the fraud. In states that have turned to private contractors to administer their lotteries, the companies have failed to deliver on wildly exaggerated claims of revenue growth. Last year, former Illinois Gov. Pat Quinn was forced to fire Northstar, the firm operating the state lottery after it failed to deliver $400 million in promised profit over three years. Despite that abysmal track record, New Jersey Gov. Chris Christie hired the same firm to take over New Jersey’s lottery; unsurprisingly, Northstar New Jersey missed it’s income target by $55 million, and revenues were 7.9 percent lower compared to the same period the previous fiscal year (under state management).

    Lotteries hang on because state officials claim that the proceeds go to worthy causes, such as schoolchildren, the elderly, or other feel-good state spending categories, never mind that it’s a bad bet for states to depend on the meager dollars of their most vulnerable citizens to fund crucial services like schools. And often, the money never goes to its intended purpose; one study found that states with lotteries increase education budgets initially but then decrease them later on by shifting general fund dollars previously earmarked to education to other purposes. Meanwhile, “states without lotteries increase their spending over time and end up spending 10 percent more of their budgets, on average, on education compared to lottery states.”

    The combination of unscrupulous vendors and firms, waning public interest in lotteries, competition from casinos and other forms of gambling, and declining revenues have made many states desperate. State lotteries have boosted advertising budgets in the hopes of squeezing more dollars out of the 20 percent of customers who constitute 80 percent of lottery sales. They’ve tried publicity stunts like bacon-scented scratch-off tickets and mobile apps to reel in younger players. Apparently, it has occurred to no one that needed revenues can be raised in traditional ways, such as through progressive taxation that asks the well-off to pay their fair share, rather than relying on the destitute to shore up state coffers.

    Unscrupulous agents may not be running away to an undisclosed location with state lottery proceeds as some did in one of the earliest state lotteries, but they are still an ill-advised way to raise reliable revenue.

    As ITEP state policy director Meg Wiehe said in a recent MSNBC interview, “lotteries are highly unstable; they’re unsustainable, unpredictable, and frankly an unfair way to pay for public services.” It’s time our legislators found the courage to raise revenues in a responsible way, rather than resorting to gimmicks. 

    Obama’s Progressive Plan to Simplify and Expand Education Tax Credits

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    In the run-up to the State of the Union, President Barack Obama proposed a slew of new tax reform ideas designed to benefit low- and middle-income families. One of his proposed reforms is to consolidate and simplify higher education tax breaks to make the credits more accessible.

    Right now a handful of overlapping education benefits often cause confusion for those applying. Roughly 14 percent of those who could have filed for education benefits did not, resulting in a loss of about $466 per filer. Obama’s proposals would simplify this process by consolidating the Lifetime Learning Credit into the American Opportunity Tax Credit (AOTC), while adding new and more generous provisions to the credit.

    The AOTC, first enacted in 2009 as a part of the stimulus bill, is an expansion of the Hope tax credit but is set to expire in 2017, which means that these breaks will revert to the less generous tax credit. The President proposes to make the AOTC permanent and adjust it annually to keep pace with inflation. Currently the AOTC provides tax credits to offset up to $2,500 of college expenses per year for up to four years. New modifications to the AOTC would increase the maximum refund from the current $1,000 to the proposed $1,500 and increase accessibility by mandating that higher education institutions provide students with the proper information necessary to claim credits.  

    The essence of Obama’s proposal is shifting from high-income deductions to middle-income credits. Some of the funding for the expansion of the AOTC would come from phasing out student loan interest deductions so that they would only apply to those who started their education receiving them, but it would not apply to new enrollees. According to the White House, eliminating student loan interest deductions would cost the average student or graduate roughly $100 a year, but this would be mitigated by the relief from the AOTC. In general deductions tend to benefit those who have higher tax liability (i.e. the wealthy), so the reallocated money would be better targeted toward low-income and middle-income families.

    As Obama originally proposed it, part of the funding for the expansion of the AOTC would have come from ending 529 savings plans benefits. Though 529 savings plans encourage investment in future higher education, the deductions associated with them tend to benefit wealthier families. Less than 3% of families even participate in 529 saving plans and those that do have a median income of $142,400.

    Unfortunately, the misguided backlash against Obama’s proposal to cut 529 savings benefits in the name of defending “middle-class” families, led by House Speaker John Boehner (R-OH) but also supported by House Minority Leader Nancy Pelosi (D-CA) and House Budget Committee member Chris Van Hollen (D-MD), has culminated in the White House nixing the 529 proposal to focus on the larger issue of education tax relief. Even without this additional funding, the White House notes that the tax changes to capital gains and inherited wealth would provide more than enough funding for the AOTC expansion.   

    As lauded as tax breaks for higher education are, the reality is that this money still is not going to those most in need – low-income students and families – and even Obama’s proposals would still benefit those that have the money to begin. The most effective way to financially assist low-income students is to invest more money in Pell Grants, which are substantially better targeted toward low- and middle- income families than any of the current higher education tax breaks. The President’s 2009 budget proposal increased Pell Grant funding from $16 billion for the 2008-2009 school year to $25 billion for the 2009-2010 school year and steadily increases funding over the next ten years. The President’s newest proposal would increase the value of Pell Grants by allowing them to be exempted from the income tax.

    While expanding Pell Grants would be the best approach to expanding access to higher education, Obama’s proposal to consolidate and simplify our education credits is still a significant step in the right direction compared to the absolute mess of poorly targeted education tax breaks we have now.    

    Ten Corporations Would Save $82 Billion in Taxes Under Obama’s Proposed 14% Transition Tax

    February 3, 2015 01:30 PM | | Bookmark and Share

    PDF of this report.

    Apple, Microsoft, Citigroup and Amgen Are Among Biggest Winners

    Earlier this week, President Barack Obama released details of his proposed federal budget for the fiscal year ending in 2016. The proposal includes a one-time “transition tax” on the offshore profits of all U.S.-based multinational corporations. The President’s plan would tax these profits at a 14 percent rate immediately, rather than at the 35 percent rate that should apply absent the “deferral” loophole. This proposal would provide huge tax cuts to many corporations currently holding profits, often actually earned in the U.S., in low-rate foreign tax havens. Ten of the biggest offshore tax dodgers would receive a collective tax break of $82.4 billion.

    Huge Tax Breaks for Notorious Tax Dodgers in Technology and Financial Sectors

    The table on this page shows the ten companies that would enjoy the largest tax breaks from President Obama’s proposed “transition tax.”

    • Apple currently holds $137 billion of its cash offshore. Under current rules, the company should pay $45 billion when these profits are repatriated. But the Obama plan would allow it to reduce its tax bill to $18 billion — a $26.9 billion tax break.
    • Microsoft would see a $17.7 billion tax cut on its $92.9 billion in offshore profits under Obama’s proposal.
    • Large financial companies with substantial offshore cash would benefit handsomely from the president’s proposal: Citigroup would enjoy a $7 billion tax cut, while JP Morgan Chase would get a $3.8 billion tax break. Bank of America and Goldman Sachs would receive tax breaks of $2.6 billion and $2.4 billion, respectively.

    While these companies operate in different economic sectors, what they have in common is that each has at least $17 billion in profits that they have designated as “permanently reinvested” in other countries and each has admitted, in the detailed notes of their annual financial reports, paying tax rates substantially below the U.S. statutory rate on these offshore profits.

    Corporate Tax Reform Should Tax Offshore Profits at Today’s Corporate Tax Rate

    Although President Obama has not given a detailed rationale for taxing offshore profits at a 14 percent rate, it’s hard to see why his approach makes sense. The companies currently holding profits in foreign tax havens accumulated these profits over a period when the statutory federal income tax rate stood at its current 35 percent. These companies shifted some of their profits offshore to avoid paying the statutory rate on their U.S. profits, and they should not receive a reward for dodging their tax bills in the form of a substantially lower tax rate.

    The ten companies profiled here are among the worst offenders and would reap the biggest rewards for bad corporate behavior.  Almost all of them have essentially admitted that their offshore cash is located in tax havens where the tax rate is in the single digits. For example, Microsoft says it would pay a 31.9 percent tax rate if it repatriated its offshore profits. Since the tax it would pay would be equal to the 35 percent statutory tax rate minus any foreign taxes already paid, the clear implication is that the company has paid only a 3.1 percent tax rate on its offshore profits. Rewarding Microsoft with a low 14 percent tax rate on its offshore holdings would amount to huge and unwarranted tax savings for a company that has made a practice of shifting U.S. profits to tax havens to avoid taxes.  

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