Month: March 2016

Thanks for reading the State Rundown! Here’s a sneak peek: Georgia and Idaho lawmakers say no to income tax cuts. The Vermont House passes a budget and tax package. Maryland’s Senate fails to move on manufacturing tax cuts. Nebraska’s legislature advances the governor’s property tax proposal with amendments.

– Carl Davis, ITEP Research Director

Georgia lawmakers ended their legislative session last week without passing a regressive package of income tax cuts. The Senate had passed two bills that together would have cut the top state income tax rate by more than 10 percent, but the House never took the bills up after Gov. Nathan Deal refused to support them. Deal argued that the cutting the income tax, the state’s largest revenue generator, would lead credit agencies to downgrade Georgia’s AAA bond rating. An ITEP analysis also revealed (PDF) that over half the cuts would have gone to the top one-fifth of Georgia earners.

Idaho lawmakers rejected a lopsided income tax cut of their own last week. On Friday the state legislature adjourned without passing any reductions to the state’s graduated income tax rates. Earlier this year an ITEP analysis of one such proposal revealed that while most Idahoans would have seen their taxes fall by $35 or less under the plan, high-income households would have received a benefit of over $800. Ultimately, the legislature prioritized enhanced funding for education over tax cuts.

The Vermont House passed a package of budget and tax bills for FY 2017 last week, sending the state budget to their colleagues in the Senate for consideration. The $5.77 billion budget includes investments in the state college system, access to child care, and community health services. Lawmakers passed a 3.3 percent provider tax on ambulance agencies to pay for an increase in reimbursement rates for ambulance services under Medicaid. An effort to impose a 92 percent tax on e-cigarettes passed out of committee but died on the floor.

Efforts to create tax incentives for manufacturers in Maryland failed this session despite backing from the governor and senior legislators. SB 181, sponsored by Sen. Roger Manno, and SB 386, championed by Gov. Larry Hogan, would have established Manufacturing Development Zones. Under the bills, new manufacturers who located in the zones would pay no corporate income tax and new employees earning less than $65,000 would pay no personal income tax for a designated period of time. New manufacturers could also apply to counties for a property tax waiver. Hogan’s bill would have applied only to poorer jurisdictions, while Manno’s measure would have been piloted in seven counties. Both bills failed to move out of the Senate Budget and Taxation Committee after established manufacturers complained the provisions would hurt their business.

Nebraska Gov. Pete Ricketts’ plan to cut property taxes got a boost this week when an overhauled version passed the Revenue Committee on a unanimous vote. The proposal would increase property tax credits for farm and ranchland owners by $30 million next fiscal year. The bill has received criticism from both sides. Organizations representing farmers and rural interests said the bill doesn’t go far enough, while Renee Fry of the OpenSky Policy Institute (and ITEP’s Board of Directors) warned that it would reduce state revenues and hamper education funding.

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. 

A few weeks ago we wrote about Tax Cut Fever in Georgia, and we have continued to monitor the high temperature of that debate since then.  We are pleased to report, however, that cooler heads ultimately prevailed as the state’s legislative session has ended without passage of either of the damaging tax-cut bills that had been under consideration.

Advocates in Georgia worked tirelessly to educate lawmakers and the public about the potentially damaging impact of two bills — HB 238 to flatten and reduce the state’s income tax (PDF) and SR 756 to amend the state Constitution (PDF) to force that rate down even further over time. ITEP analysis helped show that both were heavily skewed in favor of the wealthiest Georgians and would have weakened the state’s ability to fund its K-12 schools, hospitals, roads, and other services. HB 238 alone would bled the state budget of $281 million to $442 million per year, more than half of which would have gone to the wealthiest 20 percent of Georgians.

One of the strongest words of warning came from former State Auditor Russell Hinton, who advised that slashing state revenues would pose a serious threat to Georgia’s AAA bond rating. In the end, Georgians can be relieved that their representatives made the fiscally healthy decision to keep the state revenue system (and bond rating) intact.

Springtime has traditionally been a fertile period for state tax proposals. This year, some important debates have flourished regarding the scope of state sales tax bases.

In their purest form, sales taxes apply to nearly all of the goods and services purchased by final consumers. Maintaining a broad base and low rate helps these taxes bring in relatively steady revenues and minimizes any interference they may have with the economy. The real world, however, is much more complicated as most state sales tax bases are riddled with special exemptions.

Some of those exemptions have been crafted to advance important policy goals such as limiting the disproportionate impact that sales taxes typically have on low-income families. Others have more to do with the political influence of a given constituency than with principled tax policy. And still others are essentially historical accidents—as the economy and consumption patterns have changed, sales tax laws haven’t always kept up and initially inconsequential tax exemptions have sometimes ballooned in size. 

Shifting Ground 

It’s well-known that the nation’s service sector has grown significantly in recently decades. Today as much as two-thirds of consumer spending is on services rather than goods, and spending on services is the fastest growing area of consumption. But when lawmakers initially designed most state sales taxes in the 1930s, services were a relatively small part of the economy and were typically left out of tax bases. States have been slow to adapt to this change, though there have been some modest steps toward sales tax modernization in places such as North Carolina, as well as ongoing discussions of similar reforms in Arizona, California, Oklahoma, and West Virginia.

While few developments in sales tax policy are as important as the service sector’s growing prominence, the recent growth of online shopping has created another high-profile challenge to state sales tax systems. Under current federal law, states can only force e-retailers to collect the sales taxes their customers owe if those retailers have some kind of “physical presence” in the state. To take just one example, this means that Amazon.com (the nation’s largest e-retailer) is only collecting sales tax from customers in about half the states. For the other half, customers are supposed to be paying the sales taxes they owe directly to the state, but this requirement is unenforceable and very few do so in practice. Ultimately, the sales tax only functions if sellers are collecting and remitting the tax. For years, states have searched for ways to bring a larger number of e-retailers within their sales tax collection systems, and 2016 has been no exception in this regard. Bills taking steps to rein in the untaxed nature of online purchases have moved in Utah and in Oklahoma this year, and a recent federal court case has given states new hope of collecting these taxes as well.

Compared to the growth of the service sector and of online shopping, the rise of websites like Airbnb and apps like Uber and Lyft are extremely new developments with sometimes unclear implications for state and local tax policy. For example, it is not always clear whether Airbnb room rentals are subject to state and local hotel and lodging taxes, or whether Uber and Lyft rides are subject to sales taxes and airport pickup taxes, nor who is responsible for collecting and remitting those taxes if they are due. To their credit, some states and cities are attempting to be pro-active in updating their tax laws and regulations to account for these changes. Gov. Ducey of Arizona took executive action to help ensure that the state’s regulations adapt to the rise of the “sharing sector,” and other jurisdictions such as Cleveland, Philadelphia, San Francisco, Pennsylvania’s Allegheny County, and the state of Alabama have begun grappling with this issue as well.  

Exemptions old and new 

In contrast to the above attempts to ensure that sales tax bases can grow in line with the economy, states are also considering creating new exemptions from their sales taxes. Most state sales taxes already exempt some items deemed to be necessities, such as groceries and prescription drugs. This year has seen many calls to create similar exemptions for other necessities, particularly tampons. Tampon exemptions have already been enacted in a few states and have been the subject of vigorous debate around the country, including a lawsuit in New York, legislative proposals in California, Connecticut, Tennessee, and Wisconsin, and stories in The New York Times, Washington Post, and National Public Radio. 

But determining which items are truly necessities deserving of a tax exemption is not an easy task. As some lawmakers seek to broaden these exemptions, others are arguing that the exemptions already on the books for items such as groceries are too broad because they exempt not just bread and milk, but candy bars and soda pop as well. Last year Vermont removed soda from its broad exemption for groceries and California is considering removing its exemptions for candy and snack food. At the same time, lawmakers in Louisiana and Philadelphia have discussed implementing special excise taxes on soda.          

Healthy debates 

Ensuring that sales tax bases are not eroded as the economy changes is vital to securing adequate revenues for public services such as schools and public safety. But sales taxes are far from perfect, particularly in the way that they tend to hit lower- and moderate-income families the hardest. One tool for lessening sales tax regressivity is to exempt more necessities from the tax, but doing so can also force rates up and increase revenue volatility if the tax collects a larger share of its revenue from “unnecessary” items that people are less likely to buy during economic downturns. With that in mind, lawmakers should keep in mind that there are many tax policy solutions aside from sales tax exemptions that can benefit low-income families in more targeted ways.  

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. 

Dear Treasury, Act to Stop Inversions
This week CTJ joined with 54 other organizations in signing a letter to the Treasury Department detailing actions it could take to curb inversions. CTJ’s Director Bob McIntyre also wrote his own letter to Treasury that you can read here.

Corporate Tax Watch: How Is This Legal?
ITEP’s Director Matt Gardner scratched beneath the surface of data solutions provider IHS’s proposed inversion. Seems the company’s tax accountants and attorneys have weaved quite a complex web: the company claims only 0.6 percent of its profits are domestic even though 60 percent of its customers are U.S.-based. Read our take on the company’s likely motivation for abandoning its U.S. citizenship.  

McIntyre Op-ed: No Free Lunch in Tax Policy
CTJ Director Bob McIntyre is exasperated with one-sided tax policy discussions. In an op-ed published in The Hill (Tall Tales and Half Analyses), he explains why analyses of tax cut proposals that don’t also talk about the spending and budgetary impacts should be met with a healthy dose of skepticism. “Across-the-board tax cuts would benefit all Americans in the same way that “dropping hundred dollar bills from a helicopter would benefit all those beneath it,” he wrote. “However, in the long-run, tax cuts of this magnitude will have to be paid for, and it won’t be pretty.” Read Bob’s full op-ed here.

New Brief: Tax Breaks for Higher Education Could Do More for Working Families
Every state that levies a personal income tax has at least one tax break for higher education expenses, but often these credits are poorly targeted and, in the end, not the best way to ensure more people have access to higher education. Read ITEP’s Higher Education Income Tax Deductions and Credits in the States brief.

Three States Kick Can Down Crumbling Road on Transportation Funding
Legislators in Indiana, South Carolina and West Virginia all started the year on the right foot, looking at serious proposals to raise new revenue for transportation. Sadly, legislators in all three states did little to permanently fix their states’ transportation problems. For more details read ITEP’s blog post.

Pennsylvania Finally Has a Budget, But There is More Work to be Done.
We’ve kept our eyes on the Pennsylvania budget standoff for some time. Unfortunately, the measure slated to become law on Monday represents a missed opportunity. Read ITEP Senior Analyst Aidan Russell Davis’s take here.

Shareable Tax Analysis: 

If you have any feedback on the Digest, please email me here:   kelly@itep.org To sign up to receive the Tax Justice Digest in your inbox click here. For frequent updates find us on Twitter (CTJ/ITEP), Facebook (CTJ/ITEP), and at the Tax Justice blog.

Three states – Indiana, South Carolina, and West Virginia – started the year on the right foot, looking at serious proposals to raise new revenue for severely underfunded transportation construction and maintenance funds. Sadly, legislators in all three states embraced partial solutions or punted entirely, preferring short-term fixes at the expense of other budget priorities.

South Carolina lawmakers had the chance to pass a significant tax package that would increase revenue for road repairs. In January, the state’s Senate Finance Committee considered a plan that would raise revenue by $694 million annually through a phased-in 12-cent increase in the gas excise tax, along with other transportation-related fee increases. Those increases would then be offset with a combination of $398 million annually in “broad-based” income tax cuts (bracket expansion and rate reductions on the top and bottom brackets), “targeted” income tax cuts (creation of a 3.5 percent refundable EITC and expansions of a few other credits), and some reduction of business property taxes. The offsets were a requirement of Gov. Nikki Haley, who vowed to veto any bill without them. The net effect of this plan would have been somewhat regressive and would have been much worse without the EITC.

However, the unwieldy package that tried to appeal to all legislators was undone by its complexity. For example, the EITC intended to attract progressive lawmakers repelled more conservative lawmakers. After weeks of delay in the Senate and a filibuster, the backers of the more ambitious package caved. Senators instead passed a measure to raid the general fund for more road money, jeopardizing other priorities and failing to solve the state’s structural funding issues. House Speaker Jay Lucas was not pleased. “This plan kicks the can further down the road and into a giant pothole,” he decried. “It’s not really a new idea, and it’s not a solution.” Gov. Haley has urged House lawmakers to accept the Senate’s $400 million punt, but also acknowledged that the state needs a long-term fix.

The debate in West Virginia followed a similar pattern, but began with more urgency due to the ongoing fiscal challenge there. A global downturn in energy markets has hit West Virginia and many other states reliant on oil and gas revenues hard in the pocketbook. Just last week, revenue forecasts for the state were downgraded by $92 million, adding to the $354 million shortfall that Gov. Earl Ray Tomblin and lawmakers have been grappling with since January.

Gov. Tomblin began the legislative session by calling for new tax increases to close the budget gap, including an increase in the cigarette tax of 45-cents-per-pack, a new tax on e-cigarettes and a 6 percent sales tax on telecommunications. A Senate bill, SB 555, would have increased the gas tax by 3-cents-per-gallon, the sales tax rate by 1 percent and various vehicle fees and taxes to send more money to the State Road Fund. The Senate proposal would have increased revenue by $290 million annually.

State lawmakers have been unable to come to an agreement on how to solve the budget crisis or raise new revenue for roads. After the release of the gloomy revenue numbers, Gov. Tomblin announced that the legislative session would end with no budget at all. Lawmakers are expected to reconvene later this spring.

Indiana lawmakers followed a familiar script this legislative session. There, the most ambitious proposal belonged to state Rep. Ed Soliday. His plan, HB 1001, would have earmarked excess general funds and gasoline excise taxes for transportation infrastructure, allowed counties and municipalities to levy motor vehicle surtax and wheel taxes, and allowed some portion of local income tax revenues to be used for roads/bridges. The bill would have increased revenue by raising the gas tax, special fuel tax, and motor carrier surcharge tax. It also would have increased the cigarette tax to $1.995 per pack to pay for Medicaid (to offset the general fund revenues now earmarked for infrastructure). Soliday’s proposal was later amended by his House colleagues to include expanded tolls and an income tax cut for non-corporate taxpayers.

Unfortunately, HB 1001 was stripped of most of its revenue raising components once it moved to the Senate. The final bill allowed the earmarking of general fund and gasoline excise taxes to transportation and includes the provision allowing local jurisdictions to levy vehicle surtaxes and wheel taxes. But instead of increasing state revenue, the final bill relies on shifts and transfers,  including transferring surplus general revenue funds to the state highway fund, which over the next two years will generate less than $230 million in “new money” for transportation funding at the expense of other critical state investments. Gov. Mike Pence praised the final measure as short-term benefit for the state, but the bill is far less than the $1 billion investment in transportation infrastructure he initially sought. 

A nine-month standoff between the Keystone State’s Republican legislature and Democratic governor will come to a close this Monday when a budget passed by the legislature lapses into law. Gov. Tom Wolf has said that he will neither sign nor veto the bill, so it will pass by default.

The passage of this 3-month budget does delay some potentially serious shutdowns, including the possibility that some schools would need to close their doors mid-year. But overall the package represents a missed opportunity. The legislature’s unwillingness to consider new revenues, reliance on accounting gimmicks, and heavy budget cuts will ultimately harm Pennsylvanians without offering a long-term solution to the state’s possible $2 billion structural budget gap.

Gov. Wolf recently explained that the state “cannot afford a budget that doesn’t provide the things Pennsylvanians need from their government.” He is now asking legislators to look ahead and begin making budget decisions for the impending arrival of fiscal year 2017, which starts on July 1.  

For the new fiscal year, Wolf has proposed $2.7 billion in tax and revenue modifications, including: an increase in the state’s flat rate personal income tax from 3.07 to 3.4; expanded tax credits for low-income families; a $1 per pack cigarette tax increase; a 40 percent tax on the wholesale price of other tobacco products; an expansion of the state’s sales tax base to include cable television services, movie theater tickets, and digital downloads; a 6.5 percent shale tax on natural gas reserves; a 0.5 percent surcharge on insurance premiums, now taxed at 2 percent; an 8 percent tax on promotional play at casinos; and an 11 percent tax increase on banks and other financial businesses.

The income tax components in particular could go a long way toward narrowing the state’s budget gap while also somewhat reducing the fundamental unfairness of a state tax system that asks far more of low- and moderate-income Pennsylvanians than of the wealthy.

In short, Pennsylvania lawmakers do have reasonable options, beyond quick-fix fiscal bandages, available for addressing the state’s long-term revenue challenges.

Even as more large companies announce plans to take advantage of the inversion loophole to avoid taxes, Congress has refused to move on commonsense legislation that would put an end to inversions. Fortunately, as outlined in a new letter signed by Citizens for Tax Justice and 54 other groups, there are a number of additional actions that the Treasury Department could take without Congressional approval to stem the tide of inversions.

Although Treasury issued new regulations in response to the surge in inversions in 2014 and 2015, Pfizer’s planned inversion with Allergan demonstrates that the regulations so far have been inadequate to prevent this and similar planned inversions by Johnson Controls and IHS. Perhaps the biggest motivation for Pfizer’s planned inversion is that it could allow the company to avoid an estimated $40 billion in taxes that it owes on the $194 billion in untaxed earnings the company has offshore. Expatriating to Ireland through an inversion will allow Pfizer to avoid paying any tax on its offshore hoard through an accounting gimmick called a hopscotch loan, which effectively allows the new foreign parent company to reinvest its untaxed offshore earnings without triggering the US taxes it would normally owe.

Treasury’s earlier inversion ruling disallowed hopscotch loans in the case of inverted companies which are owned by 60 percent of the shareholders of the original US company, but Pfizer skirted this regulation by structuring its merger so that only 56 percent of the new company was owned by US shareholders. As the letter to Treasury lays out, Treasury should use its existing authority to change its threshold to 50 percent or even lower, which could have the effect of ensuring that Pfizer would not be able to take advantage of hopscotch loans to avoid the $40 billion that it owes and could prevent its inversion altogether. In fact, changing this regulation could not only stop Pfizer, but it could have the effect of stopping similarly structured inversions by IHS and Johnson Controls (both of which structured ownership to be just under the 60 percent threshold) as well as other companies considering following in their footsteps.

Even if Treasury does fully implement the proposal on hopscotch loans, the reality is that its authority to take on inversions is relatively limited, meaning that legislation is required to put a permanent stop to inversions and related tax avoidance. The most prominent piece of anti-inversion legislation is the aptly named Stop Corporate Inversions Act, which would no longer allow a newly merged company to claim to be foreign if it continues to be managed and controlled in the United States or if the new parent company is more than 50 percent owned by the shareholders of the original American company. In addition, legislators have taken direct aim at the tax incentives behind corporate inversions with legislation that would curb earnings stripping and legislation that would require companies to pay what they owe on unrepatriated foreign earnings before they become a foreign company. In other words, Congress has plenty of ways to stop inversions, they just need to stop sitting on their hands and take action before more revenue is lost to this egregious loophole.

Perhaps T.S. Eliot was on to something when he deemed April the cruelest month. Spring is a mix of heady excitement and apprehension as they await word from universities across the county. For their parents, the season brings a hyper-awareness of their own finances since tax season and tuition bills loom concurrently. ITEP’s new brief, “Higher Education Income Tax Deductions and Credits in the States,” provides an overview of the ways state governments have sought to encourage more residents to pursue and pay for higher education through their income tax codes.

The soaring cost of college and the ensuing sticker shock has spurred government at all levels to action. Over the past few decades, many states have created tax incentives to encourage families to save for college via 529 plans. Others have focused on higher education costs, providing tax breaks for student loan and tuition payments, or room and board fees. The federal government offers two deductions for college costs, the student loan interest deduction and the tuition and fees deduction. Most states allow residents to use these deductions in determining taxable income for state filing purposes.

While the goal of bringing higher education to more citizens is laudable, many of the tax incentives that states have created don’t help the working class families who need the most help accessing college. As the report notes,

The benefits of [many] higher education tax breaks are modest. Since they tend to be structured as deductions and nonrefundable credits, many of these tax provisions fail to benefit to lower- and moderate-income families. These poorly targeted tax breaks also decrease the amount of revenue available to support higher education. And worse yet, they may actually provide lawmakers with a rationale for supporting cuts in state aid to university and community colleges.

For instance, of the many tax breaks documented in the brief only seven are credits. Of those seven credits, only three are refundable, which means they are capable of benefiting low-income families who earn too little to owe state income tax. For low-income families, far too many of the tax breaks offer no assistance at all.

States could provide more support to these families by transforming current deductions into refundable credits. They could also improve the targeting of existing tax breaks through the introduction of additional means-testing.  The two deductions offered at the federal level can only be claimed by taxpayers who earn less than $80,000 in Modified Adjusted Gross Income ($160,000 for married couples). Similar limits could be applied to the deductions offered for contributions to 529 savings plans, which vary in size and scope according to the state.

Read the full brief here.

Downloadable Maps:

State Tax Treatment of Federal Deductions for Student Loan Interest and Tuition and Fees

State Tax Deductions and Credits Related to Higher Education Costs

State Tax Deductions and Credits Related to Higher Education Savings

A cursory glance at the business practices of the latest inversion candidate, IHS, quickly dispels the erroneous anti-tax talking point that corporations are renouncing their citizenship because the U.S. tax rate is high.

Earlier this week, data solutions provider IHS revealed a planned merger with a British competitor, Markit. The Wall Street Journal labeled the announcement another example of a company inverting to take advantage of another country’s lower tax rate. Such pronouncements attempt to absolve U.S. companies instead of holding them accountable for brazen tax avoidance.

As we often point out, a broad swath of profitable Fortune 500 pay nowhere near the statutory 35 percent corporate tax rate. The federal tax code regrettably offers a plethora of loopholes that allow corporations to whittle or altogether eliminate their tax bills by writing off expenses for equipment depreciation, research, manufacturing, executive stock options and, in the case of IHS, shifting their U.S.-earned profits offshore.

These intentional loopholes have made it easy for big business to dodge taxes while staying within the confines of the law. Nonetheless, some corporate filings often defy logic. IHS appears to have found a way to make the U.S. corporate tax rate an abstract concept, reporting virtually no taxable income in the United States despite holding most of its assets and generating most of its revenues domestically. The company reports that 87 percent of its income-producing assets are in the United States and more than 60 percent of its revenues are from U.S. customers, yet virtually none of its worldwide profits are taxed in the United States. Further, IHS has enjoyed $992 million in worldwide profits over five years but claims it only earned $6 million of that on U.S. soil.

For emphasis, all of that is worth repeating: 60 percent of IHS’s revenue is from U.S. customers, but the company claims that only about half of 1 percent of its profits are earned in the United States. IHS’s skilled (or cunning, depending on how you look at it) tax accountants and lawyers are finding ways to artificially shift its profits out of the United States and into lower-rate jurisdictions.

Over the same five-year period that IHS earned $992 million, it amassed $747 million of permanently reinvested foreign earnings, profits that it claims were earned abroad and will be kept there indefinitely. It’s hard to see exactly how IHS is “investing” its offshore cash in anything substantial since the U.S. share of its worldwide assets (again 87 percent of its income-earning assets are on U.S. soil) crept steadily upward during this period.

To be sure, tax minimization is certainly part of the story behind the IHS inversion. Our current tax rules will require IHS to pay tax on its offshore stash when it eventually ends the pretense that the money is offshore and uses the cash in the United States. But if the company inverts and becomes British, it could more easily continue its streak of reporting virtually no U.S. income and avoid ever paying taxes on its offshore hoard.

Congress is enabling IHS and other tax dodging, citizenship-renouncing companies every step of the way. Lawmakers could easily prevent companies such as Pfizer, Johnson Controls and IHS from inverting. And it could also curb tax avoidance strategies like earnings stripping that allow multinationals to shift so much of their income outside the United States in the first place.