Month: February 2015

Maine Gov. Paul LePage plans to borrow from the Sam Brownback playbook, announcing his intention to eliminate his state’s income tax in three steps (we saw how that worked out for Kansas) at tomorrow’s state of the state address. The governor’s current budget proposal would reduce the current top income tax rate from 7.95 to 5.75 percent, and would also slash corporate tax rates and eliminate the state’s estate tax altogether. The governor proposes to pay for these tax cuts by broadening the sales tax base and increasing sales tax rates and reducing state aid for municipalities. Eliminating the state income tax would result in the loss of half of the state’s $3 billion in annual revenue, necessitating deep cuts or major tax shifts to more recessive revenue sources. 

Ohio Gov. John Kasich’s budget proposal would lower income tax rates, eliminate the income tax for about one million business owners and increase the personal exemption allowed for Ohioans making under $80,000 a year. The plan would wipe out income taxes for 98 percent of business owners who report their profits as personal income, as businesses with annual gross receipts of less than $2 million would be eligible. Taken as a whole, the governor’s plan is a revenue loser despite several proposed regressive tax increases. The governor proposes increasing the state sales tax, increasing the state’s cigarette tax, increasing the tax on business activity, broadening the sales tax base and increasing the severance tax. Republicans and Democrats in the legislature are both likely to oppose the governor’s proposal as a tax shift, though for different reasons: Republicans want to reduce overall revenue, while Democrats oppose the governor’s plan on fairness grounds.

The budget proposed by the Texas Senate includes over $4 billion in tax cuts, with $3 billion going to school property tax relief and the other $1 billion going to tax breaks for businesses via a cut in the franchise tax. Lt. Gov. Dan Patrick, who presides over the Senate and is the rare example of a powerful lieutenant governor, used the Senate’s proposal to make good on his campaign pledges to cut taxes. Opponents of the Senate plan point out that, with oil prices declining, the state’s current surplus should be invested in needed services or saved for rainier days. “Just because this session they have a $7.5 billion cash balance and a projected increase in revenue doesn’t mean that two years from now they won’t be scraping for money just to keep up the current level of services,” argued Dick Lavine of the Center for Public Policy Priorities. State lawmakers have still not fully restored $5.4 billion in education spending cuts enacted in 2011, and more than 600 school districts have sued the state over inadequate funding.

States Starting Session This Week:
Nevada
Oklahoma
Oregon

State of the State Addresses This Week:
Oklahoma Gov. Mary Fallin (read here)
Maine Gov. Paul LePage (Tuesday)
Wisconsin Gov. Scott Walker (Tuesday)
Illinois Gov. Bruce Rauner (Wednesday)

Governor’s Budgets Released This Week:
Ohio Gov. John Kasich (Monday)
Oklahoma Gov. Mary Fallin (Monday)

Investors were jubilant last week as Yahoo CEO Marissa Mayer announced the company is moving forward with a plan to unload its $40 billion stake in Chinese company Alibaba without paying the $16 billion it would otherwise owe in federal and state corporate taxes.

While such a transfer would normally trigger corporate income liability, Yahoo is exploiting Section 355 of the tax code (which includes the cash-rich split-off loophole) to avoid paying this tax.

Congress originally created Section 355 to allow companies to spin off part of their business into a separate company still owned by its current shareholders. For example, the drug company Merck used to own the online pharmacy Medco. Merck spun off  Medco to its shareholders in a tax-free transaction. This was okay, because Medco was an active business.

But in Yahoo’s case, the new company, SpinCo, is not actively engaging in business, rather it is a phantom company that is simply made up of Alibaba-owned stock with a tiny active business attached. Unfortunately, Section 355 lacks a provision requiring that active business activities constitute a significant portion of the spinoff company, meaning that Yahoo and other companies can create a spinoff company that is made up almost entirely of stocks or other investments.

To be sure, SpinCo would be liable for the tax on the Alibaba stock if it distributed it to its shareholders. But apparently, the plan is for SpinCo to be taken over by Alibaba, in exchange for giving Spinco’s shareholders Alibaba stock that they would own directly. Such a transaction would apparently also be tax-free at both the corporate and shareholder levels. In contrast, when Yahoo sold $10 billion of its Alibaba stock last year, it paid a $3 billion in taxes, a tax bill that activist stockholders are pushing the company to avoid this time around.

It’s hard to imagine that Congress intended Section 355 to exempt Yahoo from paying tax on the huge gain in its Alibaba stock. Yet savvy tax lawyers have crafted a way for Yahoo to get away with this tax dodge.

A straightforward way for Congress to close this loophole would be to require that at least 90 percent of the spinoff company’s assets be used in an active business. Such a reform would stop companies from making a mockery of the corporate capital gains.

While Yahoo’s plan is unique in terms of the sheer scale of its tax avoidance, it is certainly not the first time a large multinational corporation has used variations on the cash-rich split-off loophole. Last year, Berkshire Hathaway, the investment company owned by Warren Buffet, announced a deal that would allow it to avoid $400 million that it would have otherwise owed while essentially selling its $1.1 billion in Washington Post stock to Graham Holdings.

Congress should not allow Yahoo to dodge as much as $16 billion in taxes, enough money to pay for one year of universal pre-k across the country. Congress should amend the law and stop future corporations from following Yahoo’s lead.