Month: September 2015

Alabama Gov. Robert Bentley has publicly said his state has a revenue problem, not a spending problem.

Perhaps this isn’t the most profound statement, but it is remarkable coming from a Republican governor who 1.) governs a state that would require a constitutional amendment to increase its low personal income tax rate, and 2.) has signed Grover Norquist’s infamous no-tax pledge.

The governor’s resolve will once again be tested this week as Alabama lawmakers reconvene for a second special session to address the state’s projected $200 million budget gap before the start of the state’s fiscal year on Oct.1. Gov. Bentley has twice proposed revenue raising packages to help set the state on a path toward fiscal sustainability and ensure vital services that improve the quality of life for all Alabamians are protected. Yet conservative lawmakers have thus far refused to compromise or put forward a plan free of damaging spending cuts.

This week’s revenue raising discussions are being greeted with anticipation and hope by many, including the 200 groups who signed on to the Stand Tall Coalition’s letter. The letter cautions lawmakers that, “Further cuts will set our state’s health system and economy on a dangerous course.” The stakes are as high as they were during the state’s regular session, if the state fails to raise new revenue,– rural hospitals could close, funding for quality childcare could be slashed,  and state troopers could close their jobs.

That, of course, is the crux of the problem with refusal to increase taxes, not just in Alabama but in other states. In theory, no-tax pledges often disconnect taxes from vital public services that our taxes fund. In practice, refusal to raise revenue often comes at a steep cost to the general public. So it’s refreshing that Gov. Bentley is pushing lawmakers to send him a bill that will raise enough revenue to plug the state’s budget gap without having to slash funding for vital programs and services.  

The governor vetoed a cut-filled budget in June and called lawmakers back for a special session in early August to seek a revenue solution to the state’s revenue problem.  However, the first special session fell apart when the House and Senate couldn’t agree on a way forward, thus lawmakers are back in Montgomery this week for a second special session.

The governor is once again proposing $260 million in revenue-raising measures that are similar to those he put forward during the first special session – eliminating the deduction for the Social Security portion of payroll taxes (taxpayers who itemize can currently deduct the full value of their payroll taxes an uncommon state tax policy practice), a 25-cent cigarette tax increase, and a few small business tax changes. The changes to the state deduction for payroll taxes is a long sought reform that will broaden the state’s income tax base and shore up revenues for the long term.  An ITEP analysis found that 65 percent of the revenue raised from the payroll deduction reform will be paid by the top 20 percent of taxpayers.

On Wednesday, the House Ways and Means General Fund Committee approved bills that raised $130 million in taxes on car rentals, car titles, cigarettes, and businesses. Should this package become law, the state’s car rental tax would increase from 1.5 to 2 percent, the car title fee would increase to $28 up from $15, and the tax on cigarettes would go up to 25 cents.   The full House is expected to vote on the bills Thursday.  Gov. Bentley isn’t satisfied with the House committee’s tax package, but he calls the bill a “step in the right direction” and says that more must be done. He cautions, “If the gap is not closed then they (lawmakers) will be closing down some facilities in the state.”

It remains to be seen if compromise will win the day in Montgomery and if enough revenues will be raised, but the fact that House members supported revenue raising measures for the first time this week is a positive sign.

Louisiana voters will consider ballot initiatives next month regarding road and bridge funding. The first measure would steer tax revenues from oil and gas from the state’s rainy day fund to its transportation fund. If approved, $21 million would shift from the rainy day fund to the state highway system in each of the next five years, with up to $100 million annually shifted to transportation thereafter. The second measure would establish a state transportation infrastructure bank, which would use public funds to offer loans and credit to public and private transportation projects. Of course, Louisiana’s legislators could also address the state’s $12 billion backlog in infrastructure needs by raising the state gas tax, which hasn’t changed in over 25 years or kept pace with inflation.

Kansas Gov. Sam Brownback has changed his spin on the disastrous tax cuts he enacted two years ago, preferring now to focus on employment numbers instead of the promised revenue growth. When asked about his policies by a local reporter, Brownback replied, “The tax cuts were always designed around jobs and economic growth. Wasn’t designed around revenue for the state.” This, of course, is false – in 2012, Brownback and economist Art Laffer claimed tax cuts would increase revenue growth by 5 percent. And despite Brownback’s sunny job growth rhetoric, Kansas still lags the nation in that category. But what use are facts to a good story?

The Illinois budget might be a disaster at the moment, but one company will still get a tax cut. Amazon will receive a corporate tax credit for a new warehouse in Joliet, despite the fact that the corporate recruiting program was put on hold in June during the budget showdown. Economists have consistently questioned whether tax incentives matter to company relocation, and some Illinois legislators called for the decision to be reviewed. The state Department of Commerce and Economic Opportunity says the tax credits were awarded to Amazon to honor a commitment made before the suspension of the corporate recruiting program, though some question that logic. Rep. Jack Franks asked, “”I’m not sure why we would provide tax credits to a company that’s already made a decision to come here. If they’ve already said they’re doing this, what benefit is there to the state?”

Tax reform proposals from conservative legislators in Georgia would make life’s necessities more expensive, according to an editorial in The Atlanta Journal-Constitution. Columnist Jay Bookman, citing ITEP data, argues that conservative plans to cut the income tax and replace the lost revenue by increasing sales taxes and applying the sales tax to groceries would result in higher taxes for middle and low-income families and tax breaks for corporations and wealthy individuals. Bookman also notes that the move could have a negative impact on the state’s bond rating if revenues don’t materialize as expected, and that families at the bottom of the income scale have already lost purchasing power.

Another editorial in The Toledo Blade argues that Ohio workers fare worse than others across the country, thanks in part to the misguided policies of current Gov. John Kasich. The column cites ITEP data to show that, under the governor’s new tax plan, the top one percent of Ohio taxpayers will receive an average cut of $17,600 while the bottom 20 percent will pay more. During his tenure Kasich also eliminated the estate tax, which provided revenue for local aid. With less aid from the state, poorer cities have struggled to get by or have been forced to raise local taxes on their already cash-strapped residents. 

Public outrage over the financial crisis may have subsided in recent years, but the lasting legacy is a nation that remains acutely aware of exploitative business practices that line the pockets of corporate executives and shareholders at the expense of ordinary working people.

Perhaps this is why H&R Block and Intuit quietly lobbied for a provision currently in the Senate appropriations bill that would make it more difficult for low-income taxpayers to claim the Earned Income Tax Credit. Currently, individuals filing their own taxes have to fill out a one-page form to claim the credit. H&R Block thinks these folks should have to fill out a longer form with repetitive and irrelevant questions.  Robert Greenstein of the Center on Budget and Policy Priorties explains why this would be unneccessary and overly burdensome. And an Aug. 24 Vox article by Dylan Matthews brilliantly describes why this measure is ridiculous.

“The only possible reason to change the form, then, is to confuse taxpayers enough that even more of them will pay companies like H&R Block to prepare their returns,” Matthews wrote.

H&R Block, in response to negative publicity, defensively argued in a press release that it is lobbying for this provision to preserve the EITC and cut down on fraud by “do-it-yourself” filers. Nonsense. Someone should tell the company’s crisis communications team that it is not good PR to both brazenly mislead and condescend within the span of five paragraphs. Tax preparers such as H&R Block, Jackson Hewitt and Liberty Tax Service have a long history of exploiting low-income taxpayers, not fighting to preserve and strengthen programs, including the EITC, that lift people out of poverty. Further, implying that low-income taxpayers are deliberately committing fraud is highly offensive.

Erroneous returns are often due to paid tax preparers’ errors. The tax code is extremely complex, but tax preparers needn’t undergo special training or certification. A 2014 GAO investigation of 19 tax preparers found that only two–barely 10 percent–properly completed tax forms. The remaining 17 made mistakes ranging from finishing a return that was $57 too little to preparing a return that grossly inflated the refund by $3,718. H&R Block should clean its own house and industry if it is genuinely worried about EITC overpayments. And while it is at it, the company should cease with the paternalistic language that essentially labels low-income people as  incapable.

H&R Block’s effort to make it more difficult for consumers to claim the EITC without tax preparers’ help is also highly suspicious given that for years the industry exploited low- and moderate income taxpayers with usurious refund anticipation loans (RALs). The RAL industry flourished in the 1990s and early aughts when electronic filing became commonplace. The loans were an immediate advance against a taxpayer’s calculated refund. Tax preparers often charged consumers a preparation fee, electronic filing fee, as well as a fee for the loan advance. By the time tax preparers finished tacking on charges, consumers often paid companies 10 percent or more of their refunds.

According to the National Consumer Law Center, 90 percent of people who received refund anticipation loans were low-income taxpayers. It’s not hard to surmise why. For families living paycheck-to-paycheck, the appeal of immediate cash to make ends meet often, by necessity, trumps concerns about predatory lending rates. Tax preparers know this, and that’s why the industry profited from RALs by more than $1 billion annually during its heyday. In 2010, the IRS passed regulations that made it less enticing for banks to grant RALs and a couple of years later, most big banks got out of the RAL business.

Don’t shed any tears for H&R Block and other tax preparation firms, though. Tax preparers continue to profit off low-income taxpayers through Refund Anticipation Checks. For consumers who cannot pay up-front costs, tax preparers offer to deduct the preparation fee from their refunds. Of course the fees add up. There’s the preparation fee, the federal filing fee, the state filing fee, and other add-ons.  

Consumer watchdog organizations continue to highlight how some tax preparers charge excessive fees. The groups are educating the public about how to file their own returns and receive refunds using their own bank accounts or other financial products to avoid copious fees. In addition, a number of local nonprofit organizations will prepare returns for low- and moderate-income people for free. H&R Block and other tax preparation firms know this, but they have a financial interest in keeping consumers dependent upon their services, hence the quiet lobbying to make it more difficult to claim the EITC.  

The public doesn’t begrudge corporations earning big profits. But it rightly detests corporations that have a willful disregard for public wellbeing. The EITC does not exist to provide business opportunities that enrich tax preparation firms at the expense of the American public. H&R Block and other corporations’ effort to complicate the EITC for the transparent reason of greasing their corporate palms is nothing short of shameful.

As Labor Day weekend approaches, a tanned and rested Congress is poised to return to Washington to hash out corporate tax changes. Much of the debate over corporate tax reform in Washington sensibly focuses on how to encourage Fortune 500 corporations to repatriate and pay U.S. taxes on the $2.1 trillion on profits they have declared to be “permanently reinvested” (and thereby free of U.S. taxes) overseas. But an overlooked fact in this debate is just how much tax companies have avoided by keeping these profits (on paper, at least) offshore. An April 2015 CTJ report estimates that Fortune 500 corporations likely have avoided $600 billion in federal income taxes on these offshore profits.

Corporations declaring their intention to keep profits permanently offshore are required to estimate, if possible, the amount of U.S. tax they would pay if they repatriate these profits. Most companies legally avoid complying with this rule simply by declaring that it is too complex to make the calculation. But CTJ went through corporate filings and found 57 Fortune 500 corporations do comply. (See table below for details) These companies estimate they would pay a 29 percent tax rate on repatriation. (Since the federal tax on repatriated profits is 35 percent minus any taxes already paid to foreign countries, this means these companies have paid an average tax rate of just 6 percent on these profits, an indicator that much of this income is being kept in low-rate tax havens.)

Hundreds of other companies with offshore cash fail to make this disclosure, so it is impossible to know precisely how much corporate income tax they have avoided on their offshore cash. But if these companies, which include notorious tax avoiders General Electric, Pfizer, Merck and IBM, owed tax at the same 29 percent average rate reported by disclosing companies, the unpaid tax bill on Fortune 500 corporations’ offshore cash would be $600 billion (that is, $2.1 trillion times 29 percent). Since almost two-thirds of Fortune 500 corporations disclose owning subsidiaries based in offshore tax havens, it seems likely that many of these corporations are sheltering their “permanently invested” profits in these havens.

President Obama and congressional tax writers are sensibly focusing their energies on finding a way to make companies with offshore cash pay at least some tax on these profits. But Obama has proposed a tax rate of just 14 percent, less any foreign taxes already paid. (Republicans in Congress will likely propose a tax rate much lower than that.) This would bring in just $220 billion. That’s nearly $400 billion less than the full amount owed. CTJ’s finding suggests that any plan that would bring in less than $600 billion would amount to yet another giveaway for corporate tax dodgers. It’s time these offshore tax dodgers pay what they owe.

The Texas Supreme Court this heard oral arguments in a school finance case regarding recession-era education budget cuts. In 2011, the Texas Legislature cut K-12 education spending by $5.4 billion and per-pupil spending declined by more than 8 percent. More than 600 school districts sued the state, arguing that the cuts make it impossible to meet minimum education standards and that funding is inadequate and unfairly apportioned. Over the past four years, the state has restored about $5 billion in funding, but District Judge John Dietz still sided with the plaintiffs, declaring that the funding system is unconstitutional. The state then appealed the case. Texas, which has no income tax, relies on local property taxes to fund its public schools. In 1993 the legislature passed the “Robin Hood” plan, which mandated some revenue sharing between wealthy and poor school districts.

The latest group to be fed up with the interminable budget impasse in Illinois is credit rating agency Moody’s, which said that the stalemate is a sign of “weak governance.” Moody’s warned Gov. Bruce Rauner and lawmakers that failure to reach an agreement by late September would turn a projected deficit of $5.14 billion into an actual one. Moody’s suggested that raising the income tax would be the most logical solution, as the state “has the economic capacity to absorb higher income tax rates. It is one of only eight states that levy a flat individual income tax. Among those states, Illinois’ current rate is comparatively low: the average among these states is 4.4%, compared with 3.75% in Illinois.” Increasing the personal income tax by 1 percent and the corporate income tax by 1.5 percentage points would generate approximately $2.4 billion in additional revenue.

Michigan group Citizens for Fair Taxes is fighting for a ballot initiative that would increase the state corporate income tax rate from 6 percent to 11 percent, a change they say would bring in $900 million annually for public roads and reverse the tax shift from businesses to working families begun under Gov. Rick Snyder in 2011. About one-third of Michigan businesses are subject to the corporate income tax. If the group collects 253,000 signatures, the proposal would go before the legislature. If the legislature fails to act or votes down the proposal, it will be put to the voters on the November 2016 ballot.

Connecticut Gov. Dannel Malloy is fighting to keep GE headquarters in the state after the company threatened to move. Some state leaders want to repeal the combined reporting requirement just enacted as part of the tax package supporting the two-year budget in June. Malloy is working with officials to create a sweetheart package of tax incentives to keep GE in the state. The move comes after GE used its political clout to force the legislature into special session this June, after the tax package narrowly won legislative approval despite business objections. Numerous studies have shown that taxes are not the primary driver behind business relocation decisions, but GE and other business still use the threat of relocation to wring concessions out of state and local governments.

Speaking of dubious tax claims, Art Laffer urged West Virginia leaders to slash income taxes to stimulate economic growth, weeks after the state’s commerce secretary said taxes were a non-issue in business relocation decisions. The secretary stated that West Virginia’s uneducated workforce was a larger factor in attracting new companies to the state. Unmoved by facts, Laffer told the West Virginia Chamber of Commerce that lower taxes and a reduced social safety net would result in more growth: “If you tax rich people and give money to poor people, you’re going to get lots and lots of poor people and no rich people.” Laffer’s remarks were praised by Senate President Bill Cole, who said, “There’s no question in my mind that, by itself, it could be the single biggest and largest economic driver that this state has ever seen. I think he’s spot on. I think, virtually, everything he’s said has proven itself out in history.” Clearly Sen. Cole has never been to Kansas.

A recent op-ed in The Huntsville Times outlines how Alabama legislators could reform the state’s tax system without constitutional amendments. The four proposals outlined would reform the state’s business privilege tax by reducing rates for small businesses and increasing them on large multinational businesses, require combined reporting on corporate income tax forms, increase the cigarette excise tax, and transfer use tax revenues to the General Fund. Author Carol Gundlach of Arise Citizen’s Policy Project says these reforms would avoid harmful cuts to Medicaid, prisons and mental health being considered by legislators.

Do you have a hot state tax tip? Send it to sdpjohnson@itep.org for the next State Rundown!

During presidential primaries, we expect candidates to talk about their big plans for moving the country forward and addressing the nation’s most pressing issues. We expect soaring rhetoric based on so-called traditional ideals. Discussing the world in right v. wrong extremes is much easier than conceding that there are myriad shades of gray and that actual governing and policymaking is always easier in theory than it is in practice.

So, you can’t blame Republican presidential candidate Dr. Ben Carson, polling at second just a few percentage points behind current frontrunner Donald Trump, for touting a tax plan that would replace the nation’s current tax system with one based on tithing. Regardless of religious or secular affiliation, most of us understand the biblical concept of giving 10 percent of our income to religious authorities.

During the first GOP primary debate, Carson said under his 10 percent flat tax “tithe” plan, “[y]ou make $10 billion, you pay a billion. You make $10, you pay one.” Sure, it may sound easy, but it is utterly unrealistic, and, based on the limited details he has released, it would fail to raise enough revenue to fund Social Security, unemployment and labor programs, let alone the entire federal government.

Carson has never specified whether his plan would actually include all income or exclude capital gains incomes, as many other tax proposals do.

Without specific details, Citizens for Tax Justice (CTJ) Director Bob McIntyre made a generous estimate of how much Carson’s 10 percent flat tax could reasonably raise by simply multiplying total federal adjusted gross income estimated for 2016 ($11.25 trillion) by 0.10. This would yield tax revenues of only $1.1 trillion. The Office of Management and Budget (OMB) estimates that the federal government will raise an estimated $3.5 trillion and spend $4 trillion in 2016. In other words, Carson’s plan likely would raise only 32 percent of the revenue of the current tax system and pay for only 28 percent of estimated government spending.

Further, McIntyre said, arguing the U.S. Tax system could be based on tithing misrepresents how societies functioned during ancient times. “Tithing was instituted to support the church,” he said. “But there were also taxes to support the government, too — pretty heavy ones during the Roman ascendancy.”

But Carson is sticking to his guns, stating that he has talked to economists who said with enough loophole closing a workable tax rate would be “somewhere between 10 and 15 percent.” However, our calculation demonstrates that even with every deduction eliminated, Carson’s 10-percent flat tax would increase the deficit by $3 trillion in just one year.

Even if Carson increased the rate of his flat tax, it would still be bad policy for the nation. Flat taxes plans are generally regressive. A CTJ analysis of one revenue-neutral flat tax plan found that it would raise taxes on the bottom 95 percent of taxpayers by an average of $2,887, while cutting them by an average of $209,562 for the richest one percent of taxpayers each year.

Carson is not alone among the Republican candidates in advocating some form of a flat tax. Ted Cruz, Rand Paul, Mike Huckabee, John Kasich, Rick Perry, Bobby Jindal, Lindsey Graham, and even Donald Trump have either endorsed or said that they are considering proposing a flat tax system. The only candidate to specify his flat tax plan with any detail is Sen. Rand Paul, whose plan would blow a $15 trillion hole in the budget over the next ten years, according to CTJ’s estimate. But Carson’s 10-percent plan would cost far more than even Paul’s proposal.