Month: November 2015

Congress Must Act Now to Stop Pfizer and Other Companies from Inverting

Posted on by tarek
November 23, 2015 05:16 PM
By Richard Phillips, Senior Policy Analyst at ITEP | | Bookmark and Share

On Monday, Pfizer and Allergan announced that they have reached an agreement to pursue the largest corporate inversion in history, a move which may allow Pfizer to avoid paying billions in taxes by pretending to be a foreign corporation.

The announcement came just days after the Treasury Department released a new series of regulations to curb corporate inversions. While the new regulations are helpful, Pfizer’s planned inversion is a stark reminder that to stop the flow of inversions, congressional, not just executive, action is required.

Pfizer’s move to invert is the latest in its long history of aggressive tax avoidance. As detailed in a recent report by Citizens for Tax Justice (CTJ), Pfizer is holding at least $74 billion in cash offshore to avoid taxes and discloses having 151 subsidiaries in known tax havens. Further, a new report by Americans for Tax Fairness on Pfizer’s tax dodging found that the company may have an additional $74 billion in earnings offshore, meaning that the company may be holding as much as $148 billion offshore. Unfortunately, the U.S. tax code enables corporations like Pfizer to pursue a business strategy of reducing taxes to as little as possible to boost their bottom line.   

While some lawmakers say that nothing short of full corporate tax reform is required to stop corporate inversions, the reality is that Congress could stop inversions tomorrow with a pair of simple pieces of legislation. First, Congress could pass the aptly named “Stop Inversions Act of 2015,” which would not allow companies to claim to be foreign if the company continues to be managed and controlled in the United States or if a majority of the “new company” is still owned by the former shareholders of the original American company. Second, Congress could pass legislation like Rep. Mark Pocan’s “The Corporate Fair Share Tax Act” or the “Stop Tax Haven Abuse Act,” both of which would curb the main advantage of inverting, the ability to strip earnings out of the United States and into lower tax jurisdictions.

Until Congress passes legislation to prevent corporate inversions, Pfizer and other bad corporate actors will continue to exploit U.S. laws to avoid paying their fair share in taxes.

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Why Lawmakers Should Say No to Tax Extenders, Yes to the Working Families’ Tax Credits

Posted on by Alex Welch

November 23, 2015 01:50 PM | | Bookmark and Share

Read Report as a PDF.

Congress is likely to consider a package of legislation primarily made up of tax breaks for business, known as the “tax extenders.” The cost of passing the tax extenders for two years would be nearly $97 billion according to the Joint Committee on Taxation. The 10-year cost for the continual extension of these provisions would be nearly $740 billion.

This year some lawmakers are pushing to make many of the tax extenders a permanent part of the tax code. In fact, the House Ways and Means Committee has passed a number of bills making permanent or even substantially expanding the cost of some of the tax extenders, including the research credit, “bonus” depreciation, and loopholes that encourage offshore tax avoidance. Further, lawmakers are negotiating a deal to make many of the tax extenders permanent in exchange for making permanent expansions to the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).

Lawmakers should keep three points in mind when considering how to deal with the tax extenders package:

1. Most of the tax extenders are ineffective giveaways to business that should be either substantially reformed or allowed to expire.

2. Any renewal of the tax extenders should be paid for.

3. To really help Americans, Congress should make permanent the enhancements to the EITC and CTC.

1. Most of the tax extenders are not worth keeping.

Of the more than 50 tax extenders, just four, bonus depreciation, the research and experimentation tax credit, the active financing exception (AFE) and the controlled foreign corporations look-through rule (CFC Look-Thru Rule), make up 62 percent of the cost of the package. These tax breaks are costly tax giveaways to large corporations that do not provide much, if anything, in economic gain. They should be allowed to expire.

The most costly tax extender is bonus depreciation, which alone will cost $246 billion over 10 years and represents one-third of the package. Congress first enacted bonus depreciation during the George W. Bush administration as a supposed economic stimulus. It has been reenacted or extended many times since then with no discernible positive effect on business investment. A study by the non-partisan Congressional Research Service (CRS) found that depreciation breaks are “a relatively ineffective tool for stimulating the economy.” Given its ineffectiveness and the fact that the economy has largely recovered, there is no reason to renew this costly provision.

The second most expensive provision of the tax extenders, costing $109 billion over 10 years, is the research credit. While promoting “research” and “innovation” is a laudable goal, the research credit is a poorly targeted way of pursuing that goal. Most of the activity that the credit rewards would have occurred anyway. In addition, the research that ends up being subsidized is often of dubious value, such as the development of new soda flavors and packaging designs. The research credit should either be substantially reformed or allowed to remain expired. It certainly should not be doubled in size, as some in Congress are proposing.

Taken together, the two offshore loopholes in the tax extenders, the CFC Look-Thru Rule and the AFE, would cost almost $100 billion over the next 10 years. These two provisions are what enable many companies like Apple and General Electric to avoid billions in taxes by shifting their profits into offshore tax havens. With the increasing, pernicious use of tax havens by multinational corporations, a good place to start in cracking down on this activity would be to allow these two loopholes to remain expired.

Many of the remaining extenders, representing one-third of the cost, do not provide a substantial enough public benefit to justify their renewal. For a deeper dive into the efficacy of the largest individual tax extenders, read the updated CTJ report “Evaluating the Tax Extenders.” While lawmakers like to tout a tiny deduction for teachers who purchase classroom supplies or the deduction for some college expenses when they talk about the tax extenders, the reality is that these provisions are just window dressing, making up only 1 percent of the overall package.

2. Any renewal of the tax extenders should be paid for.

If lawmakers decide some of the tax extenders are worth keeping, they should pay for them with offsetting tax increases. For years, Congress has been struggling to find acceptable ways to pay for essential programs like the highway bill or to undo some of the budget sequester program cuts. But lawmakers have been willing to throw fiscal responsibility out the window and pass the tax extenders without paying for them. This is a double standard.

It’s important to note the that cost of a two-year extension of the extenders obscures the real cost of the continual renewal of the extenders. If they continue to be extended, then over the next decade, the CBO estimates they will cost $740 billion.

While there are a myriad of ways to raise the revenue needed to offset the cost of any extenders, the most logical way would be to close corporate loopholes. Ideally, this would include legislation that would end offshore tax dodging such as the Stop Tax Haven Abuse Act, an anti-inversion measure like The Corporate Fair Share Tax Act, or ending the deferral of U.S. tax on profits that companies have moved offshore.

3. The expansions to the EITC and CTC should be made permanent.

If Congress really wants to help working families, it should make permanent two other expiring tax provisions, the expansions of the EITC and the CTC that were passed as part of the American Recovery and Reinvestment Act of 2009. If allowed to expire, more than 13 million families with nearly 25 million children would see their benefits cut by an average of $1,073. For families struggling to make ends meet, every dollar counts.

The research on the working families’ tax credits is clear. They can play a powerful role in increasing employment and reducing poverty, which is especially needed during this time of high poverty and growing income inequality.

Congress could also build on the success of the EITC by expanding it to childless workers, who do not see much benefit from the current system. This kind of expansion has gotten support from both Democratic President Barack Obama and Republican Speaker of the House Paul Ryan. A recent Senate proposal along these lines would provide crucial relief to over 10.5 million individuals and families and provide them an average benefit of $604. 


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Evaluating the Tax Extenders

Posted on by Alex Welch

November 23, 2015 01:15 PM | | Bookmark and Share

Many of the most costly tax extenders should be reformed or remain expired

Read Report as a PDF.

Year after year, Congress has renewed a package of temporary tax provisions known as the “tax extenders.” Nearly all of them should be substantially curtailed or allowed to remain expired. Because these provisions are in the tax code and routinely evaluated as a package, the individual provisions have not been subjected to the same level of scrutiny as spending programs of comparable size.

The four most costly provisions — bonus depreciation, the research credit, the so-called “active financing exception,” and the “CFC Look-Through Rule” — make up 62 percent of the total cost of the package. Yet they are not designed to help the economy, as discussed below. Many of the other tax extenders are subsidies that could more sensibly be provided through direct spending.

Lawmakers or special interest groups often argue that the tax extender legislation should be enacted because it includes a helpful provision that benefits individuals or small businesses. For example, it’s easy to support the small deduction for teachers who purchase classroom supplies out of their own pockets. Putting aside the merits of this provision, this break makes up just 0.3 percent of the cost of the tax extenders package. This and other similarly small provisions do not justify $740 billion over 10 years in deficit-financed tax cuts that mostly go to corporations and businesses.

Bonus Depreciation
10-Year Cost: $245.8 billion

Bonus depreciation is the costliest and most wasteful tax break in the tax extenders package. It is an expansion of existing breaks that allow businesses to deduct their asset’s depreciation more quickly than is warranted by its actual decline in value. The provision was first passed early in the George W. Bush administration as a temporary economic stimulus. It has been reenacted or extended many times since then with no discernible positive effect on business investment. Instead, it provides another corporate tax loophole for many large corporations.

How does this provision work? Companies are allowed to deduct from their taxable income the expenses of running their businesses so what is taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time. In other words, capital expenses (expenditures to acquire or upgrade assets that generate income over a long period of time) usually must be written off over a number of years to reflect their ongoing usefulness.

In most cases firms would rather deduct capital expenses right away rather than delay these deductions because of the time value of money ( e.g. a given amount of money is worth more today than the same amount of money will be worth if it is received later.) For example, $100 invested now at a 7 percent return will grow to $200 in ten years.

A report from the Congressional Research Service reviews efforts to quantify the impact of bonus depreciation and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”[1]

Research Tax Credit
10 Year Cost: $109 billion

Rather than just extending the research credit, the House has passed legislation nearly doubling the cost of the tax credit.[2] Given the myriad problems with the research credit, Congress would be better off substantially reforming the credit or letting it expire entirely but should not expand the credit.[3]

One aspect of the credit that needs to be reformed is the definition of “research.” As it stands now, accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. The uncertainty about what qualifies as eligible research also results in substantial litigation and seems to encourage companies to push the boundaries of the law.

Another aspect of the credit that needs to be reformed is the rule governing how and when firms obtain the credit. For example, Congress should bar taxpayers from claiming the credit on amended returns because it is absurd to infer that the credit retroactively encouraged research.

As it stands now, some major accounting firms approach businesses and tell them that they can identify activities the companies carried out in the past that qualify for the research credit, and then help the companies claim the credit on amended tax returns. When used this way, the credit does not accomplish the goal of increasing the amount of research conducted by businesses.

The Offshore Loopholes

Active Financing Exception (aka GE Loophole)
10 Year Cost: $78 Billion

“Subpart F” of the tax code attempts to bar American corporations from “deferring” (delaying) paying U.S. taxes on certain types of offshore profits that are easily shifted out of the United States, such as interest income. The “active financing” exception to subpart F allows American financial corporations to defer paying taxes on offshore income even though such income is often really earned in the U.S. or other developed countries, but has been artificially shifted into an offshore tax haven to avoid taxes.

The “active financing” exception should have never been a part of the tax code.

The U.S. technically taxes the worldwide corporate profits, but American corporations can “defer” (delay indefinitely) paying U.S. taxes on “active” profits of their offshore subsidiaries until those profits are officially brought to the U.S. “Active” profits are what most ordinary people would think of as profits earned directly from providing goods or services.

“Passive” profits, in contrast, include dividends, rents, royalties, interest and other types of income that are easier to shift from one subsidiary to another. Subpart F tries to bar deferral of taxes on such kinds of offshore income. The so-called “active financing exception” makes an exception to this rule for profits generated by offshore financial subsidiaries doing business with offshore customers.

The active financing exception was repealed in the loophole-closing1986 Tax Reform Act, but was reinstated in 1997 as a “temporary” measure after fierce lobbying by multinational corporations. President Clinton tried to eliminate the provision with a line-item veto; however, the Supreme Court ruled the line-item veto unconstitutional and reinstated the exception. In 1998 Congress expanded the provision to include foreign captive insurance subsidiaries. It has been extended numerous times since 1998, usually for only one or two years at a time, as part of the tax extenders.

As explained in another report from Citizens for Tax Justice, the active financing exception provides a tax advantage for expanding operations abroad. It also allows multinational corporations to avoid tax on their worldwide income by creating “captive” foreign financing and insurance subsidiaries.[4] The financial products of these subsidiaries, in addition to being highly fungible and highly mobile, are also highly susceptible to manipulation or “financial engineering,” allowing companies to manipulate their tax bill as well.

The exception is one of the reasons that General Electric paid, on average, only a 1.8 percent effective U.S. federal income tax rate over 10 years. G.E.’s dramatically lowered its federal tax bill by using the active financing exception provision by its subsidiary, which Forbes noted has an “uncanny ability to lose lots of money in the U.S. and make lots of money overseas.”[5]

Controlled Foreign Corporations Look-Through Rule (aka Apple Loophole)
10 Year Cost: $21.8 billion

The “CFC look-thru rule” allows U.S. multinational corporations to create “nowhere income,” or profits that are not taxed by any country. It allows U.S. parent companies to treat foreign subsidiaries as corporations in one country but as non-existent in another country (typically the U.S.) The result is that the subsidiary generates deductible payments in one country, but reports no corresponding taxable income in a second, low- or no-tax country.

The closely watched 2013 Apple investigation by the Senate Permanent Subcommittee on Investigations resulted in a memorandum — signed by the subcommittee’s chairman and ranking member, Sens. Carl Levin and John McCain — that listed the CFC look-through rule as one of the loopholes used by Apple to shift profits abroad and avoid U.S. taxes.[6]

Section 179 Small Business Expensing
10 Year: $68.8 billion

Congress has showered businesses with several types of depreciation breaks, that is, breaks allowing firms to deduct the cost of acquiring or developing a capital asset more quickly than the asset actually wears out. Section 179 allows smaller businesses to write off most of their capital investments immediately (up to certain limits). A report from the Congressional Research Service reviews efforts to quantify the impact of depreciation breaks and explains that “the studies concluded that accelerated depreciation in general is a relatively ineffective tool for stimulating the economy.”[7]

Section 179 allows firms to deduct the entire cost of equipment purchases (to “expense” them) up to a limit. The most recent tax extenders package included provisions that allowed expensing of up to $500,000 of equipment purchases. The deduction is phased out when such purchases exceed $2 million.

Often, the actual beneficiaries of this provision are not necessarily what people think of as “small businesses.” Still, there is little reason to believe that business owners, big or small, respond to anything other than demand for their products and services.

Deduction for State and Local Sales Taxes
10 Year: $42.4 billion

Permanent provisions in the federal personal income tax allow taxpayers to claim itemized deductions for property taxes and income taxes paid to state and local governments. Long ago, a deduction was allowed for state and local sales taxes, but that was repealed as part of the 1986 tax reform. In 2004, the deduction for sales taxes was brought back temporarily and extended several times since then.

Because the deduction for state and local sales taxes cannot be taken along with the deduction for state and local income taxes, in most cases, taxpayers will take the sales tax deduction only if they live in one of the handful of states that have no state income tax.

Taxpayers can keep their receipts to substantiate the amount of sales taxes paid throughout the year, but in practice most people use rough calculations provided by the IRS for their state and income level. People who make a large purchase, such as a vehicle or boat, can add the tax on such purchases to the IRS calculated amount.

There are currently nine states that have no broad-based personal income tax and rely more on sales taxes to fund public services. Politicians from these states argue that it’s unfair for the federal government to allow a deduction for state income taxes, but not for sales taxes. But this misses the larger point. Sales taxes are inherently regressive and allowing wealthy individuals to deduct these taxes helps perpetuate that inequality.

To be sure, lower-income people pay a much higher percentage of their incomes in sales taxes than the wealthy. But lower-income people also are unlikely to itemize deductions and are thus less likely to enjoy this tax break. In fact, the higher your income, the more the deduction is worth, since the amount of tax savings depends on your tax bracket.

The table above includes taxpayer data from the IRS for 2011 along with data generated from the Institute on Taxation and Economic Policy (ITEP) tax model to determine how different income groups would be affected by the deduction for sales taxes in the context of the federal income tax laws in effect today.

As illustrated in the table, people earning less than $60,000 a year who take the sales-tax deduction receive an average tax break of just $100, and receive less than a fifth of the total tax benefit. Those with incomes between $100,000 and $200,000 enjoy a break of almost $500 and receive a third of the deduction, while those with incomes exceeding $200,000 save $1,130 and receive just over a fourth of the total tax benefit.

Work Opportunity Tax Credit
10 Year: $17.4 billion

The Work Opportunity Tax Credit ostensibly helps businesses hire welfare recipients and other disadvantaged individuals. But a report from the Center for Law and Social Policy concludes that it mainly provides a tax break to businesses for hiring they would have done anyway:[8] 

WOTC is not designed to promote net job creation, and there is no evidence that it does so. The program is designed to encourage employers to increase hiring of members of certain disadvantaged groups, but studies have found that it has little effect on hiring choices or retention; it may have modest positive effects on the earnings of qualifying workers at participating firms. Most of the benefit of the credit appears to go to large firms in high turnover, low-wage industries, many of whom use intermediaries to identify eligible workers and complete required paperwork. These findings suggest very high levels of windfall costs, in which employers receive the tax credit for hiring workers whom they would have hired in the absence of the credit.

15-Year Cost Recovery Break for Leasehold, Restaurants, and Retail
10 Year: $17 billion

Congress has showered all sorts of businesses with breaks that allow them to deduct the cost of developing capital assets more quickly than they actually wear out. This particular tax extender allows certain businesses to write off the cost of improvements made to restaurants and stores over 15 years rather than the 39 years that would normally be required.

It is unclear why helping restaurant owners and store owners improve their properties should be seen as more important than nutrition and education for low-income children or unemployment assistance or any of the other benefits that lawmakers insist cannot be enacted if they increase the deficit.

Deduction for Tuition and Related Expenses
10 Year: $5.1 billion

The limited deduction for tuition and related expenses is not among the larger tax extenders, but it’s worth understanding because it is one of the provisions that lawmakers sometimes cite as a reason to support the tax extenders legislation. This deduction makes up only 0.7 percent of the cost of the entire tax extenders legislation. It is not justification for passing this costly legislation.

The deduction for tuition and related expenses is the most regressive tax break for postsecondary education. The distribution of tax breaks for postsecondary education among income groups is important because if their purpose is to encourage people to obtain education, they will be more effective if they are targeted to lower-income households that could not otherwise afford college rather than well-off families that will send their kids to college no matter what.

The graph below compares the distribution of various tax breaks for postsecondary education as well as Pell Grants.

The graph illustrates that not all tax breaks for postsecondary education are the same, and the deduction for tuition and related expenses is the most regressive of the bunch. Some of these tax breaks are more targeted to those who really need them, although none are nearly as well-targeted to low-income households as Pell Grants. Tax cuts for higher education taken together are not well-targeted, as illustrated in the bar graph below. Americans paying for undergraduate education for themselves or their kids in 2009 or later generally have no reason to use the deduction because starting that year another break for postsecondary education was expanded and became more advantageous.

[1] Gary Guenther, Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 112th Congress, and Economic Effects, September 10, 2012. http://www.fas.org/sgp/crs/misc/RL31852.pdf

[2] Citizens for Tax Justice, “House Leadership Content to Balloon the Deficit for the Sake of Corporate Tax Breaks,” May 20, 2015. http://www.taxjusticeblog.org/archive/2015/05/house_leadership_content_to_ba.php

[3] Citizens for Tax Justice, “Reform the Research Credit — Or Let It Die,” December 4, 2013. http://ctj.org/ctjreports/2013/12/reform_the_research_tax_credit_–_or_let_it_die.php

[4] Citizens for Tax Justice, “Don’t Renew the Offshore Tax Loopholes,” August 2, 2012. www.ctj.org/ctjreports/2012/08/dont_renew_the_offshore_tax_loopholes.php

[5] Christopher Helman, “What the Top U.S. Companies Pay in Taxes,” Forbes, April 1, 2010, http://www.forbes.com/2010/04/01/ge-exxon-walmart-business-washington-corporate-taxes.html.

[6] Senators Carl Levin and John McCain, Memorandum to Members of the Permanent Subcommittee on Investigations, May 21, 2013. http://www.hsgac.senate.gov/download/?id=CDE3652B-DA4E-4EE1-B841-AEAD48177DC4

[7] Gary Guenther, “Section 179 and Bonus Depreciation Expensing Allowances: Current Law, Legislative Proposals in the 112th Congress, and Economic Effects,” Congressional Research Service, September 10, 2012. http://www.fas.org/sgp/crs/misc/RL31852.pdf

[8] Elizabeth Lower-Basch, “Rethinking Work Opportunity: From Tax Credits to Subsidized Job Placements,” Center for Law and Social Policy, November 2011. http://www.clasp.org/resources-and-publications/files/Big-Ideas-for-Job-Creation-Rethinking-Work-Opportunity.pdf

 


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Why Online Holiday Shopping Will Cost More This Year

Posted on by tarek
November 23, 2015 09:33 AM
By Carl Davis, Research Director at ITEP | | Bookmark and Share

If recent history is any guide, U.S. consumers will do more online shopping during next week’s “Cyber Monday” sales event than on any other day in history.  E-commerce is now a $300 billion business that has been growing by roughly 15 percent each year.  While most of its popularity comes from its convenience, the tax evasion opportunities made possible by the Internet (and a gridlocked U.S. Congress) have also helped tilt the playing field in favor of e-retailers.

For years, making purchases online was an easy way to avoid paying sales tax since most e-retailers refuse to collect the taxes owed by out-of-state customers.  When that happens, shoppers are supposed to pay sales taxes directly to the states in which they live, but such requirements are unenforceable and few shoppers actually pay the tax.  The result is a massive hole in state sales tax bases that has made raising state revenue for education, infrastructure, and countless other public services more difficult.

Recently, however, tax-free online shopping has become slightly less universal as the nation’s largest online seller—Amazon.com—has expanded its physical distribution network in a way that has brought it within reach of a growing number of state tax authorities.

This holiday season will be the first in which Amazon will be collecting sales tax in a majority of states.

In fact, this holiday season will be the first in which Amazon will be collecting sales tax in a majority of states.  As recently as 2011, Amazon collected sales tax from its customers in just five states: Kansas, Kentucky, New York, North Dakota, and its home state of Washington.  With the Oct.1 addition of Michigan to its tax collection list, that number now stands at twenty six states—home to 81 percent of the country’s population.

Our new, 20-second animated map provides an overview of how Amazon’s sales tax collection practices have evolved since the company’s first online sale in 1995:

Amazon’s (often grudging) expansion in the scope of its sales tax collection represents a modest step toward a more rational sales tax.  Taxing items that are purchased at traditional retail outlets while effectively exempting those bought over the Internet is unfair and unsustainable, especially as more and more consumers shift their purchases from brick and mortar retailers to online.

But despite the progress being made, there are still many cases in which e-retailers and traditional retailers are not competing on a level playing field.  Countless online retailers continue to skirt sales tax collection requirements in most states.  And even Amazon, despite its demonstrated ability to collect sales tax from most of its customers, is not collecting tax in 20 states and the District of Columbia (this count excludes the four states that levy neither state nor local sales taxes).  The result is that while most shoppers see sales tax tacked onto their Amazon purchases, about 17 percent of shoppers can still use Amazon.com as a means of evading (knowingly or not) their state’s sales taxes, and thereby reducing funding for education and other services in the process.

While most shoppers see sales tax tacked onto their Amazon purchases, about 17 percent of shoppers can still use Amazon.com as a means of evading (knowingly or not) their state’s sales tax.

While Amazon has arguably softened its opposition to sales tax collection in some instances, in others it has continued to pursue an aggressive avoidance strategy.  Specifically, the company has severed ties with businesses located in half a dozen states (Arkansas, Colorado, Maine, Missouri, Rhode Island, and Vermont) as a means of sidestepping laws that would have otherwise required sales tax collection, or additional reporting, on Amazon’s part.  As our animated map shows, the company also previously used this tactic in California, Connecticut, Illinois, Minnesota, and North Carolina before eventually reversing course and collecting sales tax, as well as in Hawaii where business relationships were terminated for a few weeks in a successful effort to pressure former Gov. Linda Lingle to veto an Internet sales tax enforcement measure.

Ultimately, a comprehensive solution will have to come from the U.S. Congress.  The federal government has the authority to require e-retailers to collect sales taxes in all of the states and localities where their customers are located.  In 2013, the Senate passed and President Obama supported legislation that would have done exactly that, but the House failed to act.  As of now it is unclear when Congress will take up the issue again, but until that happens, sales tax collection in the rapidly growing e-commerce sector will remain an indefensible patchwork.

 

 

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State Rundown 11/20: Incentives, Deficits and Unexpected Windfalls

Posted on by tarek
November 20, 2015 02:56 PM
By Sebastian Johnson, State Policy Fellow at ITEP | | Bookmark and Share

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Oklahoma officials want an independent review of business incentives that cost the state more than $355 million each year. A new law that took effect at the beginning of this month established an Incentive Evaluation Commission charged with looking at tax credits, deductions, expenditures, rebates, grants and loans intended to promote business relocation and expansion. Under the law, each business incentive will be reviewed every four years. Currently, just two incentives – the Investment/New Jobs Tax Credit and the Quality Jobs Program – account for over $180 million in lost revenue for the state, and have failed to meet rosy job creation projections. State Auditor Inspector Gary Jones is cautiously optimistic about the independent review process, saying, “Some of these things ought to be eliminated….The problem is, you’re leaving so much to people whose jobs depend on campaign contributions.”

Gov. Bobby Jindal, who recently abandoned his bid for the presidency, returns to a state in budget turmoil. Louisiana’s budget officials predict the state faces a deficit of $370 million after downgrading their projections for 2015-2016 fiscal year revenue. The shortfall is due to freefalling oil and gas prices as well as anemic business tax collections. The state must also contend with a $117 million deficit from last fiscal year that has yet to be addressed. This mid-year deficit is the eighth time in Jindal’s eight years in office that revenue has come in under projections. There will likely be cuts to critical services. Both of the candidates vying to replace Jindal have said they will call a special session in 2016 to deal with the budget and revenue crisis.

Improved budget numbers in South Carolina have caused some officials to question whether the state needs to raise its gasoline excise tax – last increased over 26 years ago. Forecasters say the state will see an additional $1.2 billion next year in unallocated money and new tax revenues. State Sen. Tom Davis says that rather than increase the gas tax, road repairs should be funded with this unexpected revenue.  Of course, funding long-term infrastructure projects with what appears to be a one-time windfall will create sustainability problems down the road.  In the last session, Haley attempted to use the push for a gas tax increase as an opportunity to enact a significant income tax cut for high-income households. A similar “tax shift” will likely be on the table once again during the upcoming session.

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Congress Searches the Couch Cushions for Road Funding Money

Posted on by tarek
November 20, 2015 10:21 AM
By Carl Davis, Research Director at ITEP | | Bookmark and Share

For years, the nation’s transportation funding account has lurched from crisis to crisis.  Revenues have consistently failed to keep pace with the cost of infrastructure maintenance and construction.  And the root cause of these very serious problems is crystal clear: Congress’s failure to raise the gas tax since 1993.

Yet despite an abundance of voices urging action—including businesses, labor unions, civil engineers, truckers, and even AAA—Congress is continuing its long-running opposition to a gas tax increase.  Instead, House and Senate lawmakers are nearing the end of a vigorous search of the nation’s proverbial couch cushions as they hope to find enough “pay-fors” to delay having to enact a real funding reform package for at least a few more years.

The gasoline tax is the single largest source of funding for transportation infrastructure in this country.  For more than 22 years, the federal gas tax has been stuck at a flat rate of 18.4 cents per gallon, meaning that the typical driver today is paying the same $3 per tank of gas (give or take) in federal tax that they did during the first year of President Bill Clinton’s administration.  But since $3 cannot buy as much asphalt and machinery today as it did two decades ago, our transportation funding account has predictably slipped into perpetual imbalance.

Rather than update our gas tax rate, Congress is hoping to cobble together a few years’ worth of funding by shuffling around money paid by airline passengers, selling off millions of barrels of oil from the Strategic Petroleum Reserve, and spending Customs “user fees” on things that are unrelated to Customs and Border Protection.

But as bad as this incoherent and gimmicky package truly is, the sad reality is that it is better than the next most likely option on the table: a corporate “repatriation” tax.  In addition to doing nothing to fix the unsustainability of our transportation funds, repatriation would reward and encourage offshore tax avoidance and reduce federal revenues in the long-term.

At this particular moment in history, it looks like budgetary gimmicks are about the best we can hope for out of Congress.  Given that reality, state lawmakers should be aware that they will need to continue picking up the slack if our nation’s transportation network is going to keep moving forward.

But the change in the couch cushions will eventually run out.  This certainly isn’t a long-term solution for funding the nation’s infrastructure.

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Ted Cruz’s Tax Plan Would Cost $16.2 Trillion over 10 Years–Or Maybe Altogether Eliminate Tax Collection

Posted on by tarek
November 12, 2015 03:38 PM
By Bob McIntyre, Director of Citizens for Tax Justice | | Bookmark and Share

Update March 9th, 2016: We have since revised downward our analysis from $16.2 trillion to $13.9 trillion, to reflect that Ted Cruz’s staff has informed the media that the actual VAT rate will be 18.56 percent, rather than the 16 percent that he had been advertising. 

During Tuesday’s Republican presidential candidates’ debate, Sen. Ted Cruz (R-TX) made a claim that, in theory, shouldn’t be too hard to live up to. He said his tax plan is less irresponsible than plans put forth by his competitors, and he claimed the ten-year cost of his plan is less than a trillion. “It costs less than virtually every other plan people have put up here,” Cruz said.

Being less irresponsible than Jeb Bush, Marco Rubio and Donald Trump—each of whom have proposed tax plans that would cost $7 trillion or more over the next decade—is a low bar to hurdle. Yet contrary to his assertions, Cruz’s plan would be more costly than any of the other plans put forth by his competitors. A Citizens for Tax Justice (CTJ) analysis of the Cruz tax plan finds that it would cost $1.3 trillion in its first year alone and a staggering $16.2 trillion over ten years.

Cruz’s plan would eliminate the corporate income tax, the estate tax, and the payroll tax, digging an $18 trillion hole in federal revenues over a decade. He also proposes to sharply reduce the personal income tax, replacing the current graduated rate system with a flat-rate 10 percent.  Cruz’s plan would repeal most itemized deductions and tax credits, but it would leave the mortgage interest and charitable deductions largely intact, along with the Child Tax Credit and the Earned Income Tax Credit. On balance, these personal income tax changes would lower income tax revenues by 60 percent and add another $12.8 trillion to the plan’s 10-year cost.

Cruz proposes making up for the $31 trillion in lost revenue by introducing a regressive value-added tax (VAT), and, it seems, a healthy dose of magic pixie dust.

Cruz’s claim that his plan would cost “less than a trillion” depends critically on raising an enormous amount from his 16 percent VAT, which would apply to almost everything American consumers purchase. The remaining revenue shortfall would, in Cruz’s estimate, be offset by a supposed economic boom based on the discredited supply-side magic that has been part of the far right’s economic fantasies for decades.   

But Cruz’s math has a gigantic hole in it. He wouldn’t just make consumers pay his VAT, he would also make the government pay the tax (to itself) on all of its purchases, from warplanes to paper clips and the wages it pays to its employees. Cruz’s claim that the government can raise money by taxing itself accounts for a third of the alleged yield from his VAT.

Without this sleight of hand, Cruz’s overall plan would cost more than $16 trillion over a decade and reduce total federal revenues by well over a third.

Even this enormous amount may be a low-ball estimate since Cruz insists that he would “eliminate the IRS.” If he really means that, then he would apparently reduce total federal revenues by closer to 100 percent. After all, without a tax collection agency, why would anyone pay taxes?

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Candidates’ Tax Cuts Unequivocally Skew Toward the Wealthy

Posted on by tarek
November 10, 2015 04:46 PM
By Jenice Robinson, Communications Director | | Bookmark and Share

As Citizens for Tax Justice (CTJ) outlined in a post last week, most major Republican presidential candidates have released tax proposals that would overwhelmingly benefit the wealthy and balloon the national debt. No one can refute this, but candidates and anti-tax, trickle-down economics supporters are trying to obscure the facts.

Last week, the business-backed Tax Foundation released a blog that chides reporters for using dollar amounts instead of percentages to inform the public about how generous candidates’ tax cuts would be for the top 1 percent.  They may as well dangle a shiny object. Shifting the debate toward an analytic discussion of percentages versus average dollars is a distraction. The real issue is why are candidates and their allies trying to convince the public that corporations and the wealthy need more budget-busting tax breaks in the first place?

Federal lawmakers are struggling to find ways to fund the Highway Transportation Fund, pay for debts that have been built up over the past four decades and maintain essential public services. How enormous tax cuts fit into this equation is a far better issue to debate than average dollars versus percentages or shares. Better still, why not call candidates on the carpet and ask them to explain why the nation needs massive tax cuts and what programs they would cut as a result of the lost revenue?

The tax cuts for “jobs creators,” and trickle-down, stimulate-the-economy argument is tired, shopworn and unproven. The public has previously been sold the vision of a future in which everybody—but mostly and especially the rich—gets a tax cut and the nation’s economy grows by leaps and bounds. It didn’t happen in the past, and no serious person thinks it will happen in the future.

When CTJ analyzes tax proposals, its tables show average tax changes in dollars by income group, tax changes as a share of income and the overall share of the tax cut that each income group would receive. Including all three columns of data reveals a complete picture of the distributional effects, as opposed to just the change in after tax income which, in isolation, can obscure the impact.

The most important figures regarding the GOP candidates’ tax plans are the enormous revenue losses that each would incur. In the case of Sen. Marco Rubio, CTJ estimates it would lose $11.8 trillion over a decade. Jeb Bush’s plan would add $7.1 trillion to the national debt over 10 years. Donald Trump’s plan would blow a $12 trillion hole in the federal budget over a decade. An analysis of Rand Paul’s flat tax plan found it would starve the federal government of $15 trillion over a decade, and a forthcoming CTJ analysis of Ted Cruz’s plan likely will find it would be equally as devastating to the federal budget.

It is fair game to evaluate whether the nation can afford a tax proposal in which the biggest share and dollar amount flow to the wealthy.

CTJ director Bob McIntyre says criticisms of using dollars to evaluate candidates’ tax plan are a ruse.

“Why is anyone even talking about tax cuts?” McIntyre said. “We already don’t raise enough revenue to pay for existing programs, and as more and more Baby Boomers continue to retire, we’ll need a lot more revenue to pay back IOUs to Social Security, while maintaining other essential programs.”

By trumpeting tax cuts without talking about the consequence and then attempting to shift the public debate toward theoretical discussions about percentages versus whole numbers, candidates and anti-tax advocates are trying to obfuscate the real issue, McIntyre said.

Given the reality of our nation’s fiscal situation, neither dollars nor percentages can justify more huge tax cuts for the wealthy. That’s the substantive discussion we should be having.

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New Law Endangers Michigan’s Fiscal Future

Posted on by tarek
November 10, 2015 03:45 PM
By Carl Davis, Research Director at ITEP | | Bookmark and Share

Earlier today, Michigan Gov. Rick Snyder signed a package of tax changes that will eventually fund improvements to the state’s transportation infrastructure, but it comes with cuts to other services and a weakened long-term fiscal position.  When most of the law’s provisions are phased in five years from now, they will collectively drain (PDF) more than $800 million from local governments, universities, health care, and corrections every year.  Making matters worse, a modified income tax trigger could push the general fund loss to $1 billion per year within a decade and could turn this so-called “funding” package into a net revenue loser.

Below is a list of the package’s most significant components (revenue estimates are for Fiscal Year 2021):

New Revenue

  • $404 million from increasing the gasoline tax by 7.3 cents and the diesel tax by 11.3 cents on Jan. 1, 2017.  These tax rates will also be tied to inflation starting in 2022.
  • $221 million from increasing most vehicle registration fees by 20 percent and from levying higher fees on electric vehicles.

Funding Shifts

  • $600 million annually will be moved out of the general fund to be spent on transportation.  The Detroit Free Press identifies local governments as the group most likely to face funding cuts under this shift, followed by higher education, public health, and corrections.

Tax Cuts

  • $206 million in tax cuts will be distributed to Michiganders by expanding the state’s property tax credit for low- and moderate-income families.  Some features of the credit will also be indexed to inflation starting in 2021.
  • A sizeable, but uncertain revenue loss will come from cutting the state’s top income tax rate via an ill-conceived “trigger” mechanism.  Starting in 2023, the state’s income tax rate will be reduced if general revenue growth exceeds the inflation rate multiplied by 1.425.  The non-partisan House Fiscal Agency estimates (PDF) that if this law were in effect today, $593 million in revenue would be lost next year as a result of dropping the tax rate from 4.25 to 3.96 percent.  If this type of cut is combined with the property tax credit expansion, fuel tax increases, and vehicle registration fees just described, the net result of this “funding” package will be to reduce state revenues—not raise them.

Ultimately, these reforms to Michigan’s fuel taxes are long-overdue and the property tax credit expansion is a reasonably effective way of offsetting some of these taxes for lower-income families.  But the components of this package that will have the largest impact on Michigan’s budget in the years ahead are the $600 million general fund earmark for transportation, and the automatic income tax cuts scheduled to take effect long after most of today’s lawmakers have left office.

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How to Curtail Offshore Tax Avoidance

Posted on by tarek
November 9, 2015 12:10 PM
By Richard Phillips, Senior Policy Analyst at ITEP | | Bookmark and Share

In a time of fiscal austerity, it is breathtaking to learn that Congress has allowed Fortune 500 companies to avoid an estimated $620 billion in federal taxes on earnings they are holding offshore. While the inaction by lawmakers on this issue may create the impression that there is nothing to be done, the reality is that this tax avoidance could be shut down tomorrow if Congress decided to act. Making this point clear, Wisconsin Rep. Mark Pocan has proposed a pair of new bills this week that would substantially curtail offshore tax avoidance by U.S. multinational corporations.

To start, Rep. Pocan’s The Corporate Fair Share Tax Act takes direct aim at the driver behind the infamous corporate inversion loophole. Using this loophole, U.S. companies, like Burger King or Medtronic, merge with a smaller foreign company and then claim to be a foreign company for tax purposes. The primary advantage of this arrangement is that it allows these pretend foreign companies to engage in an accounting maneuver known as “earnings stripping,” wherein the U.S. subsidiary borrows money from its new foreign parent and then makes interest payments that have the effect of decreasing its U.S. income for tax purposes. To counter this maneuver, the The Corporate Fair Share Tax Act would no longer allow companies to deduct excess interest payments from their U.S. income. This measure would raise an estimated $64 billion in new revenue over 10 years according to the Joint Committee on Taxation (JCT).

The immediate need for this kind of anti-inversion legislation has become even clearer in recent days as Pfizer, one of the nation’s largest pharmaceutical companies, has indicated that it is seeking to invert and incorporate in Ireland to avoid potentially billions in taxes that it owes. Pfizer and a handful of other companies with inversions in the works this year confirm that congressional action is still needed, despite the improvements made to the law through an executive action by the Obama Administration last year.

Rep. Pocan’s second piece of legislation, the Putting America First Corporate Tax Act, would strike a blow at the heart of the offshore tax avoidance by requiring companies to pay the same tax rate at the same time on their foreign and domestic profits. Right now, the U.S. tax system allows companies to defer paying taxes on earnings that they book abroad (at least on paper) until they officially repatriate it back to their U.S. parent company in the form of dividends. This policy creates a huge incentive for companies to shift their U.S. profits to low- or no-tax jurisdictions in order to avoid taxes. IRS data show that U.S. companies are booking more than half of their (allegedly) foreign profits in known tax havens.

Rep. Pocan’s legislation would stop this practice by ending the ability of companies to defer paying U.S. taxes on their offshore income, meaning that they would pay the same tax rate at the same time on earnings regardless of whether they are booked in the United States or in the Cayman Islands. This legislation would not only level the playing field between multinational and purely domestic companies, but according to the U.S. Treasury Department, it would raise as much as $900 billion in critically needed revenue over 10 years.

Congress should take action against offshore tax dodging and an excellent place to start would be the passage of Rep. Pocan’s The Corporate Fair Share Tax Act and Putting America First Corporate Tax Act.

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