Month: February 2016

This Super Tuesday the presidential primary season will finally kick into high gear, as millions of Americans go to the polls. Taxes have been a key issue this election season, with all of the candidates spelling out substantial tax reform agendas. Over the past year, we have kept a close eye on each candidate’s proposals and provided full distributional analyses of their plans when possible.

Below are short summaries of each candidate’s record and recent tax reform proposals.

Democrats

Hillary Clinton

Throughout her career, Clinton has pursued incremental changes that would significantly improve the fairness of the tax code. As a candidate, Clinton has proposed a series of progressive revenue-raisers, including estate tax reform, enacting a surcharge on multimillionaires and limiting the value of itemized deductions. In addition, she has proposed a variety of tax breaks (to be offset by the aforementioned tax increases) to address issues ranging from incentivizing companies to engage in profit sharing to helping individuals pay for the expense of taking care of a loved one.

For more:
CTJ Commentary on Clinton’s Tax Fairness Proposals 

CTJ Commentary on Clinton’s Anti-Inversion Proposals 

CTJ Commentary on Clinton’s Proposal to Pay for College Affordability 

Hillary Clinton’s Record on Tax Issues 

Bernie Sanders

Sanders has a long record of championing tax fairness through his many progressive legislative proposals, such as his bill to end offshore tax dodging and another to substantially reform the estate tax. During the campaign, Sanders has proposed more than $13 trillion in mostly progressive tax increases to fund his expansive agenda: moving to a single-payer healthcare system, increasing infrastructure spending and expanding access to college education.

For more:
CTJ Analysis of Sanders Health Tax Plan 

Bernie Sanders’ Record on Tax Issues 

Republicans

Ben Carson

Though he has not held any elected office, Ben Carson has used his position as a public figure to advocate for a flat income tax system based on the biblical tithe of 10 percent. As a candidate, he has proposed a 15 percent flat income tax – but in truth, the income tax rate would be 30.2 percent for many since his plan retains payroll taxes. A CTJ analysis finds Carson’s plan would cost $9.6 trillion in revenue over 10 years, actually increase taxes on the bottom 50 percent of Americans and provide the top 1 percent with two-thirds of the overall tax break.

For more:

CTJ Analysis of Ben Carson’s Tax Plan 

Ben Carson’s Record on Tax Issues 

Ted Cruz

Ted Cruz has made a name for himself as one of the most radical anti-tax lawmakers in the country by calling for the abolition of the IRS and for a move to an extremely regressive flat tax system. A CTJ analysis of Cruz’s tax reform plan found that his plan was the most costly, losing $16.2 trillion over 10 years. Even that number assumes he doesn’t eliminate tax collection altogether by following through on his call to eliminate the IRS.

For more:

CTJ Commentary on Ted Cruz’s Tax Plan 

Ted Cruz’s Record on Tax Issues 

John Kasich

While John Kasich has sought to portray himself as the moderate choice in the GOP race, his record as governor of Ohio is very conservative on tax issues. Kasich relentlessly pushed for largely regressive tax cut and reform measures. Unfortunately, Kasich has not specified his tax reform agenda in enough detail for CTJ to analyze, but what he has released indicates that his plan would follow the pattern of other candidates in cutting taxes by trillions of dollars, mostly for the rich.

For more:

CTJ Commentary on John Kasich’s Tax Plan

John Kasich’s Record on Tax Issues

Marco Rubio

Rubio has sought to set himself apart from other candidates by highlighting his proposals to replace the standard deduction with a refundable tax credit and to adopt a more robust refundable child tax credit. While this effort is commendable, CTJ’s analysis of Rubio’s plan found that only 6 percent of the $11.8 trillion in tax cuts he proposes would go to the bottom 20 percent, while over a third of the total would go just to the top 1 percent of taxpayers.

For more:

CTJ Analysis of Marco Rubio’s Tax Plan

Marco Rubio’s Record on Tax Issues

Donald Trump

Donald Trump has been all over the place on tax policy during his career, proposing at one time to impose a heavy tax on wealthy individuals and later proposing massive tax cuts for those same individuals. Early in the campaign, Trump indicated that he would raise taxes on the well-off, but his tax reform plan would likely lower taxes for the rich (including himself). According to a CTJ analysis, his plan would cost an astounding $12 trillion in revenue over the next ten years, with a majority of the tax breaks going to just the richest 5 percent of taxpayers.

For more:
CTJ Analysis of Donald Trump’s Tax Plan

Donald Trump’s Record on Tax Issues

Thanks for reading the Rundown! Here’s a sneak peek: Alaska legislators consider moving money from their oil tax fund to shore up the budget. Maine lawmakers consider tax changes that would benefit the top 5 percent of earners while Oklahoma lawmakers consider delaying a tax cut that would also primarily benefit the wealthy. Hawaii’s legislature will mull a new state Earned Income Tax Credit. And the South Dakota House passes a sales tax increase by a one-vote margin.

 – Meg Wiehe, ITEP State Policy Director

Efforts to raise taxes in Alaska to close a yawning budget gap caused by declining oil revenues may be pushed to next session. Legislators are instead considering plans to use the Permanent Fund to plug the state’s revenue hole. The Permanent Fund is a constitutionally-mandated sovereign wealth fund, financed with oil tax revenue that pays Alaska residents a dividend each year. Dividends have ranged from $878 to $2,072 per person over the last decade. Under Gov. Bill Walker’s plan, that payout would be reduced as the state would transfer $3.3 billion from the Permanent Fund to the state budget each year. Rep. Mike Hawker’s plan would go even farther, putting dividends on hold until the state’s deficit is eliminated. A large reduction in the dividend is likely to impact lower- and moderate-income families much more heavily than the wealthy, though a progressive income tax (as has also been proposed by the Governor) could help offset some of that regressivity.

Under the cloud of a large budget deficit, the Oklahoma Senate Finance Committee has voted to reverse itself on a previously approved income tax cut. The committee surprised many by voting 10-2 to delay the 0.25 percent reduction in the state’s top income tax rate that went into effect January 1. Gov. Mary Fallin and the leaders of the House and Senate all want the income tax cut to remain in effect. The author of the bill to postpone the tax cut, Sen. Mike Mazzei, rallied support to his cause last week, as we covered on The Tax Justice Blog. Expect additional fireworks in this developing story.

A column in the Portland Press Herald makes the case against a bill that would give upper-income Mainers a tax break. The column’s author, Bill Creighton, is in the top 5 percent of Maine taxpayers and would see a tax cut if LD 1519 were passed. The proposal would eliminate the cap on itemized deductions adopted last year in a comprehensive tax reform package and would come at a cost to the state of roughly $52 million. ITEP crunched the numbers on behalf of the Maine Center for Economic Policy and found that over half the benefit of eliminating the cap on itemized deductions would go to the top 1 percent of taxpayers. That group would receive an average tax cut of $4,000 per year. No Mainer in the bottom 80 percent of the income distribution (those making less than $93,000) would see any benefit.

Hawaii lawmakers will consider creating a state Earned Income Tax Credit (EITC). SB 2299 would implement a state credit equal to 10 percent of the federal EITC—providing an average benefit of approximately $220 per eligible filer. In 2013 over 315,800 Hawaii residents, including 127,200 children (PDF), benefited from the federal version of the EITC. Enacting an EITC could go a long way toward lessening the unfairness of a tax system that ITEP ranks as levying the 2nd highest taxes in the country on low-income taxpayers.

The South Dakota House voted to raise the state sales tax rate by half a point, from 4 to 4.5 percent, in order to fund an increase in pay for teachers. The measure initially failed by one vote, but supporters were able to convince their colleagues to reconsider. The measure will now go to the Senate for consideration. The South Dakota Budget and Policy Institute, citing ITEP data, says the change will raise $107 million but will also make the state’s tax structure more regressive. They suggest an alternative plan that would remove food purchases from the sales tax base but raise the rate an entire percentage point on all other goods. This alternative would raise $128 million while actually cutting taxes for the bottom 20 percent of earners.

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email. 

Greetings! Thanks for reading the Tax Justice Digest. In the Digest we recap the latest reports, posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

New ITEP Report: Undocumented Immigrants’ State and Local Tax Contributions
If we could send sound with this email you’d hear a drum roll! This week ITEP released its popular report showing that the 11 million undocumented immigrants currently living in the United States pay $11.6 billion annually in state and local taxes. Want to know more and how much undocumented immigrants pay in your state? Click here for a helpful map and the full report.

Tax Breaks for Manufacturing . . . Death?
Great title, right? In his thoughtful piece, ITEP Executive Director Matt Gardner examines the manufacturing deduction and the tobacco companies who “manufacture” cigarettes. Tobacco companies benefited from the deduction and avoided an astonishing $1.3 billion in taxes over the last five years. Read the full post here.

How Pfizer Could Get Away With Avoiding $35 Billion in Taxes
This week Americans for Tax Fairness released a new report, based in part on CTJ research, which found that Pfizer has likely understated the size of its permanently-reinvested offshore stash by a factor of two. In fact, Pfizer may avoid paying as much as $35 billion on its offshore profits, if its proposed inversion goes ahead as planned. Read all the gory details here.

New Report: Tennessee Hall Tax Repeal Would Overwhelmingly Benefit the Wealthy
Senior ITEP Analyst Dylan Grundman took a close look at a bill in the Tennessee legislature that would eliminate the Hall Tax, the state’s limited income tax on interest and dividends that generates $341 million per year. The wealthy would win in a big way if the tax is eliminated. Read the full report here.

Guest Blog: Income Tax Cuts to Offset Gas and Cigarette Tax Increases? There are Better Ways
Senior ITEP Analyst Lisa Christensen Gee published a post in the Indiana Institute for Working Families’ blog. Her piece describes the ITEP analysis of a proposal that would hike the state’s gas and cigarette taxes and reduce the personal income tax rate. Lisa concludes that “the bill undermines revenue potential for infrastructure improvements, deprives the state of revenue needed for other critical investments, and exacerbates the unfairness of Indiana taxes (Indiana has the tenth most unfair tax system in the country).” Click here for ITEP’s full analysis and Lisa’s post.

Corporate Tax Watch: Facebook and Verisign
This week ITEP Director Matt Gardner took a close look at Facebook and Verisign’s tax filings. Here’s his piece. If you’d like to get Corporate Tax Watch emails – sign up here.

Shareable Tax Analysis: 

ICYMI: Just a month ago we joined with groups across the country in celebrating EITC Awareness Day. For a refresher on who is helped by the Earned Income Tax Credit, click here.

It’s no secret that federal tax breaks for manufacturing corporations aren’t very well targeted. Since Congress enacted a special tax deduction for companies engaged in domestic manufacturing back in 2004, we have deplored its use by companies “manufacturing” items as various as gift baskets, B movies and even restaurant reservations. Relentless efforts by aggressive corporate lobbyists have stretched the definition of eligible manufacturing income almost beyond recognition.

But sometimes the manufacturing deduction applies to activities that, while they should be considered to be manufacturing, are nonetheless not activities we want to encourage as a nation. Tobacco companies “manufacture” cigarettes—but do Americans, or lawmakers, really think it’s a good idea for the federal government to subsidize this activity? New financial reports from major corporations in this sector show that cigarette makers are enjoying substantial manufacturing tax breaks for producing products that kill people.

The Altria Corporation, maker of Marlboros, cut its federal taxes by $799 million over the past five years using the manufacturing deduction.  Reynolds American, maker of Camel cigarettes and Kodiak chewing tobacco, raked in $359 million over this period, with Lorillard enjoying $233 million in federal tax breaks. The three biggest U.S. tobacco producers cut their federal taxes by $1.3 billion over the last five years using this single tax break.

What makes this even more maddening is that these tax breaks fly in the face of other federal public policies designed to discourage the production and consumption of cigarettes. In the same year that the manufacturing deduction was enacted, Congress enacted a landmark tobacco buyout designed to encourage farmers to shift away from tobacco production. And of course, the substantial cigarette excise taxes levied at both the federal and state level are often viewed as a means of discouraging Americans from spending money on tobacco products.  

In a perfect world, Congressional tax writers would be asking hard questions right now about whether it makes sense to offer a special lower tax rate for manufacturing in the first place. But at a minimum, policymakers should be asking whether it makes any sense to subsidize an industry producing products that kill thousands of Americans a year. 

Last year Citizens for Tax Justice (CTJ) published a report showing that the drug manufacturer Pfizer was holding (on paper) $74 billion of its profits offshore, declaring that these profits would be “permanently reinvested” abroad to avoid incurring even a dime of U.S. tax on those profits. Now a new report from Americans for Tax Fairness (ATF), based in part on CTJ research, finds that Pfizer has likely understated the size of its untaxed offshore stash by a factor of two. In fact, Pfizer may avoid paying as much as $35 billion on its offshore profits, if its proposed inversion goes ahead as planned.

How is this possible? The ATF report shows that Pfizer has been using accounting gimmicks for many years to systematically shift its profits to its offshore subsidiaries. While Pfizer officially declares that it has $74 billion in earnings offshore for tax purposes, its real offshore cash could be as much as $148 billion based on its deferred tax liabilities declared in the company’s annual financial report. This means that Pfizer could get away without paying an estimated $35 billion in taxes on this enormous stash of offshore earnings if it is allowed to complete its planned inversion. Pfizer’s planned inversion will allow it to permanently shift this enormous stash of offshore earnings out of the US tax system and therefore allow it to avoid the $35 billion in taxes that it currently owes.

The ATF report rightly asserts that the Treasury Department could take regulatory steps that could reduce the tax benefits of inversion for Pfizer and other tax-averse multinationals. By tightening its 2014 rules governing “hopscotch loans,” ATF argues, the Treasury could help take away one of the largest incentives for Pfizer and other companies to invert.

But as University of Southern California Professor Ed Kleinbard noted (PDF) in testimony before a House Ways and Means Committee hearing on international tax reform earlier this week, we shouldn’t have to depend on regulatory reforms to end this tax-dodging charade. Congress has a much more direct path to ending sham inversions. Sadly, many representatives at this week’s hearing appeared more interested in holding a show trial on the alleged flaws of our corporate tax system than in constructing a sensible policy strategy for ending corporate tax avoidance.

Read the Americans for Tax Fairness full report here. 

Lawmakers in Tennessee will debate a bill today (SB 47) that would gradually eliminate the Hall Tax, Tennessee’s limited income tax on interest and dividends that generates about $341 million per year for public services in Tennessee. The bill would reduce the tax rate incrementally whenever state revenue growth exceeds 3 percent, until the tax is phased out altogether. As our newly updated report explains, this would be bad policy for the state of Tennessee for a number of reasons:

• In a state that already leans more heavily on its low-income families for tax revenue than all but six other states, slashing the Hall Tax would make this imbalance even worse. The richest 1 percent of Tennesseans would receive tax cut windfalls averaging more than $5,000 and making up 45 percent of the total. In contrast, the 95 percent of Tennesseans who have incomes below $173,000 per year would get only 14 percent of the benefit, receiving a $17 tax cut on average.
• To add insult to this injustice, $85 million, or 25 percent, of the total cut would actually flow to the federal government as Tennesseans lose the ability to write off their Hall Tax Payments on their federal tax returns and pay more to the federal government as a result. In fact, the richest 5 percent of Tennesseans would gain so much from the tax cut that they would lose more in federal write-offs than the bottom 95 percent would gain from the tax cut.
• Local entities would suffer as well, as Hall Tax revenues are shared with Tennessee counties and municipalities. SB 47 would hold these local governments harmless for the first few years, but they would eventually lose all of their Hall Tax revenue, which is currently about $119 million worth of city streets, local police officers, county roads, etc. per year. Once that revenue goes away, Tennesseans will either face cuts to those services or increases in their local property taxes. And of course, delaying the effect on local governments means speeding up the losses to the state budget.

As we highlighted in earlier blogs, this approach of cutting taxes in small increments based on automatic “triggers” is a growing trend across the states. Such proposals appear modest on the surface but are ultimately yet another way of undermining vital public services while placing an even greater share of the responsibility for funding those services on low- and middle-income families.

Thanks for reading Corporate Tax Watch. Sign up to receive our occasional Corporate Tax Watch emails here. 

Facebook: An Industry Leader in Rolling the Dice on Probably-Illegal Tax Breaks

The Facebook Corporation has been criticized for paying no income taxes in the U.S and in the rest of the world. The company leads the Fortune 500 in its use of executive stock options as a way of cutting its tax bill. But the company’s latest annual report, covering tax year 2015, adds a new wrinkle: Facebook is now an industry leader in its reliance on tax breaks it doesn’t believe are actually legal. The company discloses $1 billion in new “uncertain tax benefits” related to tax year 2015.These benefits in financial-reporting jargon are tax breaks the company claimed, but that Facebook believes have a greater than 50 percent chance of ultimately being disallowed by tax authorities. The Securities and Exchange Commission (SEC) requires corporations to disclose the value of these tax breaks because this statistic is a great indicator of which corporations are most aggressively pushing the legal envelope in the tax avoidance schemes they concoct each year. Facebook’s 2015 uncertain tax breaks are bigger than those disclosed by Amazon, Boeing, DuPont, Ford Motor and Goldman Sachs put together.

Verisign: Cornerstone of the Tuvalu Economy?

Verisign is less visible than tech giants such as Microsoft and Facebook, in part because the company specializes in maintaining the infrastructure of the Internet. But the company has been every bit as successful as its larger compatriots in avoiding corporate income tax liability. The company’s latest annual report shows that it paid no federal or state income taxes, after subtracting an executive-stock-option tax break, on $250 million in U.S. profits in 2015. And over the past five years, Verisign reports just $1 million in current federal income taxes on over $1 billion in income, for a five-year tax rate of just 0.1%. The company’s low foreign tax rates look downright confiscatory by comparison: Verisign paid an 11.5 percent foreign tax rate on $970 million in foreign profits over the same period. The company notes cryptically that “[a] significant portion of our foreign earnings for the current fiscal year was earned in low tax jurisdictions,” but doesn’t specify what fraction of these profits were placed in Verisign’s subsidiaries in the Cayman Islands or Tuvalu. 

Immigration policy—it’s a politically contentious issue but one of key importance in current state and national debates. To dispel inaccuracies and provide sufficient information to inform these debates, ITEP released today an updated report on the state and local tax contributions of undocumented immigrants. 

The report, Undocumented Immigrants’ State and Local Tax Contributions, finds that undocumented immigrants living in the United States collectively pay an estimated $11.64 billion dollars each year in state and local taxes. Contributions vary by state, ranging from less than $2.2 million in Montana with an estimated undocumented population of 4,000 to more than $3.1 billion in California, home to more than 3 million undocumented immigrants. Nationwide, the average tax contributions of undocumented immigrants equal 8 percent of their income. In contrast, the top 1 percent of taxpayers in the United States pay an average nationwide effective tax rate of just 5.4 percent.

See the report for state-by-state estimates on undocumented immigrants’ current state and local tax contributions, including breakdowns of sales and excise, personal income, and property taxes.

Further, the report shows how the tax contributions of undocumented immigrants would increase if more were granted a pathway to legal status due to increased earnings and higher compliance with the tax code. If all undocumented immigrants in the United States were granted legal status and allowed to work legally, their state and local tax contributions would increase by an estimated $2.13 billion a year, with their nationwide effective state and local tax rate increasing to 8.6 percent.

The report also examines the potential state and local tax impact if President Obama’s 2012 and 2014 executive actions are upheld and fully implemented.  We estimate that the tax contributions of the more than 5 million undocumented immigrants who would be eligible for temporary reprieve under the actions would increase by an estimated $805 million. (Smaller gains in this scenario reflect the fact that the executive actions would only affect around 46 percent of the undocumented population and do not grant a full pathway to legal status.)

See the report for state-by-state estimates of the post-reform state and local tax contributions of the total undocumented immigrant population and of the 5 million undocumented immigrants directly affected by President Obama’s executive actions.

While our estimates look only at the tax consequences of immigration reform on state and local taxes, it’s important to note that our findings mirror those at the federal level. Full immigration reform at the federal level would decrease the deficit and generate more than $450 billion in additional federal revenue over the next decade, according to a 2010 report from the non-partisan Congressional Budget Office. And the president’s executive actions are estimated to have positive effects on labor market growth and productivity, as well as wages and economic growth according to both the Council of Economic Advisers and the Center for American Progress.

To view the full report, find state-specific data, or review our methodology go to www.itep.org/immigration/.

Ensuring Indiana has funding needed to adequately repair its roads and bridges over the next several years is a top priority among lawmakers this legislative session. Among the proposed infrastructure improvement plans is HB 1001, which would raise the state’s gasoline tax by 4 cents per gallon, the tax on diesel fuel by 7 cents, and the cigarette tax by $1 per pack. The package would increase road funding by an estimated $500 million a year, with the revenue from the cigarette tax increase offsetting general revenue funds that would be newly diverted for transportation.

The House bill also includes a $294 million tax cut via a gradual reduction in the state’s personal income tax rate to 3.06 percent. By also proposing a reduction in the personal income tax, the bill undermines revenue potential for infrastructure improvements, deprives the state of revenue needed for other critical investments, and exacerbates the unfairness of Indiana taxes (Indiana has the tenth most unfair tax system in the country). Hoosiers among the bottom 80 percent of earners already pay a higher share of their income in state and local taxes than those in the top 20 percent. Under HB 1001, the average taxpayer among the bottom 80 percent would see a tax hike while the wealthiest 20 percent would benefit from a tax cut.

HB 1001: Taxing the Bottom and Cutting the Top

Our analysis[i] of HB 1001 illustrates how upper-income taxpayers come out ahead under this proposal. Gas and cigarette increases are regressive—meaning that middle- and low-income families pay a larger share of their incomes than the wealthy. As shown in Table 1, taxpayers making less than $22,000 will see their taxes go up by 0.7 percent of their incomes while taxpayers in the top 5 percent will pay increases less than 0.05 percent under the proposed gas and cigarette changes.

While cutting the personal income tax can offset some of the regressive effects of raising regressive consumption taxes, cutting the income tax rate disproportionately benefits wealthier taxpayers, worsening the tax fairness of the proposal.[i] The combined impact of these regressive tax increases and cut to the income tax rate would result in a tax increase for the average Indiana taxpayer in the bottom 80 percent and an average tax cut for the top 20 percent. For families in the bottom 20 percent, this means an average tax increase of $79 while those in the top 1 percent would see an average tax cut of more than $1,200.

More Equitable Alternatives

If lawmakers are intent on offsetting regressive consumption tax increases with tax cuts, there are more equitable ways to do it. We considered three alternatives, all of which would cost the same amount as the proposed rate cut but better target the cut to households who are already being asked to pay a higher share of their income in Indiana taxes.

The three proposals include raising the personal exemption by $1,530 for all taxpayers, raising the personal exemption by $2,150 for households with income less than $100,000 (or $50,000 if single or married filing separately), and coupling Indiana’s Earned Income Tax Credit (EITC) to the federal EITC and increasing it from 9 percent to over 32 percent. Table 2 shows how each of these alternatives compares to the proposed HB 1001 rate reduction.

Under Option 1, the same number of Hoosiers (90%) would receive an income tax cut as under the proposed rate reduction, but the share of the tax cut going to low- and higher-income households is rebalanced: the top 20 percent of earners receive 29 percent of the cut (instead of 55) and the remaining 80 percent of earners receive 71 percent (instead of 45). 

In Option 2, the tax cut is more narrowly targeted to the bottom 80 percent of earners. While these earners would still be paying a higher net tax under HB 1001 (the average increase in gas and cigarette taxes would be greater than their average income tax cut), this alternative gets closer to holding these taxpayers harmless than HB 1001’s rate cut.

Option 3 is the most targeted of the alternatives presented, targeting the cut to the bottom 60 percent of earners. Coupling Indiana’s EITC with the federal credit and increasing its value from 9 to over 32 percent would fully offset the impact of the proposed tax hikes on the average taxpayer in the bottom 40 percent of earners. It would also help offset the disproportionately high rate of taxes these earners pay in all Indiana state and local taxes.

Closing Thoughts

The gas tax is a critical source of revenue for funding state transportation infrastructure needs. Indiana hasn’t raised its gas taxes in 13 years, making money to pay for these critical investments harder to come by, especially in light of the growing costs of materials and construction. Given this, lawmakers’ efforts to raise the gas tax are applaudable, but pairing an increase for transportation funding with a large tax cut undermines the purpose of the tax increase while shorting the state of revenue needed to fund other critical state investments, including higher education, public health, and safe communities. Indiana would be better off pairing regressive tax increases with targeted tax cuts for working families rather than enacting cuts that tilt the state’s upside down tax system more in favor of the wealthy.

This post was originially published in the Indiana Institute for Working Families blog.

[i] While Indiana has a flat income tax rate, the effect of its income tax is not perfectly “flat” because the state offers some sensible tax breaks (personal exemption, rent deduction, EITC, etc.). Because of these tax breaks, a different portion of households’ income is subject to the flat income tax rate—for example, a personal exemption of $1,000 exempts 20% of income from taxation for a family with $5,000 while this same exemption only exempts 0.002% of income for a household with $50,000. Since a larger portion of middle- and high-income families’ income is subject to the income tax, when there is a reduction in the tax rate, they benefit more from the cut. (Note that while low-income families pay a smaller share of their income in personal income taxes, they still pay the highest share of their income in all state and local taxes combined.)

[i] This analysis was performed using the ITEP Microsimulation Tax Model, which is a tool for estimating the impact of federal, state, and local taxes by income group.  It uses a very large stratified sample of federal tax returns, as well as supplementary data on the non-filing population, to derive estimates that apply to taxpayer populations at the state level. The U.S. Treasury Department, the Congressional Joint Committee on Taxation, the Congressional Budget Office, and several state departments of revenue use similar models.  For a more detailed explanation of the ITEP Tax Model, see http://www.itep.org/about/itep_tax_model_full.php 

Thanks for reading the Rundown! Here’s a sneak peek: Missouri lawmakers want to move money from anti-poverty programs to road construction in a move some are calling unconscionable. Arizona could pass a first-of-its-kind tax credit for concealed weapons carriers. Louisiana paid out more in corporate tax breaks than it made in corporate tax revenue. One North Dakota lawmaker has regrets about a recent oil tax cut.

 – Meg Wiehe, ITEP State Policy Director

The Missouri Legislature will consider a proposal to shift money from programs for poor families and children to road construction. Last year, legislators passed the Strengthening Missouri’s Families Act over the veto of Gov. Jay Nixon. The two-part measure eliminated the state’s Temporary Assistance for Needy Families (TANF) benefits for 9,500 Missourians (6,300 of them children) and made another 58,000 adults ineligible for food stamps. The money saved was supposed to go to job training, child care and other programs to help poor Missourians; instead, lawmakers want to spend the money on road construction to avoid raising the state’s gasoline excise tax by 1.5 cents a gallon. Missouri has not seen a gas tax increase in almost 20 years.  Gov. Nixon, who supports the gas tax increase to pay for road construction, rebuked the idea of paying for roads with money diverted from safety net programs as a budget gimmick that “could jeopardize priorities such as local public schools, higher education and services for Missourians with developmental disabilities and mental illness.” An editorial in the St. Louis Post-Dispatch called the proposal “unconscionable,” arguing that if “Missouri drivers want better roads, they — and not the neediest among us — should bear the burden.”

One North Dakota senator says the state will soon come to regret its 2015 decision to lower its oil extraction tax rate. Sen. Jim Dotzenrod said in an op-ed for the Grand Forks Herald that the rate reduction from 6.5 to 5 percent will leave North Dakota with $132 million less in annual revenue if prices remain at $25 a barrel. The rate cut was adopted last year at the insistence of lawmakers who wanted to offset the elimination of a “trigger” provision in a 1987 drilling law. The trigger provision automatically reduced the extraction tax rate if oil prices fell below a pre-determined price of about $55 per barrel; given the recent steep decline in oil prices, the effective tax rate would have fallen from 6.5 to 1 percent if the trigger were not eliminated. While eliminating the trigger was broadly supported by the state’s political establishment, the choice to permanently lower the extraction rate from 6.5 to 5 percent was not. Dotzenrod notes that “the effect of this cut in the oil extraction tax could be quite high because it will be in place even when oil prices rise. For example, had this cut been in effect during the 2013-15 biennium, the revenue loss would have been well over $600 million.” He believes the rate cut will adversely affect future investments in public services.  

Louisiana lawmakers are zeroing in on highly inefficient tax credits as one reason for the state’s ongoing budget woes. The state’s Department of Revenue reports that Louisiana paid corporations $210 million more in tax rebates and credits than it collected in corporate income and franchise taxes. From 2004 to 2014, state spending on the six largest tax credits increased from $207 million to $1.08 billion. Gov. John Bel Edwards wants lawmakers to close or reduce several corporate tax giveaways to help plug a significant revenue gap.

If you carry a firearm in Arizona, you could get a tax break. A House committee passed a new tax credit of up to $80 for Arizonans who get concealed weapons permits. Only those who obtain permits after the passage of the credit will be eligible. The bill’s sponsor, House Majority Leader Steve Montenegro, says the tax credit encourages gun safety since individuals must attend firearms training classes to get a permit. The credit, which would be the first of its kind in the nation, would cost $1.9 million in revenue.

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email.