Month: April 2016

A new report from the Internal Revenue Service (IRS) estimates that the “tax gap,” meaning the amount in taxes that are owed but go unpaid each year, was $406 billion on average between 2008-2010. This is a $406 billion cost that honest taxpayers are forced to make up for due to the illegal actions of individuals and corporations.

While the $406 billion figure is rather staggering, many experts believe that this could be an understatement of the cost of tax evasion. In testimony before the Senate Budget Committee, Bob McIntyre, director of Citizens for Tax Justice, explained that the IRS estimates likely underestimate the amount of income that individuals and corporations are able to evade by hiding their money in tax havens.

It is also important to note that the vast majority of middle income taxpayers are not the ones evading taxes. That’s mainly because they can’t cheat even if they were so inclined. Employers must report wages to the IRS and remit withholding taxes. The majority of the tax gap ($247 billion) is due to underreporting of business income.

The most obvious way to crack down on tax evasion is to beef up enforcement by the IRS. But due to serious budget cuts enacted by Congress, the IRS estimates that its enforcement actions reduced the tax gap by only 11 percent.

Providing the IRS with the resources it needs to do a better job cracking down on tax cheats would seem to be a no brainer, except to the brain dead members of Congress. According to one estimate, increasing funding for IRS enforcement, modernization and management systems can save the government $200 for every dollar invested.

Rather than increasing the funding of the IRS to close the tax gap however, Congress has actually cut the IRS budget by 17 percent since 2010, after accounting for inflation. While cutting the IRS budget may appeal to members of Congress who are in favor of tax cheating, it’s counterproductive in terms of deficit reduction and protecting honest taxpayers.

So if Congress wants to get serious about closing the tax gap, the first thing it should do is reverse these budget cuts and increase the IRS’s funding substantially. In addition, there are numerous legislative actions that Congress could take to crack down on tax evasion. For example, Congress could require more information reporting, increase penalties for tax-evasion facilitators and close the various offshore loopholes that create the opportunity for tax cheating businesses to game the tax system. 

Allowing for rampant tax evasion steals money from honest taxpayers and the public investments that we need. Congress should act immediately to stop this theft of taxpayer money.

Headlines about the happenings (or non-happenings) at the Illinois Statehouse this past year have been dismal as the state enters the 11th month of the fiscal year without a budget. While the budget stalemate is unlikely to be resolved any time soon, lawmakers are moving forward with important efforts to improve Illinois’ future fiscal health by advancing measures that would reform the state’s personal income tax.

The majority of states and the federal government tax lower levels of income at lower rates and higher levels of income at higher rates, but due to a state constitutional prohibition, Illinois can only apply a single rate to all taxable income. According to ITEP’s tax inequality index, Illinois has the fifth most unfair tax system in the country, requiring more from low- and middle-income taxpayers than from high-income earners. If Illinois were able to adopt a graduated rate structure instead, it would greatly improve tax fairness, as well as improve the ability of its income tax to keep pace with income growth and the rising costs of critical services like education and roads.

Both the House and Senate are expected to take up several bills next week that could change this for Illinois. One set of bills would put the question to voters in November whether the Illinois Constitution should be amended to allow for a graduated income tax. The second set of bills establish what the rate structure would look like should the constitutional measure pass in the fall. The proposed rate structure (see below) would cut the current marginal tax rate of 3.75 percent to 3.5 percent on income below $200,000 for married filing jointly ($100,000 for single) and introduce two new brackets with higher marginal rates on income over $750,000 ($500,000 if single).

An ITEP analysis of the proposal estimates that 99 percent of Illinoisans who file income tax returns would receive a tax cut, with only a small fraction of the state’s top earners paying a higher income tax rate. The result is a more progressive tax—one that requires less from those with less and more from those with more. Additionally, this rate structure is estimated to generate in the ballpark of $2 billion in additional revenue, which the state desperately needs in the short-term to regain its financial footing and in the long-term to keep up with the rising costs of services.

The Illinois House is expected to vote on the bills this coming Tuesday, May 3rd, with the Senate following course on Wednesday, May 4th. While holding one’s breath for a budget deal is not advisable, here’s to hoping we can heave a collective sigh of relief for a fairer and more sustainable income tax when picking up Illinois papers next week.   

If you are looking for an example of how corporate interests continue to dominate the agenda in Congress, a recent hearing on business tax reform held by the Senate Finance Committee is Exhibit A.

Over the past several years, the American public has watched as the media has continually reported on how major profitable corporations are using offshore loopholes and special interest tax breaks to get out of paying their fair share in taxes. These reports have left the American public rightly outraged. In fact, a Pew Research poll found that 82 percent of all Americans (including a majority of Republicans) say that they are bothered by corporate tax avoidance.

Given the unusually strong consensus on this issue, Tuesday’s Senate Finance Committee hearing should have focused on how to clamp down on offshore tax avoidance or curb the broad tax breaks that corporations receive. Instead, the discussion focused almost exclusively on how Congress could provide corporations with lower statutory tax rates, expanded loopholes and even bigger tax breaks.

Lawmakers are clearly disconnected from their constituents on this issue. They have bought into the enormous lobbying campaign by corporations touting the idea that U.S. corporations pay too much in taxes.

While it is true that the U.S. statutory tax rate is 35 percent, the wide swath of loopholes and breaks allow large profitable U.S. companies pay closer to 19.4 percent on average, with many companies paying nothing at all. A lot of the reason multinational corporations are able to pay such low rates is that they are allowed to avoid an estimated $695 billion in taxes on the $2.4 trillion that they hold offshore. In other words, the real problem with the tax code is not that U.S. multinationals are paying too much, but rather the fact that they are allowed to avoid so much in taxes.

Congress could shut down corporate tax avoidance and at the same time raise much-needed tax revenue tomorrow by ending the deferral and inversions loopholes. Instead, the Senate Finance hearing focused on how to enact substantial new tax cuts for corporations. For example, several participants discussed the need for the U.S. to move to a territorial tax system, a move that would dramatically increase, not decrease, the incentive for U.S. companies to shift more of their profits (and even real activities) offshore to avoid paying taxes. While this move alone would lose a huge amount of revenue, multiple panelists insisted that this tax break would not be nearly enough and that huge rate cuts would also be necessary to remain “competitive.”

If lawmakers insist on moving forward with policies that cut taxes for corporations there will almost certainly be huge policy and political consequences. Policy wise, lawmakers will find it impossible to raise enough revenue to make the public investments that are the true backbone of a competitive economy. Politically, lawmakers may find themselves on the side of hugely unpopular tax cuts that the vast majority of Americans oppose and may decide is reason enough to vote them out of office. 

Hundreds of Fortune 500 corporations routinely lower their federal tax bills by taking advantage of a tax break that allows them to write off executive compensation in the form of stock options.

As we have noted previously, the tax break has allowed giant tech firms such as Facebook, Microsoft and Apple to substantially reduce their effective tax rates by claiming “expenses” they never actually paid.

But newly released annual financial reports show that the problem goes beyond American firms: a number of formerly U.S.-based companies that have inverted  (that is, filed paperwork to claim their headquarters are overseas) continue to claim these U.S. tax breaks for their executives’ pay. In other words, not only have many inverted companies shifted their headquarters to low-tax countries to avoid having the U.S. as their primary residence for tax purposes, they are still using every trick and loophole available to avoid paying taxes on U.S. profits.

Endo Pharmaceuticals is a textbook case. The company formally inverted to Ireland in 2014, but its executives stayed stateside. The company now appears to be enjoying the best of both worlds, pretending its profits are being earned in Ireland while claiming lavish U.S. tax breaks for the stock options given to its executives.

Endo International, as the company now styles itself, discloses in its latest annual financial report that the company has reduced its U.S. taxes by more than $50 million over the last two years using the executive-stock-option tax break.

And Endo’s not alone. A number of other inverted companies still appear to be claiming U.S. tax breaks for their executives’ stock options. Horizon Pharma, the Illinois corporation that has claimed Irish residency since 2014, enjoyed $19 million in stock option tax breaks in 2015.

The same tax breaks are also still being claimed by companies that renounced their U.S. citizenship prior to the most recent wave of inversions. Eaton has enjoyed $50 million in stock-option tax breaks in the three years since its 2012 inversion. In the five years since Valeant Pharmaceuticals decamped to Canada, the company has disclosed $80 million of stock option tax breaks. Herbalife, whose L.A.-based executives have been pretending to run their company from the Cayman Islands since 2002, discloses $86 million in stock option tax breaks over the past five years.

Covidien, the “Irish” company with a strong Boston accent, claimed $76 million in stock option tax breaks over the last two years of its existence before merging with Medtronic in that company’s own inversion. And Medtronic itself, in its first annual report as an Irish entity, discloses $81 million in tax savings from the executive stock option tax break.

The most sensible reform step for Congress would be to pare back this tax giveaway for U.S. corporations as well as inverted companies, so that all companies will pay something resembling their fair share. But it’s hard to see how anyone can think it’s a good idea that companies that have renounced their U.S. citizenship, at least on paper, should be able to claim tax breaks for the lavish stock options given to the very executives who, in some cases, were responsible for the companies’ inversion decisions.

People may disagree about what exactly Donald Trump is, but almost no one would call him a farmer. Well, no one except the property tax department of New Jersey. According to a recent report from the Wall Street Journal, Donald Trump has saved tens of thousands of dollars in property taxes on two golf courses in New Jersey through the use of a farmland tax break.

To qualify for the tax break, Trump maintains a small goat herd, hay farming and woodcutting operation on his New Jersey golf courses. The properties include just enough of these activities to qualify for a rather generous farmland tax break, which by one calculation has allowed Trump to pay less than $1,000 annually in property taxes on a property on which he would otherwise have owed around $80,000.

Trump is the latest of many high profile examples of wealthy individuals taking advantage of tax breaks meant for farmers. In 2011, reporting found that Tom Cruise managed to pay a measly $400 in property tax on an $18 million Colorado property by allowing sheep to occasionally graze on his land. Similarly, Senator Bill Nelson was able to reduce his property taxes from over $45,000 to just $3,700 by allowing cows to graze on his land in Florida.

What the cases of Trump, Nelson and Cruise reveal is that it is often difficult to craft tax breaks so that they can only be obtained by those individuals they are meant for. In the case of the farmland tax break, presumably the goal is to provide support to and help conserve small family farms, yet loose definitions of what constitutes an eligible farm allow it to be gamed by wealthy individuals.

To ensure that the Trumps of the world are not getting tax breaks for farmers, states can take a number of approaches. To start, states could tighten the rules around what constitutes an eligible farm, which is exactly what Colorado did after the revelations around Tom Cruise and other celebrities taking advantage of the system. Alternatively, states could trade-in their farmland tax breaks for an agricultural circuit breaker, which would only allow for a tax break in the case of real low- and middle-income farmers.

In any case, everyone should be able to agree that Trump is no farmer, even if he played a singing one at the Emmy’s. 

Thanks for reading the State Rundown. Here’s a sneak peek: Illinois lawmakers push to change state’s income tax structure to a graduated one, could ask voters to change state constitution. Kansas lawmakers have had it with Brownback, and refuse to cut services anymore unless tax increases are on the table. Strong majority of Oklahoma voters favor tax increases over further budget cuts to solve revenue crisis. Mississippi lawmakers pile new tax cuts on top of old ones.

— Carl Davis, ITEP Research Director 

Facing a never-ending revenue crisis, Illinois lawmakers have finally suggested the logical solution of adopting a progressive income tax. House Speaker Mike Madigan and top Democratic representatives have offered a bill, approved by the House Revenue Committee, that would replace the state’s current flat income tax with a graduated system. Under the new plan, the income tax rate for married/joint filers with income of $200,000 and lower would fall from the current 3.75 percent rate to 3.5 percent. Joint income between $200,000 and $750,000 would be taxed at 3.75 percent, while an 8.75 percent rate would apply to joint income between $750,000 and $1.5 million. Joint income over $1.5 million would be taxed at 9.75 percent. Proponents of the bill say it would raise $1.9 billion in revenue, which would help significantly with the state’s $10 billion in outstanding unpaid bills. Unfortunately, Gov. Bruce Rauner has already rebuffed the measure.

The graduated income tax measure is coupled with a proposed constitutional amendment resolution that would ask voters to decide if the state should move to a graduated income tax (the current flat income tax rate is mandated by the state constitution). Previous legislative efforts to implement a graduated income tax in 2014, or to create a new millionaire’s tax, fell short. Voices for Illinois Children has come out strongly in favor of the progressive income tax, saying “This will allow the tools we need to not rely on low- and middle-income families. We truly believe this is one of the best ways to move our state forward.”

Kansas officials have lost patience with Gov. Sam Brownback’s ruinous tax cuts, and many lawmakers who helped him pass those cuts now refuse to cut spending any further. Tax collections were short of projections in 11 out of 12 months last year, and even conservative lawmakers argue that Brownback should scale back his tax cuts to balance the budget. Following the advice of supply-side Svengali Art Laffer, Brownback promised that economic growth would make up the revenue shortfall caused by his cuts, but the rapid growth never materialized. To make up the deficit this year, the governor has cut higher education by $17 million and shortchanged educators’ pensions by $93 million. Additionally, $750 million has been transferred from road projects to other areas of the budget, setting the state up for ballooning maintenance and infrastructure costs down the line. Facing an election year, many lawmakers say they will cut no further and plan to leave Brownback holding the bag.

A new poll of Oklahoma voters shows a large majority favor income tax increases over budget cuts in the face of the state’s ongoing revenue crisis. The poll, commissioned by the Oklahoma Policy Institute, found that 56 percent of voters “favor increasing state revenues by raising taxes and reducing tax breaks,” while just 15 percent want to cut money for education, health care and public safety. At the same time, 59 percent of voters want to maintain broad-based tax credits for working families, like the state Earned Income Tax Credit and the state Child Tax Credit. Two-thirds of voters would support increasing the top income tax rate on incomes above $150,000 and 62 percent say that the income tax cut that went into effect in January of this year should be delayed.

Mississippi lawmakers passed a $415 million tax cut deal this week despite facing a revenue shortfall caused by previous tax cuts. The package would phase out the corporate franchise tax, which brings in $260 million in revenue each year, and would cut the state’s bottom income tax rate from 3 to 0 percent. The income tax cut will cost $145 million annually, and while many lower-income families will not benefit from the cut, upper-income families will receive tax cuts averaging $220 or more per year. Legislators also lowered taxes on income from self-employment by $10.2 million over three years. The cuts will begin phasing-in in 2017 but most of the revenue impact is delayed until later years, not taking full effect until 2028.

At the same time, Mississippi is dealing with a large drop in revenue following tax cuts of roughly $350 million that Gov. Phil Bryant initiated in his first term. Those cuts included $150 million in sales tax rebates to developers of retail centers, another $100 million in limits on the taxing of multi-state corporations, and an additional $100 million in cuts to the business inventory tax. One recent editorial called out legislators who “have chosen to pass legislation pandering to different constituencies while ignoring serious issues like crumbling roads and infrastructure needs.”

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.

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

Alaska’s Historic Income Tax Proposal
In an attempt to help solve Alaska’s $4 billion budget shortfall Gov. Bill Walker introduced his New Sustainable Alaska Plan, which proposes a personal income tax in the state for the first time in 35 years. ITEP analyzes the new income tax in this new report.

Koch Brothers Kudzu Spreading in Tennessee
Tennessee has one of the most unfair tax systems in the nation. Now, thanks to a Koch Brothers-backed lobbying effort, the state is about to pass legislation that will require the rich to pay even less. Read more.

Missouri Voters Reject Billionaire’s Campaign to Squash Local Taxes
Rex Sinquefield, a Missouri billionaire, is on a relentless quest to squash local and state taxes in Missouri, spending millions of his own money this year on a campaign to persuade St. Louis and Kansas City residents to vote to end their cities’ earning taxes. Missouri voters rejected his agenda. For more on this tax justice win read ITEP Senior Analyst Dylan Grundman’s post.

Mississippi Tax Cut Madness
Despite a plea from one of the state’s largest newspapers to “Stop the Madness,” Mississippi lawmakers this week passed costly tax cuts that will phase in over the next 12 years. Read the details here.

And That’s a Wrap! Maryland Legislative Session Ends
This legislative session, Maryland lawmakers grappled with reducing income tax rates and also expanding the state’s Earned Income Tax Credit for childless workers. These tax cuts, that at one time seemed inevitable, never came to fruition. Read ITEP Senior Analyst Dylan Grundman’s take on Maryland’s session.

ICYMI: ITEP Senior Analyst Lisa Christensen Gee wrote an op-ed for USA Today called Undocumented immigrants pay up on Tax Day. Lisa writes, “It may come as a surprise to some that just like almost everyone else, undocumented immigrants pay taxes. They pay property taxes and sales taxes, and many also pay taxes on their incomes. In fact, on average, they pay a higher share of their incomes in state and local taxes than taxpayers in the top 1%.”

If you have any feedback on the Digest, please email me here: kelly@itep.org

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For frequent updates find us on Twitter (CTJ/ITEP), Facebook (CTJ/ITEP), and at the Tax Justice blog.

This Tuesday, the front page of Mississippi’s capital city newspaper, the Clarion-Ledger, featured a three-word plea to state lawmakers: “STOP THE MADNESS.” The accompanying editorial re-capped a legislative session in which legislators, largely as a result of having cut taxes by $350 million in recent years, have made painful funding cuts to most state agencies yet are inexplicably debating  another round of tax cuts.

Unfortunately, Mississippi legislators could not be swayed. Rather than heeding the clarion call to “stop the madness,” the legislature opted to drag it out over the course of the next 12 years. The slow onset of these tax cuts will begin with phasing in a 50 percent deduction for federal self-employment taxes from 2017 to 2019, then accelerate with cuts to the bottom personal and corporate income tax rates from 2018 to 2022, and then conclude with the phase-out of the corporate franchise tax from 2019 to 2028. The bill delays the worst of these effects until several years down the road (see graph), but ultimately the cuts will reduce revenues by $415 million per year that fund services that legislators have already cut this year. The insanity was exquisitely captured in a political cartoon in which policymakers sit in an already-sinking boat labeled “state budget,” while the lieutenant governor suggests they “shoot holes in the bottom so it’ll drain faster.”

The political dynamics leading to this result were interesting as well. The session started with a legislative race decided by an official straw-drawing ceremony, which was later negated, giving Republicans a supermajority in the Mississippi House that some thought would lead to a tax cut package like the one just enacted. But in the end, some Republicans voted against the bill and several Democrats supported it as a tradeoff for ensuring bipartisan support for $249 million in bond-financing for construction projects throughout the state. That bill and some of the specific projects it funds are  high enough priorities for certain legislators that they agreed to support the tax cuts to ensure the bond bill passed.

In other words, Mississippi legislators kicked two cans down the road at once: they simultaneously borrowed money for needed infrastructure improvements and enacted tax cuts that will undermine the state’s ability to repay those debts in the future. Sanity cannot return to the Mississippi Legislature soon enough.

Tax cuts in Maryland seemed inevitable at times this year, as lawmakers in the House and Senate seemed to be in agreement on some key issues. Both chambers sought to improve the Earned Income Tax Credit (EITC) for childless low- and middle-income working Marylanders while also cutting tax rates for those higher up the income scale. But lawmakers were unable to agree on whether the bulk of the benefit should be distributed broadly, or whether it should be reserved primarily for the wealthiest Marylanders. In the end, all of the personal income tax changes under consideration were left on the cutting-room floor, though it’s worth noting that lawmakers were able to agree on a $37.5 million credit for aerospace company Northrop Grumman.

The central difference between the two tax plans was that the Senate’s version was heavily skewed toward the highest-income Marylanders while the House’s version was tailored to be more consistent in its impact across different income groups (see Figure 1). The Senate plan (PDF) would have cut the state’s top four income tax rates, which affect people with incomes of at least $100,000 or $150,000 depending on filing status, and increased the personal exemption by $200 per person. The House plan (PDF) omitted the personal exemption increase and focused its rate cut on a middle income tax bracket that affects all Marylanders with taxable income of at least $3,000. 

Looking back on the session, Senate President Thomas Miller made the peculiar claim that his chamber’s plan “did tax cuts across the board,” while the House “wanted simply to help the people on the lower end of the economic spectrum.” That difference, said Miller, was the reason that lawmakers failed to reach agreement.

But ITEP’s analysis makes clear that of the two, the House’s plan was actually closer to being an “across the board” cut. The Senate’s plan would have provided roughly $1,700 in tax cuts each year to members of the state’s top 1 percent of earners (a group that averages $1.6 million in income). The House’s version, by contrast, would have given that group a reduction more in line with what lower- and middle-income households could expect to receive: approximately $140 on average versus about $60 for low-income families and $40 for middle-income families. Overall, the Senate’s version gave more than a quarter (27 percent) of the total benefit to the top 1 percent of earners and almost half (48 percent) to the top 20 percent of Marylanders—a far cry from an “across the board” benefit.

While Maryland will be no worse off for its failure to cut income tax rates, these disagreements did have the unfortunate side effect of blocking an expansion to the state’s EITC that was widely agreed upon by lawmakers in both the House and Senate. Similar to a recent innovative change in neighboring Washington, D.C., the expansion would have significantly improved the value and reach of the credit for childless adults, a group largely overlooked by the federal EITC on which the Maryland credit is based.

Figure 2 shows how meaningful the expansion would have been for childless adults at different income levels. For example:

• Currently, a single working Marylander with no children and an income of $11,000 (just below the federal poverty guideline of $11,880) is eligible for a Maryland EITC of only about $77. Increasing Maryland’s EITC from 26 percent of the federal credit to 28 percent (as is already scheduled to occur next year) would only improve this by about $6. But under the expansion proposed in SB 840, that person would have received a total Maryland EITC of $506, which, combined with the federal EITC of $297, would go much further toward lifting this worker out of poverty.
• A single working Marylander with no children and an income of $5,940 – only half the federal poverty guideline – receives a Maryland EITC of just $127 even when the credit increases to 28 percent of the federal credit as scheduled. But this person’s credit would have been $454 under SB 840, a $327 increase that would be very meaningful for someone in such severe poverty.
• A single working Marylander with no children and a full-time $9-per-hour job ($18,720 annually) is currently not eligible for any federal or Maryland EITC because the credit is heavily weighted toward working families with children and very-low-income childless adults. But under the expansion proposed in SB 840, such an individual would have received a state credit of $366, enough to pay for a community college class that could improve their job skills.

The debate in Maryland this year exemplifies the difficult political realities associated with crafting tax policies that are geared toward those most in need. With continued work, hopefully the negotiations this year paved the way for some of the EITC improvements in SB 840 to become law in the future.