Month: September 2015

Michiganders will pay sales and use tax on online purchases for the first time when a new law goes into effect this Thursday. The Main Street Fairness Act, signed by Gov. Rick Snyder in January, requires out-of-state companies with a physical presence in the state, such as a warehouse or distribution center, to collect and remit sales and use taxes on online purchases made by Michigan residents. State analysts estimate that the measure will increase revenue by $60 million annually. The Michigan law is the latest in a series of so-called “Amazon laws,” named after the largest online retailer most likely to be affected by such measures. For more on this story, check out this ITEP blog post.

Conservative lawmakers in Arizona could be gearing up for a push to eliminate the state’s income tax, according to trial balloons in Forbes and by the Arizona Free Enterprise Club (AFEC). The recent advocacy comes from none other than Travis Brown and Stephen Moore, the Scooby Doo villains seemingly behind every terrible state tax plan. In Forbes, Brown uses praise for Gov. Doug Ducey’s education plan as an excuse to argue that Arizona should eliminate its income tax because “now is the time to end the price on work…. There’s no need for such an innovative and financially attractive place as Arizona to slap a growth-discouraging premium on doing business in the state.” Moore argues in a paper on behalf of AFEC that eliminating the income tax would make Arizona more competitive and attract jobs, investments and new residents. Left unmentioned were the disaster in Kansas, where lawmakers took such advice to heart, or the numerous studies showing that businesses and residents don’t follow income tax cuts. 

The budget impasse in Illinois continues with no end in sight. This week, Illinois Sec. of State Jesse White warned that the lights at the state capitol could be cut off if lawmakers can’t reach a deal. Moody’s noted that even reinstating the income tax increase that expired in January, a source of continuing conflict between Gov. Bruce Rauner and the legislature, won’t be enough to close the $5 billion gap. Illinois Comptroller Leslie Munger says the state’s backlog of unpaid bills could hit $8.5 billion by the end of December. Meanwhile, Chicago Mayor Rahm Emmanuel has proposed a city property tax increase of $543 million over the next three years to avoid huge spending cuts.

Deadlock is the name of the game in Pennsylvania, too, where Gov. Tom Wolf and the legislature have yet to agree on a new budget. The governor and key lawmakers met on and off on Monday, which marked 90 days since the start of the fiscal year, but there were no breakthroughs. Gov. Wolf has proposed a tax plan  that would increase education funding and eliminate the budget deficit, while legislators want to privatize state-run wine and liquor stores and reduce pension spending. Wolf says he plans to veto a continuing resolution passed by the legislature since the state has waited too long for a permanent solution. Yields on state bonds have increased as investors see Pennsylvania’s financial situation as increasingly risky. 

The slow march toward a more rational sales tax continues.  On Thursday, Amazon.com (and other e-retailers) will begin collecting and remitting sales taxes owed by Michigan customers.  Once this happens, the share of the country’s population living in states where Amazon collects sales tax will pass the 80 percent mark.

For years, online retailers’ refusal to participate in state sales tax systems has allowed shoppers to evade the tax by purchasing items from out-of-state companies via the Internet (companies that have a “physical presence” in a state must collect sales tax in that state, both on purchases made over the Internet and in “brick and mortar” stores).  When e-retailers don’t collect sales taxes legally owed by their customers, that responsibility falls directly on the customers themselves and the tax becomes all but unenforceable.  The result is a system where items purchased in state at traditional stores are taxed, while those ordered from afar are effectively tax-free.

For years, Amazon.com was the poster child for this tax enforcement nightmare.  As recently as 2011, the nation’s largest online retailer only collected sales tax in five states: Kansas, Kentucky, New York, North Dakota, and its home state of Washington.  With Amazon’s shift toward emphasizing faster delivery times, however, the company has been opening distribution centers in a growing number of states and has come within reach of those state’s sales tax collection laws as a result.

The addition of Michigan as the 26th state where Amazon collects sales tax does not solve all of the problems associated with online sales tax enforcement.  The company is still shirking its tax collection responsibility in nearly half the states, despite its demonstrated ability to comply with those laws in states and localities stretching from coast to coast.  And thousands of other e-retailers with less recognizable brand names are continuing to dodge sales tax collection laws as well.

A comprehensive solution will require action by Congress.  Legislation along the lines of the Marketplace Fairness Act, which passed the Senate in 2013 and is supported by President Obama, could empower states to require that all e-retailers collect sales tax from their customers.  But with gridlock having long ago having become the norm inside in the Beltway, most observers aren’t betting on that reform making it to the President’s desk anytime soon.

The emerging conventional wisdom on Donald Trump’s tax plan is that it is a trillion dollar giveaway to the best-off Americans coupled with a populist flourish in the form of a small tax hike for the carried interest income earned by hedge fund millionaires.

But even Trump’s so-called populism on carried interest is a fig leaf. What appears to be a small hike for money managers may actually be a major tax cut for this privileged group.

Carried interest is essentially wages that money managers disguise as capital gains to take advantage of a special low 23.8 percent tax rate on capital gains—well below the 39.6 percent current top tax rate on regular income. Trump’s tax proposal would eliminate the carried interest loophole but also drop the top rate on ordinary income to 25 percent. The tax rate on carried interest, then, would marginally increase from 23.8 to 25 percent, a small sum for the hedge-fund millionaires who Trump claims are “getting away with murder.”

This supposed tax increase, however, obfuscates the even larger tax break the Trump plan would give to money managers by creating a new, low 15 percent tax rate for pass-through business income.

Pass-through business income is the money that owners of businesses such as partnerships and sole proprietorships report on their personal income tax forms. The most likely consequence of having a special low 15 percent tax rate on pass-through income is that wealthy Americans, including money managers, will find ways to disguise their salaries as pass-through business income to take advantage of the low rate.

Put another way, the Trump plan creates an entirely new path for hedge fund and private equity money managers to game the tax system. Rather than imposing a 1.2 percent tax hike on carried interest income, Trump’s plan would effectively lower the tax rate on carried interest to 15 percent. Notwithstanding Trump’s claims about working families being taken off the tax rolls, it’s the hedge fund class that will be writing “I win” on their tax forms as a result of this provision.

If the idea of a special low rate for pass-through income sounds familiar, it’s because it has been tried before. Cutting the tax rate on pass-through income was a centerpiece of Kansas Gov. Sam Brownback’s supply-side tax-cutting experiment several years ago. Brownback claimed that a special zero percent tax rate on pass-through businesses would result in a wave of job creation—and, as is now widely recognized, no such wave ever occurred and the provision helped devastate the state’s revenue. 

The bottom line is that Trump’s pass-through tax break would likely make an already unsustainable tax plan even worse. A new Citizens for Tax Justice analysis of Trump’s proposal estimates that the plan would cost nearly $11 trillion over a decade and give the deepest tax cuts to wealthy individuals and corporations. The tax avoidance prompted by Trump’s business tax cuts would likely dig this fiscal hole even deeper.  

*Updated as of November 4, 2015

Donald Trump released a tax plan today that is missing some details. But a preliminary analysis of the plan by Citizens for Tax Justice finds that it would cost $12 trillion in its first decade. The plan would reduce taxes on all income groups, but by far the biggest beneficiaries would be the very wealthy.

This is yet another example of a presidential candidate making a mockery of populism by trumpeting a massive tax break for the rich as a plan that will benefit average Americans. The top 1 percent of Americans will receive an average tax break of $227,000 per year while the bottom 20 percent will receive an average tax cut of only $250.

Trump claims the plan will be revenue neutral, but he has made bombastic exaggerations before and this time is no different. In fact, there is no possibility that this plan would not be a gigantic tax cut for the rich and a gigantic revenue loser for the government.

Trump also claims he will pay for the plan by closing tax loopholes for the rich. But in truth, his plan would expand loopholes for the rich and cut their tax rate by 40 percent. His plan also would cut the corporate tax from 35 to 15 percent, which also would mainly benefit the rich. And his plan repeals the estate tax, a tax that only the very richest of the rich pay.

Click here to read CTJ’s full analysis of Trump’s proposal. 

There have been lots of fireworks since the beginning of the year in Maine over tax policy, and they are unlikely to stop anytime soon. This week, the Maine Republican Party announced its intention to seek a ballot measure that would implement a flat 4 percent income tax, replacing the current graduated income tax structure. Their goal is to eventually eliminate the state income tax entirely.

If voters were to approve this ballot measure, the result would be a massive tax cut for the wealthiest Mainers and a steep reduction in the quality of critical public services that would undermine the state’s economy. The Institute on Taxation and Economic Policy (ITEP), estimates that shifting to a 4 percent flat income tax by 2021 would cost $600 million in state revenues – about half of all the state money spent on K-12 education according to the Maine Center of Economic Policy. ITEP also found that half of the tax cut would go to Mainers making more than $175,000 annually, with the top 1 percent of taxpayers receiving an average cut of over $21,000.

Meanwhile, the 20 percent of Maine taxpayers that make do with just an average of $23,000 a year would get a tax cut of only $14 (the vast majority of low-income Mainers would see no cut at all). The ballot measure doesn’t specify which budget cuts or tax increases will happen to make up the lost revenue, but one can be sure that any of the paltry tax cuts given to middle and working-class Maine families will be outweighed by higher sales and property taxes or cuts in public services. ITEP crunched the numbers- if all of the lost revenue was replaced with a higher sales tax, the average taxpayers the in bottom 80 percent would see a significant tax hike while the majority of the state’s wealthy taxpayers would still make out with sizeable tax cuts.

The most egregious part of the Maine Republicans’ push to lower income taxes that benefit the wealthy is that the plan would undo most of the good that came about from tax reform enacted in Maine this year. In a bipartisan compromise, Republican and Democratic legislators rebuked the governor’s initial proposed giveaway to the wealthy and instead cut income tax rates across the board while broadening the tax base. They also implemented or enhanced refundable tax credits for working families, doubled the homestead property tax exemption, cut estate taxes and increased the sales tax. The package had its flaws- mostly in that it is a small tax cut on net and shifted some responsibility for paying for state services away from the personal income tax and onto regressive sales taxes. However, it also made great strides in improving tax fairness and sustainability in the state. Now Republicans want to undo the hard work of the previous legislative session and put Maine on a worse path.

One can confirm that this recent push for a flat income tax is all about politics and not about the welfare of the state by looking at the other proposals included in this ballot initiative, which include draconian reforms to social services meant to punish the low-income residents who rely on them. Undocumented immigrants, felons convicted of drug crimes and the unemployed would be kept from getting any TANF or SNAP benefits, the amount of time citizens could collect benefits would be reduced, and all adult TANF beneficiaries would be subject to drug testing, a policy that has failed in many states. As Jesse Graham of the Maine People’s Alliance laments, Maine Republicans want “tax cuts that primarily benefit the wealthy and new attacks on poor people and immigrants.” Apparently what they don’t want is responsible tax policies that would work for everyone, not just the privileged few. 

Progressive activists in California introduced a new ballot proposal this week that would make permanent temporary income tax increases on the state’s highest earners included in Proposition 30, which passed in 2012 and expires in 2018. Under the measure California couples making more than $580,000 annually would pay higher rates on their income. The new measure would also implement a higher income tax rate on couples earning more than $2 million annually. If enacted, the proposal would increase state revenues by about $10 billion each year, with the money going to K-12 education, healthcare subsidies for low-income citizens, and early childhood development. Last week, a coalition of labor unions endorsed their own version of a Proposition 30 replacement. That measure would extend all of the income tax increases under Proposition 30 through 2030, raising $7 to $9 billion in new revenue earmarked to K-12 funding. Neither of the new proposals would extend the sales tax increase in Proposition 30 past its 2016 expiration.

Arizona Rep. Charlene Fernandez is taking on the state’s controversial income tax credits for private school tuition, saying the program has “existed within a system that lacks transparency and accountability” for almost 20 years. Fernandez points out that, even though fewer students attend private schools in Arizona now than when the credits were created, more state revenue is being spent on private school tuition. An investigation by The Arizona Republic found that while legislative staff estimated the credits would cost the state just $4.5 million annually in 1997, today they cost $140 million every year. Worse, over $80 million in state money has paid administrative fees for scholarship organizations since 1998 instead of supporting students. Rep. Fernandez wants stricter oversight of the program, but partisan resistance has blocked her efforts.

Wallethub recently put out a 50-state study that combines their survey data with ITEP’s distributional data from Who Pays? to compare public perception of state and local tax fairness with the reality on the ground. According to the results of Wallethub’s survey, both Democrats and Republicans support progressive taxation at the state level, despite every state having an upside down and regressive tax system. Though the survey data is useful in pointing out that the majority of Americans support progressive taxation, it’s best to stick to ITEP’s distributional analysis as the best measure of fairness since in some cases perception can distort reality.

New Jersey lawmakers could support an increase in the state’s gas tax, which hasn’t been raised since 1988, to address a huge backlog of transportation maintenance and construction projects. However, some legislators, including Assembly Minority Leader Jon Bramnick, want to couple any gas tax increase with a decrease in New Jersey’s estate tax. Currently, the estate tax is levied on estates valued at more than $675,000; raising the threshold to the federal level of $5.34 million, as some advocate, could cost New Jersey $300 million in lost revenue. Worse, the benefits of an estate tax cuts would accrue to just over 3,300 wealthy households, making an estate tax cut an especially poor offset for increased gas taxes, which would disproportionately affect low-income and middle-class households. Bramnick has also suggested a gas tax increase could be avoided if the state were the cut $1 billion from its in education budget.

A big property tax cut championed by Iowa Gov. Terry Branstad has failed to pan out as predicted. Two years ago, legislators limited the growth rate for property tax assessments on residential and agricultural properties, reduced the assessment threshold for commercial and industrial properties and provided tax credits to businesses and individuals. Proponents argued that the package would stimulate the economy. But, as The Associated Press reports, “it is difficult to assess exactly how many jobs have been created or businesses enhanced because of the tax cut. The state’s unemployment rate has declined over the past year, but the tax cut can’t be directly credited with that.” Today, the tax cuts are a big drag on the state budget, costing $260 million in this fiscal year alone. Much of that money was earmarked as state aid to local municipalities, who were hit hard by lost property tax revenue. 

After months of budget negotiations, legislators in Alabama and North Carolina limped to the budget finish line last week. Legislators left Montgomery and Raleigh with budget agreements that represent missed opportunities, a disregard for the near-future revenue needs, and lessons about punting difficult governing decisions down the road.

Alabama: Throughout the legislative session (and two special sessions) Alabama’s Gov. Bentley proposed revenue raising packages to close a significant general fund gap. His proposals were designed to help set the state on a path toward fiscal sustainability and plug the state’s $200 million short fall while ensuring vital services that improve the quality of life for all Alabamians were protected. Yet conservative lawmakers refused to compromise or put forward a plan free of damaging spending cuts.  Ultimately, the legislature passed a cigarette excise tax of 25 cents per pack and approved a permanent shift of some use tax revenue from the Education Trust Fund to the General Fund. All told the tax hikes raised about $164 million so the state still resorted to some cuts to balance its books.

Kimble Forrester with Alabama Arise offers a thoughtful summary of learned lessons from this year’s lengthy budget debate. He appreciates that a budget deal was reached before the start of the state’s fiscal year on October 1, but cautions that lawmakers missed an opportunity.  From his editorial in The Huntsville Times:

“Avoiding disastrous cuts to Medicaid and corrections is commendable, but why stop short of level funding for other services that have endured years of cuts?“

 Clearly lawmakers didn’t go far enough to sure up the state’s coffers in anticipation of future needs, but some good may have come out of the budget debate. Forrester says that at least two lessons were learned:

1.) “There’s growing support for cutting taxes at lower incomes and raising taxes at higher incomes.” 2.) “Momentum is growing to modernize Alabama’s upside-down tax system.” Let’s hope lawmakers take these lessons to heart and come back next session read to continue on a path toward tax fairness and sustainability.

North Carolina: Lawmakers in North Carolina also finally crossed the budget finish line.  While the drawn out budget negotiations resulted in a deal that mostly walked back any significant spending cut threats for the time being (teachers’ assistants and drivers education were spared), the next time lawmakers put together a 2 year spending deal they will have $1 billion less revenue available thanks to delayed tax cuts included in the final package. Most significantly, the budget reduces the state’s personal income tax rate from 5.75 to 5.499% starting in 2017 and loosens the revenue target needed to reduce the rate for profitable corporations to 3%. Regrettably current lawmakers are able to tout that they balanced the state’s budget while also cutting taxes, but these tax cuts aren’t actually being paid for in the current budget.  

In her letter urging Governor McCrory to veto the budget last week (he regrettably signed it into law on Friday), Alexandra Sirota of the NC Budget and Tax Center argues:

 “A compromise budget shouldn’t compromise North Carolina’s future. This budget does not reflect the need for the state to serve as a partner in economic development and economic opportunity for all North Carolinians.”

It’s worth noting that these tax cuts cumulatively cost $1 billion, on top of the $1billion in tax cuts the legislature passed in 2013. Sadly, the only lesson North Carolina lawmakers seem to be learning is how to dig their budget hole deeper. 

Last week the Coca-Cola corporation revealed that it may have to pay $3.3 billion in back taxes to the U.S. government. The disclosure, buried in a corporate filing, says that the reason for this tax hit is the company’s allegedly inappropriate use of transfer pricing to shift its intangible property out of the United States and into low-rate tax havens. Put another way, the company appears to be pretending, for tax purposes, that some of the income it earns each year in the United States was actually generated in another country.

The disclosure comes at a valuable time, because Congress is now focusing its attention once again on the problem of how to deal with the mountains of offshore cash held by Fortune 500 corporations – and Coca-Cola is a very big player in this debate. At the end of 2014, Coke disclosed having a whopping $33.3 billion in permanently reinvested foreign earnings – 16th highest among the Fortune 500. These are earnings that the company has stated its intention to keep offshore indefinitely, and for this reason it does not have to pay even a dime of U.S. tax on this $33.3 billion.

Even without the help of an official notice from the Internal Revenue Service, one could be forgiven for suspecting that all was not right with Coca-Cola’s statements about the location of its profits. In 2014, the company generated 43 percent of its worldwide revenue in the United States, but somehow that only translated into 17 percent of its income being in the U.S. And a 2014 CTJ report found that Coca-Cola had at least 13 subsidiaries in known foreign tax havens, including three in the Cayman Islands. These facts alone are not enough to show conclusively that Coke is aggressively shifting its U.S. profits into tax havens, but certainly the most likely reason for having three Cayman Islands subsidiaries is to shift profits there–and that is essentially what the IRS has accused them of doing.

Coke’s $33 billion in offshore cash is a decent chunk of the $2.1 trillion in permanently reinvested earnings that have captivated the minds of Congressional lawmakers. Lawmakers on one side claim these are legitimate foreign earnings that big corporations are yearning to bring back to the U.S., and that with a lower corporate tax rate they would immediately do so. Skeptics argue that these companies are simply moving their U.S. profits offshore on paper in hopes of reaping tax rewards. The latest disclosure from Coca-Cola strengthens the argument that this mountain of allegedly “foreign” offshore profits are not, in fact, “the real thing” at all.