Month: December 2015

Last year we reported that the Netflix corporation had given itself the ultimate Christmas gift, using a stock option tax break to zero out every last dime of income taxes on its $159 million in US profits. Now there is at least circumstantial evidence that Netflix’s worldwide ambitions extend to manipulating foreign tax codes. An investigation by the Sunday Times finds that Netflix is booking all of its profits from sales to U.K. customers in a Luxembourg affiliate—which means that the company claims it’s not earning a dime from the $200 million of revenue it derived from U.K. customers last year. 

Since 2013, eighteen states have enacted laws either increasing or reforming their gas taxes to boost funding for transportation infrastructure.  A snapshot of gas tax rate changes scheduled to occur this upcoming January 1st, however, reveals that five states will actually move in the opposite direction as 2016 gets underway.

Gas tax rates will decline in New York, North Carolina, Pennsylvania, Vermont, and West Virginia—in most cases because of gas tax rate structures that link the rate to the average price of gas (an approach similar to a traditional sales tax applied to an item’s purchase price).  But cutting gas tax rates is problematic because doing so reduces funding for economically vital transportation infrastructure investments.  And with drivers already benefiting from gas prices that have just reached a six-year low, the timing of these rate cuts is difficult to justify.

Given these realities, many states have recently taken steps to limit gas tax volatility by imposing “floors” on the minimum tax rate, limitations on how much the rate can change from one year to the next, and in some cases even moving toward entirely different formulas based on more stable (and arguably more relevant) measures of inflation. 

While five states will be forced to grapple with the consequences of reduced transportation revenue, there are four states where gas tax rates will actually rise on January 1: Florida, Maryland, Nebraska and Utah.  In addition to those increases, Washington State has a gas tax increase scheduled for July 1st and governors in states such as Alabama and Missouri have said they intend to pursue gas tax increases during their upcoming legislative sessions.  With lower gas prices having become the norm for now, lawmakers in those states that have gone years, or even decades, without raising their gas taxes should give real consideration to enacting long-overdue updates to their gas tax rates

The five states that will see their gas tax rates decline on January 1st include:

• West Virginia (1.4 cent cut), New York (0.8 cent cut), and Vermont (0.27 cent cut) will see their gas tax rates fall because their rates are tied to the price of gas, which has been declining in recent months.
• North Carolina (1.0 cent cut) was scheduled to see an even larger decline in its gas tax rate due to falling gas prices, but lawmakers intervened in 2015 to limit the size of the cut and its impact on the state’s ability to invest in infrastructure.  Moving forward, North Carolina will also have a somewhat more stable gas tax because of a reform that removed a linkage to gas prices and instead tied the rate to population growth and energy prices more broadly.
• Pennsylvania (0.2 cent cut) is the only state in this group whose decline is not directly linked to falling gas prices.  A reform approved by lawmakers in 2013 included a modest tax rate cut in 2016, though notably, this cut is bookended by significantly larger increases in 2014, 2015, and 2017.

And in the four states where gas tax rates will rise:

• Florida (0.1 cent increase) is seeing its tax rate rise due to a forward-thinking law, in place for more than two decades, that links the state’s gas tax rate to growth in a broad measure of inflation in the economy (the Consumer Price Index).
• Maryland (0.5 cent increase) is implementing a rate increase as a result of the U.S. Congress’ failure to pass legislation empowering states to collect the sales taxes owed on purchases made over the Internet.  In 2013, Maryland lawmakers enacted a transportation funding bill that they had hoped would be partially funded by requiring e-retailers to collect sales tax.  Rather than trusting Congress to act, however, state lawmakers also built in a backup funding source: an increase in the state’s gas tax rate from 3 percent to 4 percent of gas prices this January 1st, plus a further increase to 5 percent on July 1 if Congress continues to delay action.
• Nebraska (0.7 cent increase) and Utah (4.9 cent increase) are seeing their gas tax rates rise because of legislation enacted by each state’s lawmakers in 2015.  The Nebraska law (enacted over the veto of Gov. Pete Ricketts) scheduled 1.5 cent rate increases for each of the next four Januarys, though more than half of this year’s scheduled increase was negated by a separate provision linking the state’s gas tax rate to (currently falling) gas prices.  In Utah, the 4.9 cent increase is the first stage of a new law that could eventually raise the state’s gas tax rate by as much as 15.5 cents, depending on future inflation rates and gas prices.

Earlier this year, lawmakers in states such as Georgia, Kentucky, and North Carolina realized that allowing gas tax rates to fall would harm their ability to invest in their states’ infrastructure.  As a result, each of those states acted to limit scheduled rate cuts and curtail the volatility of their gas tax rates moving forward.  Without question, linking gas tax rates to some measure of growth (be it gas prices, inflation, or fuel-efficiency) is a valuable reform that can improve the long-run sustainability of this important revenue source.  But as the gas tax cuts taking effect next month demonstrate, that linkage should be done in a way that manages potential volatility in the tax rate.

View chart of gas tax changes taking effect January 1, 2016 

Read the Tax Justice Digest for recent reports, posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

Happy Holidays! We wish you and yours a cookie filled and relaxing end to your 2015. Sit back and take a deep breath, we’ve got a jammed packed Tax Justice Digest for you this week:

Extenders Bill Passes

Late last week Congress passed the extenders bill – a package of legislation mostly made up of tax breaks for businesses that have actually already expired. Citizens for Tax Justice weighed in on the package and urged lawmakers to reject the deficit-financed $690 billion tax cut deal.

Apple CEO Gets It Wrong on Tax Avoidance
This week the Institute on Taxation and Economic Policy weighed in on Tim Cook’s 60 Minutes interview in which he responds to questions about the company’s history of tax avoidance by saying that raising the issue is simply “political crap.”

Inquiring Minds….   
Ever wonder how CTJ analyzes tax proposals? This post about ITEP’s microsimulation tax model should help answer your questions.

Our Gifts to You: 8 Book Recommendations and Tax Wars
We are a wonky bunch during work hours, but after hours and on weekends we go crazy and read some pretty entertaining books. Here’s a list of 8 books we read this year that we recommend. Enjoy.

The new Star Wars movie is getting rave reviews (our staff who saw it enjoyed it too). Here’s our take on Star Wars and taxes. We call it Tax Wars.  

State News

Looking Back on 2015: This year states enacted a mix of tax policy changes—some good and some bad.  But there were more than a few bright spots worth highlighting.  Here are five tax policy trends from 2015 that we hope will keep on giving into the new year.

Predictions for 2016: As the year comes to a close, several tax bills are already being debated in states across the country. In the new year we will write more about state tax policy trends for 2016, but in the meantime, here are some of the big state tax policy developments happening now.

Shareable Tax Analysis:

As is often the case, 2015 was a year in which states enacted a mix of tax policy changes—some good and some bad.  Regressive income tax cuts in Ohio and North Carolina, and an irresponsible tax “trigger” in Michigan, were some of this year’s low points.  But despite those steps backward, there were also more than a few bright spots.  Here are five tax policy trends from 2015 that we hope will keep on giving into the new year.

1.      Tax Breaks for Working Families

Lawmakers from both sides of the aisle came together in five states this year to champion state Earned Income Tax Credits (EITCs), an important tax fairness and poverty alleviation tool for working families.  These actions were a huge victory for anti-poverty advocates who have largely been fighting proposals to weaken or eliminate the credit in recent years. Other states enacted or enhanced other credits that benefit lower-income families.

• California enacted the state’s first refundable EITC.  The new credit is targeted to working families and individuals who are living in deep poverty.
• Colorado’s 10 percent refundable state EITC is now funded, allowing families to file for the credit on their 2015 state tax returns.
• Hawaii temporarily expanded the state’s food sales tax rebate.  Most notably, the maximum credit increases from $85 to $110.
• Maine converted the state’s nonrefundable 5 percent EITC to a fully refundable credit. Lawmakers also created a new targeted, and refundable, sales tax credit to offset the impact of increased sales taxes on low- and middle-income residents.
• Massachusetts’ state EITC was increased from 15 to 23 percent of the federal credit.
• Michigan expanded eligibility for the state’s property tax homestead credit and increased the maximum value of the benefit.
• New York enacted a permanent refundable income-based property tax credit for homeowners.
• New Jersey’s state EITC was increased from 20 to 30 percent of the federal credit.
• Rhode Island’s state EITC was increased from 10 to 12.5 percent of the federal credit

2.      Equitable Income Tax Reform

Washington Gov. Jay Inslee shone a bright light on tax fairness issues this year by proposing that his state’s tax system (ranked worst in the country for its regressivity by ITEP) should be reformed by adding a tax on capital gains income.  Ultimately, Inslee’s proposal wasn’t enacted during the 2015 session.  But at least three states did manage to enact meaningful, fairness-enhancing reforms to their income taxes.

• Connecticut lawmakers passed a budget with more than $1 billion in new revenue to plug a budget gap and ensure the state has resources to make needed investments in education, transportation, and health care.  Among the most significant changes are an increase in the tax rate paid by high-income households from 6.7 to 6.99 percent.  Lawmakers also enacted combined reporting—a vital tool for combatting corporate tax avoidance—though the implementation of that reform has since been delayed in an effort to appease General Electric. 
• Maine legislators significantly improved upon a “tax shift” package proposed by Gov. Paul LePage earlier this year.  While the package included a mix of progressive and regressive features, the overall plan actually lessens the unfairness of Maine’s tax system in part with stricter limits on itemized deductions and the gradual phase-out of both standard and itemized deductions for high-income taxpayers.
• In order to address a revenue shortfall, Vermont lawmakers enacted a handful of tax increases this year.  Most notably, they broadened the income tax base by capping itemized deductions (mostly used by upper-income taxpayers) at just 2.5 times the value of the state’s standard deduction.  Lawmakers also eliminated a bizarre, circular tax break that allowed Vermont residents to deduct their Vermont income taxes from their Vermont income taxes.

3.      Sales Tax Modernization

State and local sales tax laws have grown increasingly outdated as the nation’s economy has become more digital and service-oriented.  While most tangible goods sold at traditional stores have always been taxed, too often other transactions are exempt by default.  This year, however, several states took action to expand their shrinking sales tax bases to include transactions such as personal services, e-retail, and some tangible goods while other states embraced taxing the emerging ‘shared economy’ services including Airbnb and Uber rentals.

• Connecticut lawmakers expanded the state’s sales tax base to include various car wash services as well as clothing (previously, clothing items priced under $50 were exempt from sales tax).
• Florida tax collectors reached an agreement with Airbnb to begin collecting local hotel taxes.
• In Illinois, a sales tax measure passed in 2014 spurred Amazon.com—the nation’s largest e-retailer—to begin collecting sales taxes when it took effect early this year.
• Michigan lawmakers enacted reforms expanding the state’s ability to require that e-retailers collect and remit sales taxes.  That change caused Amazon.com to begin collecting sales taxes on October 1.
• North Carolina expanded its sales tax base to include repair, maintenance, and installation services for motor vehicles and other items.  Tax collectors in the state also reached an agreement with Airbnb to begin collecting sales taxes and hotel taxes.
• Rhode Island expanded its sales tax and hotel tax bases to include short-term private rentals (such as Airbnb) as well as room resellers (such as Expedia).
• Tennessee lawmakers added cloud computing and video game services to the state’s sales tax base.
• Vermont lawmakers added soda and other sugary drinks to the state’s sales tax base.
• Washington lawmakers raised around $160 million through eliminating four sales tax exemptions including a break on machinery and equipment for large software manufacturers.  Additionally, Washington expanded its ability to collect sales taxes from e-retailers with the enactment of a “click-through” nexus law, and reached an agreement with Airbnb for the company to begin collecting sales and hotel taxes.

4.      Moving Away from Film Tax Credits 

Of all the tax incentives that states have enacted in an effort to grow their economies, film tax credits are among the least effective.  While local caterers and movie “extras” may benefit when a filmmaker comes to town, most of the high-paid and high-skilled positions involved in a film shoot are inevitably filled by out-of-state residents.  Combine that fact with the temporary nature of filmmaking and the high cost associated with offering a film tax credit generous enough to be competitive with other states, and it’s understandable that many lawmakers have soured on these giveaways.  In 2015, two states eliminated their film tax credits and one state decided to limit film tax credit spending.

• Alaska repealed its film tax credit as a way to dealing with the state’s ongoing revenue shortfall.
• Louisiana capped its film tax credit due to its high cost and linkage to multiple scandals.
• Michigan repealed its film tax credit because of concerns about its low economic impact.

5.      Raising Gas Tax Revenue for Transportation Investments

No state tax trend was more pronounced this year than the movement to raise revenue for transportation infrastructure projects.  Some of these revenues took the form of increased fees on drivers, but the most significant revenue gains came from increasing the gasoline tax.  Eight states either increased or reformed their gas taxes and two states (Kentucky and North Carolina) took action to prevent significant gas tax cuts from taking effect.  These increases come on the heels of gas tax actions already taken by eight other states in 2013 and 2014.

• Georgia implemented a 6.7 cent per gallon increase on July 1, 2015.  Future increases will occur alongside growth in inflation and statewide vehicle fuel-efficiency.
• Idaho enacted a 7 cent increase that took effect July 1, 2015.
• Iowa increased its gas tax by 10 cents on March 1, 2015.
• In Kentucky, falling gas prices nearly resulted in a 5.1 cent gas tax cut this year, but lawmakers scaled that cut down to just 1.6 cents.  The net result was a 3.5 cent increase relative to previous law.
• Michigan Gov. Rick Snyder signed legislation raising the state’s gasoline tax by 7.3 cents, effective January 1, 2017.  These tax rates will also grow alongside inflation in the years ahead.
• In Nebraska, a 6 cent increase was enacted over Gov. Pete Ricketts’ veto.  The gas tax rate will rise in 1.5 cent increments over four years, starting on January 1, 2016.
• In North Carolina, falling gas prices were scheduled to result in a 7.9 cent gas tax cut in the years ahead, but lawmakers scaled that cut down to just 3.5 cents.  The eventual net result will be a 4.4 cent increase relative to previous law.  Additionally, a reformed gas tax formula that takes population and energy prices into account will result in further gas tax increases in the years ahead.
• South Dakota implemented a 6 cent increase on April 1, 2015.
• In Utah a 4.9 cent increase will take effect January 1, 2016, and future increases will occur as a result of a new formula that considers both fuel prices and inflation.  This reform made Utah the nineteenth state to adopt a variable-rate gas tax.
• Washington Gov. Jay Inslee signed legislation raising the state’s gas taxes by 11.9 cents.  The increase takes effect in two stages: 7 cents on August 1, 2015 and 4.9 cents on July 1, 2016.

As the year comes to a close, several tax bills are already being debated in states across the country. ITEP is closely following those proposals because they will likely dominate state headlines in 2016. In the new year we will write more about state tax policy trends for 2016, but in the meantime, here are some of the big state tax policy developments happening now:

There are bright signs on the horizon in Alaska. Gov. Bill Walker recently proposed a progressive income tax to address the state’s budget implosion, brought on by declining oil and gas revenues. Alaska has not had a personal income tax since 1980, when massive oil deposits were discovered on state land. Walker’s proposal would set the state income tax at six percent of what Alaskans pay in federal income taxes. The governor would also raise the state’s gasoline tax, which has not increased in 45 years. To learn more, check out this post on the Tax Justice Blog.

Florida Gov. Rick Scott will continue to push his $1 billion hodge-podge of tax cuts, though even legislators from his side of the aisle balk at the price. The package includes sales tax holidays for back-to-school shopping and hurricane preparedness and a tax break for college students’ textbooks. But those measures are mere leaves for the massive corporate tax cuts at the core of the proposal: corporate income tax cuts worth $770 million annually and a sales tax break on commercial rents that will cost $339 million over the biennium. House Speaker Steve Crisafulli says the governor’s plan may not be possible in its entirety. The state will post a one-time surplus of $635 million next year, but much of that money will go to support public education. Furthermore, a one-time cash infusion won’t pay for tax cuts that recur year after year.

Louisiana Gov.-elect John Bel Edwards will push to double the state’s EITC as part of his plan to reduce poverty in the state. As we outlined in a previous blog post, the move by Edwards is one of a number of encouraging signs for tax justice advocates. The governor-elect also appointed a moderate Republican, former Lt. Gov. Jay Dardenne, to be the state’s budget chief. Dardenne could have the skills to get a revenue-raising tax reform through the legislature since he was able to do so in the early 2000s. Louisiana faces a $1 billion deficit next fiscal year.

Mississippi lawmakers are set to push for tax cuts again next year after a failed attempt to pare back and even eliminate the personal income and corporate franchise taxes in 2015. While the Mississippi Economic Council for Transportation is calling on lawmakers to raise close to $400 million through the gas tax to pay for a long list of transportation infrastructure projects, Gov. Phil Bryant has said “any tax increase must be offset by corresponding tax cuts.”  Given the nature of the tax cuts proposed last year, such a plan would likely result in a significant tax reduction for the state’s wealthiest residents and a hike on low- and moderate-income working families.

Virginia Gov. Terry McAuliffe’s budget proposal unveiled this month includes corporate and personal income tax cuts.  The governor wants to cut the state’s corporate income tax rate from 6 percent to 5.75 percent. The proposal would cost $64 million in state revenues. McAuliffe claims that these changes are necessary to compete with neighboring North Carolina, which has repeatedly slashed its corporate tax rate in recent years. But an analysis by The Commonwealth Institute says these claims are false. They point out that two-thirds of Virginia corporations pay no income tax despite record profits, and that the governor’s proposed tax break would help a few large companies while providing no benefits for small businesses and families. They also note that recent history does not provide much reason to be optimistic about the Governor’s plan: a 2009 tax break for manufacturers, for example, failed to spur job growth in that sector. The governor also wants to cut the personal income tax through slightly increasing the size of the personal and dependent exemptions.  Such a proposal will only cut taxes by a little more than $20 million a year and ITEP found that more than a quarter of taxpayers, primarily low- and moderate-income working families, will see no benefit from the proposal. 

Happy Holidays from all of us at CTJ and ITEP! As the weather gets colder, our thoughts turn to warm chili and cuddling up with a good book. Our staff enjoyed these books this year and we hope you will too! If you have books to recommend to us, send them along to Kelly@itep.org

***

Wonder by R J Palacio ($11.95 at Powell’s) – This smart, fast-paced book should be required reading for all humans. Don’t let the fact that this is a young adult book fool you – chances are you’ll be a better, kinder person for having read this gem. – Kelly Davis

Citizen: An American Lyric by Claudia Rankine ($13.32 at Powell’s) – This searing book of poetry is a reflection of the black lived experience in America. Rankine weaves personal experience, celebrity and pop culture references, and contemporary media tragedies into a genre-bending meditation on racism and prejudice in our society. A hard read, but well worth it. – Sebastian Johnson

Showdown at Gucci Gulch by Jeffrey H. Birnbaum and Alan S. Murray ($18.00 at Powell’s) – This work is both a riveting story of political intrigue and a must-read for anyone interested in reforming our tax code. The book tells the unlikely story of how the 1986 tax reform was enacted despite the opposition of DC’s many Gucci-clad lobbyists. The book even discusses the critical role of Citizens for Tax Justice in spurring on the push for reform with its blockbuster corporate tax reports.  – Richard Phillips

Between The World and Me by Ta-Nehisi Coates ($24.00 at Powell’s) – Here’s a description from an October 25, 2015 Daily Beast article by Felice Leon: “The piece is a raw account of Coates’s trying experiences as a black man living in America—from his father’s heavy-handed approach toward parenting (i.e. whippings) to the pain and rage caused by losing a close college friend at the hands of the police. The theme of the black body—protecting it, fearing its loss, and its destruction (which in his book, Coates describes as ‘traditional’ in America)—is woven throughout.” – Ed Meyers

Big Magic by Elizabeth Gilbert ($24.95 at Powell’s) – Looking for a book to get your creative juices flowing or just want to feel inspired? This is the book for you. Reading this book is a great way to begin 2016. – Kelly Davis

The Complete Beatles Recording Sessions by Mark Lewisohn ($45.00 at Powell’s) – Almost a quarter century ago, producer Mark Lewisohn wrote this fascinating look at the details of how the Fab Four cranked out some of the most influential pop music in history in seven short years at Abbey Road studios. The book is a labor of love, with a day-by-day chronology of every recording session from “Please Please Me” to “Let It Be.” Music-making technology moved light-years ahead in the 1960s, and the Beatles were not simply riding this wave—they were helping to push it forward by constantly demanding more and more of their sound engineers. But you don’t have to be a gearhead to appreciate this book: above all, Lewisohn puts us in the studio alongside Lennon and McCartney as observers of the creative (and usually collaborative) process that generated music their fans will always carry with them.  If I lost this book today, I’d go out and buy another copy tomorrow. No serious fan should be without it. – Matt Gardner

The Hidden Wealth of Nations by Gabriel Zucman ($20.00 at Powell’s) – This book may be a quick read at just 130 pages, but it still provides a deep dive into the lurid underworld of tax havens. Zucman weaves together history and hard data to tell the story of the rise of tax havens and to approximate just how much damage they are doing to the world. This book is a must-read for anyone concerned with economic inequality and tax equity. – Richard Phillips

Chronicle of a Death Foretold by Gabriel Garcia Marquez ($8.50 at Powell’s) – This classic from the Colombian author and innovator of magical realism recounts the story of Santiago Nasar, a man murdered in the beginning of the novel. The story explores themes of morality, collective responsibility, gender relations and purity, and is presented in a quasi-journalistic collection of testimonials. Marquez captures the rich beauty and timeless complexity of Colombian culture, deftly employing irony and mystery to draw the reader into the narrative. – Sebastian Johnson 

Anyone watching Apple CEO Tim Cook on CBS’s “60 Minutes” last night would be forgiven for wondering why Congress and the IRS won’t just leave this nice man and his poor company alone. Cook fielded questions on a wide variety of topics from national security to the future of the “Apple car,” but generated the most headlines for his combative, evading and ultimately misleading comments on tax issues.

In response to a typically mild question from interviewer Charlie Rose — “How do you feel when you go before Congress and they say you’re a tax avoider” — Cook told Rose that “we pay more taxes in this country than anyone.” In fact, that’s true, by the tally of the bean counters at the Institute on Taxation and Economic Policy. Apple’s federal income tax bill — just over $8 billion in 2014 — is larger than any other Fortune 500 corporation reported in that year.  But as Rose gamely pointed out in response, this reflects the truly gigantic scale of Apple’s reported profits rather than an overdeveloped sense of patriotism. Focusing on the amounts of tax the company can’t avoid, rather than the taxes the company has successfully dodged, is a classic corporate PR strategy routinely practiced by even the most blatant tax avoiders. It’s also basically meaningless.

But Cook wasn’t done. Faced with Rose’s reminder that Congressional investigators had found that “Apple is engaged in a sophisticated scheme to pay little or no corporate taxes on $74 billion in revenues held overseas,” Cook shot back: “That is total political crap. There is no truth behind it. Apple pays every tax dollar we owe.”

Of course, the exhaustive 2013 investigation by the U.S. Senate’s Permanent Subcommittee on Investigations (PSI) that brought Apple’s tax avoidance practices to light never alleged that Apple’s practices were illegal. What the PSI found was that Apple had used loopholes in the tax laws to make legal, but ethically reprehensible, “cost-sharing agreements” with its insubstantial Irish subsidiaries that allowed the company to avoid paying tens of billions of dollars in income taxes. The question the PSI hoped to encourage Congress to consider as a result of these hearings was not whether Apple’s actions were illegal. It was whether the company’s brazen tax avoidance should be made illegal by closing these egregious tax loopholes.

Cook’s comment does bring up an important, uncomfortable point: fully two years after the PSI unveiled Apple’s Irish tax-avoidance strategies, Congress has done precisely nothing to act on the PSI’s findings. At the end of the day, it’s the responsibility of Congress to close the door on the blatant corporate tax avoidance practiced by Apple and other multinational corporations.

Until that day comes, Apple execs have signaled clearly that they will continue to stash their corporate cash in offshore tax havens. As ITEP found earlier this fall, Apple shifted a record $50 billion in cash offshore in 2014, and admitted paying a tax rate of just 2.2 percent on its offshore cash. The tens of billions of dollars in corporate taxes the company is not paying to the U.S. are making it harder to adequately fund roads, healthcare and schools. Cook was correct when he told a George Washington University commencement audience, in a speech excerpted in last night’s “60 Minutes” broadcast, that “[a] company that has values, and acts on them, can really change the world.” Too bad that company isn’t Apple.

Even in the universe of Jedi, Death Stars and Ewoks, tax policy plays a surprisingly important role in driving the events of the day. In anticipation of the release of the newest Star Wars movie, we just wanted to share some of the little known tax policy lessons from the Star Wars universe.

1. A trade tax dispute sets off the turmoil central to the Star Wars movies.

The first words in the opening crawl of Star Wars Episode I: The Phantom Menace read, “Turmoil has engulfed the Galactic Republic. The taxation of trade routes to outlying star systems is in dispute.” The beginning crawl then explains that to protest trade taxation the Trade Federation has set up a blockade of all shipping to the planet of Naboo, which causes the Supreme Chancellor to dispatch two Jedi Knights to help resolve the tax dispute. In other words, the chain of events set off in The Phantom Menace begin with a classic interjurisdictional dispute over the taxation of trade.

Taxes on imported goods, known as tariffs, used to play a central role in funding the U.S. federal government. Through the late 18th and early 19th century, these revenues represented between 50 and 98 percent of all government revenue. During the late 19th and early 20th centuries, the dependence on tariff revenue dropped dramatically due to the rise of the income tax and the perception that the tariff was both regressive and economically distortive. Today tariffs represent just one percent of total federal revenue.

While most lawmakers now understand the potential for tariffs to set off turmoil on a worldwide (or galactic) scale, the real world Donald Trump has proposed to massively increase tariffs during his presidential campaign.

2. The Star Wars universe has problems with corporate tax enforcement and shell companies.

For those who want to go deeper into the Star Wars universe, there is a vast literature of books that more fully fill out how this alternative galaxy functions. In the book “Republic Commando: True Colors,” set between the second and third Star Wars movies, the author reveals that the Star Wars universe faces many of the same tax enforcement problems that we face in the world today.

Specifically, the book details the story of two employees of the Galactic Republic’s Treasury Corporate Tax Enforcement department who discover that a shell corporation Dhannut Logistics, presumably controlled by Darth Sidious (aka Emperor Palpatine), is being used to funnel money to pay for the construction of a massive clone army. Similarly, anonymous shell corporations incorporated in states like Delaware are frequently used as a conduit for illicit activities like money laundering and tax evasion. Given this, it is clear that both the Star Wars universe and the United States could benefit from requiring the disclosure of the beneficial ownership of corporations.

3. Murder is so frequent on the planet of Tatooine that there is a tax on it.

It is very common for jurisdictions to raise a lot of their revenue by taxing those things that they have in excess. For example, Nevada’s budget is very dependent on gambling revenues, North Dakota’s on natural gas and Florida on tourism. The one thing that the planet of Tatooine, the home world of Luke Skywalker, has in excess is murder, which maybe the motivation behind Jabba the Hutt’s decision to impose a so-called “murder tax.” While a tax on murder may raise revenue in the short term, it is likely that this source of revenue is not necessarily sustainable in the long run considering that each transaction necessarily requires a one person reduction in the tax base. Tatooine and many U.S. states dependent on similarly unsustainable revenue sources would be much better off in the long term if they enacted a broad based income tax to fund public services.