Month: May 2015

Although Michigan voters rejected a ballot proposal Tuesday that would have raised sales taxes, gasoline taxes, and vehicle registration fees, the debate over how to boost funding for the state’s deteriorating infrastructure is far from over. 

Leading up to the election, 87 percent of likely voters said that if defeated, lawmakers should immediately begin work on a new plan to fix the state’s transportation system.  It appears voters were turned off by what The Detroit Free Press described as “one of the most complicated and confusing questions ever placed on a Michigan ballot.”  Had the measure passed, it would have triggered ten other laws that dealt with issues such as offsetting the tax increases paid by some low-income families via a boost in the state’s EITC, and reimbursing local governments for the revenue loss they would otherwise have faced under the plan.

Some voters said that lawmakers showed “cowardice” by bringing a plan to voters rather than raising revenue through the normal legislative process.  These voters are likely to get their wish in the months ahead.  Polling indicates that a straight up sales tax increase could be popular.  There is also talk about asking businesses to pay more, particularly since they saw their taxes slashed dramatically under the tax package signed by Gov. Rick Snyder in 2011.

The ballot measure was a complicated mix of tax increases and tax cuts that anti-tax advocates trumpeted as a tax increase on working people.  An ITEP analysis found that while most Michiganders would indeed pay more, the bottom fifth of Michigan taxpayers would actually receive an average tax cut of $24, and it would be the state’s highest earners that would face the largest increases.  For the vast majority of drivers, the increase would be a relative bargain given that the poor condition of the state’s roads costs most drivers over $500 per year in vehicle repairs.

Now that voters have defeated the measure, anti-tax advocates have begun spinning this election as evidence that voters are unwilling to pay higher taxes.  But the reality is that just 37 percent of Michigan residents think spending cuts alone could free up enough money to bring the state’s infrastructure up to 21st century standards.  When asked about cuts in specific programs, the results were similar.  Majorities ranging from 63 to 88 percent of voters oppose major cuts in K-12 education, universities, public safety, and health care for the poor, elderly, disabled, and children.

The hard truth is that Michigan’s roads are not going to fix themselves, and the state has to raise money some way to bring roads up to par. Gov. Snyder has conceded as much. 

While the focus of marijuana legalization debates is rightly on the potential health and criminal justice impacts, the decision to legalize marijuana also has real implications for state and local revenue.

Over the past two decades, 23 states and the District of Columbia have enacted laws allowing the production and use of marijuana for medical purposes. Taking this one step further, Colorado, Washington, Alaska and Oregon are moving forward with systems that will permit the general production and purchase of retail marijuana. California, Maine, Nevada and others may soon follow in the coming years.

Given the increasing prominence of these issues, the Institute on Taxation and Economic Policy (ITEP) has written a new report providing a comprehensive overview of best practices for taxing marijuana and the potential impact these taxes could have on state and local revenue.

One of the central findings of the ITEP report is that predicting how much money state and local governments could raise from marijuana taxes is extremely difficult. To start, no jurisdiction in the world has legalized marijuana in modern times for a sustained period of time so there is not much historic data to go on.

Colorado and Washington have raised tens of millions in revenue from marijuana taxes, but these experiments in taxing marijuana are only a year old and the markets in both states are still evolving immensely, making it difficult to draw too many definitive lessons from either state.

The critical problem with estimating the revenue yield of marijuana taxes is that there are unpredictable factors that could work to substantially increase or decrease the revenue these taxes could yield. On the negative side for example, it’s unclear whether there will be a dramatic decrease in the cost of marijuana production if legislation allows for cheaper cultivation methods, which could limit the ability of state governments to impose really dramatic excise taxes. Another significant factor that could drive marijuana tax revenue downward would be a step up in enforcement of federal laws against the production and consumption of marijuana.

One factor that could increase revenue is that legalization would likely significantly increase marijuana consumption across the United States, which would mean a bigger marijuana market to tax. In addition, bringing marijuana into the legal market would mean that individuals involved in the cultivation and sale of marijuana would be more likely to report their income from and pay taxes on these activities. Finally, states that adopt legalization early may experience a significant uptick in revenues from tourists, though this revenue could be fleeting as more states legalize marijuana.

Taking these factors all together, a recent study by the Congressional Research Service found that a $50-an-ounce tax at the state level could potentially raise about $6.8 billion annually if it were implemented across the country. Another report found that applying existing sales taxes and a 15 percent excise tax on marijuana in each state would generate just under $3.1 billion in state tax revenue. To give some context, raising somewhere between $3.1 to $6.8 billion would put marijuana taxes in the ballpark of the $6.5 billion that state and local alcohol taxes raise each year, yet put them well below the $17.6 billion raised by state and local cigarette taxes.

Read the Full Report:

Issues with Taxing Marijuana at the State Level

Dr. Ben Carson enters the Republican presidential field without any significant legislative experience so he doesn’t have a record on tax policy. But in a 2013 op-ed, the well-respected neurosurgeon explained his avid support for a flat tax system. The case Carson made then and more recently in an interview on Fox News for the flat tax is based on a number of falsehoods about our current tax system and how a flat tax would work in practice. 

Below are some truths about the flat tax that Carson should consider:

1. Flat tax proposals typically do not tax capital income, even though they should.

Carson argued that a flat tax would ensure that the wealthy are paying at least the same amount in taxes as everyone else, compared to our current system where Warren Buffett pays a lower rate than his secretary. Most flat tax proposals, however, exempt capital gains and dividends from taxes, meaning that under such plans someone like Buffett would typically pay no taxes on the bulk of his income rather than the current, maximum rate of 23.8 percent A truly proportional tax system would specify that capital income be taxed the same as normal income.

2. A flat tax would increase taxes on low- and middle-income families.

Carson has bought into the widely disproven notion that low-income people don’t pay taxes, and his op-ed argued that a flat tax would guarantee that low-income individuals pay something in taxes. While the federal tax code means poor and very low-income people pay little or nothing in federal income taxes, the truth is that all working people pay federal payroll taxes, not to mention a plethora of state and local taxes.

A Citizens for Tax Justice study of one flat tax proposal found that the bottom 95 percent of taxpayers would see their taxes go up by an average of $2,887, while the top 1 percent of taxpayers would receive a tax break of $209,562.

3. Deductions and credits make the tax code complicated, not the progressive rate structure.

One of the typical arguments for the flat tax is that it would simplify the tax code. Carson wholly buys into this, claiming a flat or proportionate tax would substantially simplify the tax system. Our current, federal progressive rate structure, however, is not the reason for our tax code’s complexity. It is the myriad tax deductions, credits and loopholes that Congress continually creates. We could simplify the tax system by reforming tax expenditures, as Carson argued, but this would not benefit from or require eliminating the progressive rate structure.

4. A flat tax would still require a revenue collections agency.

In his op-ed, Carson trots out the same irresponsible talking point as Sens. Ted Cruz and Rand Paul, arguing that a flat tax system would allow for the abolition of the Internal Revenue Service (IRS). The truth is that even under a radically simplified tax code, there is no way for a modern state to collect revenue without some agency like the IRS. While calling for the abolition of the IRS may be a good line in a presidential stump speech, it serves to demonize an agency that is woefully underfunded and simply carrying out the role that Congress created for it.

A complex Michigan ballot initiative that would increase various taxes to fund roads, public transit, K-12 education and local governments is a sound idea that, unfortunately, is unpopular among the state’s voters. The measure, Proposal 1, would increase the sales tax from 6 to 7 percent for education, and increase the gas tax and vehicle registration taxes to fund transportation. The measure also includes a provision to improve the EITC. An analysis of the plan estimates it would raise about $1.8 billion annually. The bottom fifth of Michigan taxpayers would receive an average tax cut of $24, while earners in the state’s top bracket would pay an average of $497 to $697 more. Given that Michiganders spend more than $686 a year on vehicle repairs thanks to atrocious roads, the measure is a comparative bargain for most.

The South Carolina Senate Finance Committee passed a road funding bill that would raise $800 million a year by increasing the gas tax and driver’s license and vehicle registration fees. It would also tie the gas tax to inflation and increase the sales tax cap on cars.  Passed earlier, a House plan would raise $400 million by increasing the gas tax and sales tax cap on cars (by smaller amounts than the Senate bill) and introducing a new gas excise tax at the wholesale level. Neither measure includes the immense income tax cuts that Gov. Nikki Haley insisted be included with any bill that raises the state gas tax. For more on the gas tax debate in South Carolina, check out this guest blog post from John Ruoff on the Tax Justice Blog.

Despite the plethora of bad press the state has received for attempting to balance the budget on the backs of low-income people while maintaining ill-advised tax cuts for the wealthy and businesses, Kansas lawmakers continue to propose regressive tax plans to plug the state’s deficit. Sen. Les Donovan, who chairs the Senate Assessment and Taxation Committee, suggested that the committee would consider a measure to increase excise taxes on cigarettes and liquor as well as a bill that would weaken the state’s EITC by reducing the credit and making it non-refundable. The committee will also review a host of small tax exemptions to phase out. Kansas faces an $800 million deficit, $400 million of which must be closed with spending cuts or tax increases.

Over the past decade, West Virginia lawmakers have phased out and eliminated the state’s Business Franchise Tax and reduced the corporate income tax rate from 9 to 6.5 percent. The tax cuts failed to deliver the promised job growth, instead blowing a hole in the state budget; business tax collections next year will be lower than they were in 1990.  Meanwhile, public university students in West Virginia could soon see big tuition increases thanks to shrinking state funding. West Virginia University is considering a 10 percent tuition hike on top of the 29 percent increase over the past five years, while West Virginia State University recently announced a 7 percent hike.

A California Senate committee approved a bill that creates a refundable earned income tax credit (EITC) for low-income and working families. The state EITC would equal 30 percent of the federal EITC for eligible individuals with children.

More tax changes are likely coming to the Buckeye State. Lawmakers are considering a tax package from Gov. John Kasich and an alternative offered by leaders in the House; Senate leaders have indicated that they will draw up their own separate tax plan that will likely include elements from the governor’s proposal and the House proposal.

Kasich’s plan would cut income taxes for the third time in his administration – essentially, another giveaway to the wealthiest Ohioans. His proposal would cut income tax rates by 23 percent across the board, exempt business income for business owners with $2 million or less in annual receipts, and increase the allowed personal exemption for individuals making less than $80,000. To partially pay for these cuts, Gov. Kasich wants to means-test three deductions and credits for seniors – a progressive aspect of his plan that is unfortunately offset by the regressive nature of his rate cuts and business income exemption. A report by Policy Matters Ohio, using ITEP data, found that the governor’s plan would give the top one percent of Ohio taxpayers an average break of $13,000, while the bottom 60 percent of taxpayers would get just 15 percent of the income tax cuts.

But, more significantly, Gov. Kasich’s plan would also increase sales taxes, commercial activity taxes and cigarette taxes, as well as implement a new severance tax on oil and gas, to pay for his income tax cuts. The sales tax rate would increase from 5.75 to 6.25 percent and new services would be added to the base. The excise tax on cigarettes would increase by $1 per pack. These changes would wipe out the modest income tax cuts for the bottom 60 percent of taxpayers and leave them with higher tax bills than before.

As bad as the governor’s plan is, the alternative offered by the House isn’t much better. Policy Matters Ohio says the proposal “is tilted in favor of the wealthiest Ohioans and would increase income inequality in Ohio”. While the House budget would implement smaller income tax cuts than Kasich’s proposal – just a 6.3 percent across-the-board cut, rather than 23 percent – more than half of their cuts would go the top 5 percent of Ohio taxpayers. The bottom fifth of taxpayers would receive an average tax cut of just $2. The House plan would means-test the deduction available for Social Security income and other senior credits – a progressive feature that is, again, outweighed by regressive cuts. In total, the House plan would also expand the business income deduction currently available, another concession to wealthy Ohioans. The House’s plan would reduce tax revenue by $1.2 billion, $700 million more than the governor’s plan.

The Senate has not yet released a plan, but Senate President Keith Faber says tax cuts are definitely planned. An editorial in The Columbus Dispatch suggests that senators follow the governor’s lead and support income tax cuts with a shift to consumption taxes. But the reality is that consumption taxes are regressive and a shakier foundation on which to base state budgets.

Instead, Ohio policymakers should avoid income tax cuts – which will benefit those already doing well – and focus on funding key investments that support working families, the middle class, and businesses alike, such as public education and infrastructure. 

Interpreting corporate tax data shouldn’t be like playing “Where’s Waldo.” Analysts seeking to understand whether big corporations are engaged in tax-avoidance hijinks should be aided, not thwarted, by the information that companies make available in their annual financial reports. A long-brewing effort to require country-by-country (CbC) reporting of corporate income and taxes promises to help demysticize things a few years down the road. But meanwhile, a new, voluntary disclosure of detailed data on the location of offshore profits by the shoe manufacturer Skechers gives a tantalizing taste of just how helpful these disclosures might someday be in ferreting out offshore tax avoidance.

U.S. multinational corporations, in the annual financial reports they file with the Securities and Exchange Commission, generally report their income and taxes in two broad categories: “United States” and “foreign.” And even at this level, Skechers’ 2014 annual financial report raises red flags: how could a shoe manufacturer that says 89 percent of its property, plant and equipment (and 66 percent of its sales) are in the United States report that only 43 percent of its income is attributable to the U.S.?

But Skechers, in what to our knowledge is an unprecedented public disclosure, breaks out its foreign income further, to include the specific countries in which it reports substantial profits. It turns out that in 2014, 71 percent of what Skechers called foreign income, and 44 percent of its worldwide income, was apparently “earned” in the Bailiwick of Jersey. Yet the company reports having no meaningful sales, and no property, in Jersey. Composed of the Island of Jersey and surrounding uninhabited rocks, Jersey is generally recognized to be one of the more notorious foreign tax havens, and not a hotbed of shoe production or sales.

So why would Skechers volunteer this information? The simple answer is that the Securities and Exchange Commission (SEC) asked them to. When the SEC sent a letter to Skechers asking for more detail on the company’s foreign income, the company obliged. Having made this disclosure in a public letter to the SEC, the company presumably saw no point in not also including this information in their annual report.

Would we see similar bombshells if Apple, Microsoft, General Electric and other corporate titans were required to disclose CbC data? CTJ’s research findings on the use of offshore subsidiaries certainly suggest so. A June 2014 CTJ report found that 72 percent of Fortune 500 corporations admit having subsidiaries in known tax havens, and  a May 2014 CTJ report found that American corporations are collectively stashing more than half of their subsidiaries’ profit in just 12 known tax havens. These garish statistics pretty much have to be the product of some aggressive acts of tax dodging.

As we have noted previously, the movement for CbC reporting is gaining steam, at least abroad. And if the recent disclosure from a second-tier shoe manufacturer is any indication, lawmakers interested in real corporate tax reform should be pushing the Securities and Exchange Commission to mandate CbC disclosure for all U.S-based corporations. 

Senator and now presidential candidate Bernie Sanders has one of the strongest records of any elected official when it comes to standing up for tax fairness. In many cases, Sen. Sanders has been the lone voice in the Senate fighting for legislation that would ensure that corporations and the wealthy pay their fair share.

For example, Sen. Sanders is a long-time champion of legislation that would end offshore tax avoidance by no longer allowing multinational corporations to “defer” (forever) paying taxes on their foreign income. While some other proposals would narrow offshore loopholes, ending deferral would totally eliminate the incentive for companies to shift profits to tax havens because it would require them to pay taxes on these profits regardless of where they are held.

Adding to this, Sen. Sanders has introduced legislation that would return the estate tax exemption levels to the more robust 2009 levels ($3.5 million for individuals). This increase in the estate tax would still mean that only the top 0.3 percent of all estates (as opposed to the just the top 0.1 percent as is the case now) would owe anything in estate taxes.

Looking back, Sen. Sanders has repeatedly fought against regressive tax cuts.  During his time in the House of Representatives, he received a perfect score on the Citizens for Tax Justice “Congressional Tax Report Card” for his repeated votes against the Bush-era tax cut bills, including the 2004 bill that included a repatriation tax holiday for multinational corporations, a bill that many Democrats, like then-Senator Hillary Clinton, voted for. In 2010, Sen. Sanders spoke for nearly nine hours straight in the Senate chamber to make the case against extending the temporary Bush tax cuts.

Looking forward, Sen. Sanders’ early campaign materials indicate that tax fairness will be a major part of his presidential campaign. Sen. Sanders laments that many “major profitable corporations have paid nothing in federal income taxes” and that “corporate CEOs in this country often enjoy an effective tax rate which is lower than their secretaries.” With any luck, the addition of Sen. Sanders to the presidential race will serve to bring much needed attention to the egregious inequities in our tax system as well as to his many sensible proposals to correct these same inequities.