Month: May 2016

Alaska, North Dakota, Oklahoma, West Virginia, and Wyoming.

What do these states have in common?

These are the five states that are most reliant on the energy sector (mining, quarrying, and oil and gas extraction) for their economic output, according to data from the Bureau of Economic Analysis. All of them are also facing budget shortfalls brought on in part by the falling price of energy, and in part by short-sighted tax cuts made by lawmakers that failed to prepare for this decline.

Alaska, Oklahoma, and West Virginia are currently grappling with these issues in contentious legislative sessions. In Alaska, the magnitude of the state’s budget shortfall forced lawmakers to extend their session beyond its scheduled date of completion, while West Virginia lawmakers just returned to their state capital this week for a special session. Lawmakers in North Dakota and Wyoming are not currently in session, but are gearing up to deal with the shortfalls that await them when they return to session in 2017.

In order to close their budget gaps, these states are contemplating whether previous tax cuts should be rolled back, whether new types of tax increases should be enacted, or whether the shortfalls should be closed primarily through deep cuts in public services. On the revenue side, there is also significant variation in the types of tax changes being explored—ranging from progressive income tax reforms to sharply regressive increases in consumption and excise taxes. Each of these five states’ tax and budget debates are discussed below.

In Alaska, lawmakers are facing a budget gap exceeding $4 billion and are currently focused on deep budget cuts and scaling back oil and gas tax credits as part of their extended legislative session. However, those changes alone will not solve the state’s budget problem. Gov. Bill Walker has proposed a broader package of tax policy options, including reinstating a personal income tax for the first time in 35 years and increasing existing taxes on various items and industries. Also on the table are proposals to scale back and restructure the state’s Permanent Fund dividend—an annual cash payment received by the vast majority of Alaskans each year. ITEP analyzed the Governor’s plan in a recent report and found that an equitable solution to the state’s revenue shortfall will require lawmakers to enact a personal income tax.

While Alaska’s tax cutting history is somewhat more distant than in other energy-dependent states, it is also the most dramatic. Following the discovery of oil, Alaska became the only state to ever eliminate a broad-based personal income tax and also started paying out dividends to Alaskans each year from the state’s Permanent Fund. Because Alaska also does not levy a sales tax at the state level, it is forced to rely heavily on oil tax revenues and royalties. For decades, oil revenues filled roughly 90 percent of the state’s general fund, but lower prices and declining production have dramatically reduced the level, and reliability, of those revenues.

West Virginia lawmakers are dealing with a $270 million budget hole this week as part of a special legislative session. During the regular session Gov. Earl Ray Tomblin proposed increasing the state’s tobacco tax and applying the sales tax to telecommunications services. These proposals will be revisited this month, along with a possible increase to the state’s general sales tax rate on either a temporary or permanent basis. Budget cuts and fund sweeps will also be debated, though the West Virginia Center on Budget & Policy notes that the state also has plenty of progressive revenue options worthy of consideration. The decision by previous West Virginia lawmakers to slash business taxes is a major contributing factor to the state’s shortfall. Elimination of West Virginia’s business franchise tax took full effect last year, and over the last several years the state’s corporate income tax was reduced as well.

Lawmakers in Oklahoma, facing a $1.3 billion budget hole with only a few weeks remaining in their legislative session, are weighing changes to income, sales, and excise taxes in addition to reductions in public services. Among the most damaging proposals on the table is an effort to eliminate or pare back tax credits for low-income families such as the state’s Earned Income Tax Credit (EITC) and sales tax relief credit. Oklahoma lawmakers have repeatedly cut the state’s income tax over the past decade, with the most recent reduction triggered this January despite an official “revenue failure.” Today this series of cuts comes with an annual price tag exceeding $1 billion in lost revenue. More sensible options under consideration include rolling back the state’s recent personal income tax cuts or repealing the state’s deduction for state income taxes paid.

North Dakota lawmakers, gearing up for their biennial session in 2017, have seen the state’s revised revenue forecast fall short once again. In response to that shortfall Gov. Jack Dalrymple issued budget guidelines requiring state agency heads to hold budget requests to 90 percent of current spending, signaling that most agencies will face budget cuts of up to 10 percent. This request follows a $245 million reduction this February done in an effort to help balance a mid-biennium revenue shortfall exceeding $1 billion. This is the first time since 2002 a North Dakota Governor has taken such measures. But unlike in other energy-dependent states, Gov. Dalrymple is refusing to consider tax increases and many legislators are promising not to raise taxes. Instead they intend to slash state services and withdraw money from their Budget Stabilization Fund. This painful budget tightening follows multiple cuts to the state’s income taxes over the past decade. In 2015, the most recent cuts led to reductions in both the individual and corporate rates costing the state $108 million over the biennium.

Lawmakers in Wyoming, expecting to be short at least $300 million over the coming biennium, last week weighed whether local governments should be able to impose an optional 2-percent tax on groceries. This tax was rolled back in 2006 in the face of criticism that it disproportionately fell on the state’s poorest residents. Lawmakers also considered raising the state property tax and increasing the tax on wind and energy production. However, only draft bills on the wind tax moved out of committee. In addition to these tax proposals, Gov. Matt Mead recently announced that state agencies must cut their budgets by 8 percent for the biennium. Wyoming has not enacted the same level of tax cuts over the years as in other energy-reliant states, largely because it already relies on such a narrow tax system. Wyoming levies no individual or corporate income tax, relying primarily on taxes on minerals, sales and use, and property.

If lawmakers in any of these states are looking for inspiration to take action, Louisiana and Nevada (ranked #7 and #9, respectively, in terms of their economic reliance on energy) stand out for their willingness to at least begin addressing their shortfalls by increasing tax revenue. Louisiana lawmakers this year, after much negotiation, approved a temporary increase in the state’s sales tax rate, removed sales tax exemptions, raised taxes on cigarettes and alcohol, and extended or reinstated taxes on vehicle rentals, cellphones, and landlines. Louisiana’s Gov. John Bel Edwards plans to call a second special session to continue pursuing revenue solutions. Nevada, in 2015, approved tax measures expected to raise up to $1.1 billion through a cigarette tax increase and the continuation of formerly temporary business taxes. These revenue increases have played a vital role in helping to avoid painful cuts in the face of low energy prices and weakened tax receipts.

States’ heavy reliance on their energy sectors has certainly contributed to their recent budget shortfalls. As energy prices plummeted, tax and royalty revenues fell and lawmakers have been forced to make tough decisions to fill the gaps. But not all of the blame for these states’ bleak fiscal outlooks can be assigned to the volatility of the energy sector. Narrow tax structures and repeated tax cuts, often enacted when energy-related revenues were abundant, have also played major roles in these states’ financial debacles.

Looking ahead, the experience of these states should serve as a cautionary tale for lawmakers prioritizing tax cuts over the long-run sustainability of state budgets.

Thanks for reading the State Rundown! Here’s a sneak peek: New Jersey legislative leaders support pairing a gas tax increase with a boost to the EITC. An Oklahoma coalition urges lawmakers to protect state tax credits for working families in possible budget deal. Vermont legislators end their session with a package of tax and fee increases. New CBPP report shows that state estate taxes reduce inequality and support broad prosperity.

— Carl Davis, ITEP Research Director

New Jersey leaders are finally considering an update to the state’s decades-old gasoline excise tax rate to pay for needed infrastructure improvements.  But while an update to the gas tax is sorely needed, an increased gas tax will disproportionately impact lower- and moderate income families who spend a significant share of their incomes refueling their vehicles.  To deal with this reality, State Senate President Steve Sweeney and Assembly Speaker Vincent Prieto have proposed boosting the state’s Earned Income Tax Credit (EITC) from 30 to 40 percent of the federal credit to offset some of the impact that higher fuel taxes would have on these families. The development comes after Prieto broke with Sweeney and Gov. Chris Christie on a plan to pair a gas tax increase with a repeal of the state’s estate tax. Combining a gas tax increase with enhancements to low-income refundable credits like the EITC is a model worthy of close attention from lawmakers across the country.  This pairing could allow for economically crucial infrastructure projects to move forward without having to pay for them on the backs of working families.

A coalition of clergy and progressive organizations urged Oklahoma lawmakers last week to protect tax credits that benefit over 400,000 working families and seniors in the state. Over the past few months legislators have considered reductions and/or elimination of a variety of tax credits and exemptions in order to close the state’s budget gap, including the state’s EITC, Sales Tax Relief Credit, and Child Care/Child Tax Credit. Low-income families with children can receive benefits from these credits in amounts as high as $300 or more. While scaling back these credits would have a real impact on the ability of vulnerable families to make ends meet, the proposals under consideration would only reduce the state’s current $1.3 billion budget gap by about $76 million. Notably, state legislators have thus far been unable to rein in tax credits and incentives for corporations.

Vermont legislators recently ended their session and passed a $49 million revenue package that relies largely on fees to raise money for home weatherization, increased Medicaid costs, and public sector employee contracts. The package includes a new fee on the registration of mutual funds in the state, which is expected to raise $20.8 million. The package contains a few tax changes as well, including a 3.3 percent tax on ambulance providers and the conversion of the tax on heating oil, kerosene and propane to an excise tax of 2 cents per gallon of fuel. The move from a price-based tax to one based on consumption is meant to offset the effect record low fuel prices. Lawmakers also expanded the state’s lodging tax to include Airbnb and similar companies.

A new report from the Center on Budget and Policy Priorities (CBPP) makes the case for state estate taxes, arguing that they are “a key tool for reducing inequality and building broadly shared prosperity.” CBPP Senior Fellow Elizabeth McNichol notes that only the wealthiest households are subject to the tax – the top 2.56 percent of estates on average in states where the tax is levied. Currently, just 18 states and the District of Columbia tax inherited wealth. You can read the full report here.

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. 

Donald Trump said Tuesday he will not release his tax returns before the election because “there’s nothing to be learned from them,” potentially making him the first major presidential nominee not to release a full return in 40 years.  

Perhaps what the presumptive Republican presidential nominee really means is that he has nothing to gain politically by releasing his returns, but the public could learn quite a bit.

For instance, we might discover that despite Trump’s actual earnings, his taxable income isn’t much at all because, as some suspect, he may write off most of his lavish life style as “business expenses.”

If widespread speculation is true, this would mean that American taxpayers are footing the bill for a big share of Trump’s private jet, his golf outings, his mansions, and who knows what else. In a February 2016 article for The National Memo, David Cay Johnston outlines nine “bombshells,” that Trump’s tax returns may reveal, including how arcane tax rules may allow him to remain relatively tax free.

If Trump, who is vying to be the next president of the United States, is living large at the expense of the rest of us, doesn’t the public deserve to know?

During the thick of the Republican primary, Trump vowed to release his tax returns, but he has since resisted by claiming that he cannot release them while the IRS is auditing them. This flimsy excuse is simply not true. In a statement, the IRS wrote, “nothing prevents individuals from sharing their tax information.”

Ironically, Trump in 2012 said that Republican presidential candidate Mitt Romney was “hurt really very badly” by not releasing his tax returns and that Romney should have released them by April 1. No word on why what was good for Romney is not good for him.

Trump in so many words has declared that his business acumen and negotiating skills qualify him for the highest office in the land. In that vein, his tax returns may contain critical insights into how he is using the tax code to build his wealth.

During the 2012 campaign, for example, Mitt Romney’s tax returns exposed a myriad of loopholes that allowed him to pay a paltry 14 percent tax rate on millions in earnings. Specifically, Romney’s returns brought attention to the preferential rate on capital gains and also illustrated how some wealthy individuals use offshore shell companies or avoid taxes through special IRAs.

Given that Trump’s tax plan includes trillions in tax cuts for the wealthy, it isn’t surprising that he may be trying to hide from the public’s view the numerous ways that tax system is already rigged in favor of wealthy individuals like him.

But here’s the thing. A president is accountable to the American people. The electorate must demand more than bombastic proclamations and shouldn’t concede the point when a politician declares, “trust me I know how to get it done.” We should also be wary of allowing a presidential contender to go against the grain of what almost every presidential candidate in the last two generations has done–release at least one detailed tax return. 

Donald Trump may have turned conventional wisdom on its head this election cycle, but we shouldn’t allow him to rewrite critical rules that have helped reveal the character and agenda of our presidential contenders. 

Throughout the 2016 campaign, presidential candidate Donald Trump has claimed he would raise taxes on himself and other rich individuals, even while promoting a detailed tax plan that would do precisely the opposite.                          

Trump this weekend attempted to clarify this inconsistency. He remains, he says, committed to his regressive tax proposal, but he’ll rely on legislative negotiations with Congress to ensure the middle class doesn’t get the short end of the stick. If he means what he says, that’s a novel political tactic, to say the least.

Trump’s inconsistency on taxes came to a head last week, when he responded to criticisms that his plan would lavish huge tax cuts on wealthy Americans by saying ambiguously that he is “not such a huge fan of that.” Trump added that he is “so much more into the middle class” in his approach to tax reform.

Yet Trump’s comments are incompatible with the tax plan he announced last fall, which would reserve a stunning 37 percent of its tax breaks for the very richest 1 percent of Americans while cutting federal revenues by $12 trillion over a decade.

On the Sunday talk-show circuit, a number of interviewers sought to clarify this discrepancy. Speaking on “Meet the Press,” Trump reiterated that his plan would “lower the taxes on everybody very substantially,” but clarified that his negotiations with congressional leaders would likely turn his plan upside down: “For the wealthy, I think, frankly, it’s going to go up. And you know what, it really should go up.”

Trump made a similar forecast in his appearance on “This Week”: “On my plan, they’re going down. But by the time it’s negotiated, they’ll go up.” In other words, Trump stands behind the details of his plan but expects that a Congress suddenly hungry to tax the rich more would turn it upside down. If this is truly his position, it’s perplexing but it means he believes a wholesale failure to pass his tax proposal would qualify as effective leadership.

Presidential candidates routinely seek to appeal to the voting public by proposing vague tax platforms that promise big tax cuts to middle-income families, but they often omit the vital details that would be required to score these plans. Trump has emphatically not taken this approach. To his credit, Trump months ago released a comprehensive and detailed plan that left little open to interpretation. If Trump now thinks his plan is bad policy, he owes it to the American public to outline, in similar detail, what he thinks tax reform should look like.

Thanks for reading the State Rundown! Here’s a sneak peek: Wyoming and North Dakota grapple with declining revenue amid an energy bust. Arizona lawmakers reach a budget agreement. Missouri legislators consider a state EITC, and Missouri judges rebuff Krispy Kreme.

— Carl Davis, ITEP Research Director

State governments across the country continue to grapple with bottom-barrel energy prices, with Wyoming the latest to deal with the fallout. March revenue collections were worse than expected, with sales and use tax receipts $9.3 million below projected levels and severance taxes falling $17.4 million short. Wyoming, which is one of nine states without a broad-based personal income tax, is unusually dependent on the fossil fuel industry to support the state budget. Making matters worse, declining fossil fuel production could also have a secondary impact on sales tax revenue – the largest source of government funding – if demand for goods and services also decreases. Gov. Matt Mead has asked state agencies to cut their FY 2017 budgets by an additional 8 percent as revenues are expected to come in $300 million short over the biennium. Meanwhile, legislators are considering a number of tax increases to shore up the budget. One proposal would allow local jurisdictions to impose a sales tax on groceries—a development sure to worsen the stark regressivity of Wyoming’s overall tax system. Another proposal would increase the tax on producing wind energy, and lawmakers have also considered an increase in the state’s property tax to fund school construction.

North Dakota faces a similar predicament as a result of its extraordinary reliance on the fossil fuel industry coupled with historically low energy prices. This week, Gov. Jack Dalrymple asked state agency heads to hold 2017-2019 budget requests to 90 percent of current spending levels, but made exceptions for the departments of corrections and human services and K-12 spending. It is the first time since 2002 that a governor has issued budget guidelines mandating cuts. North Dakota was the only state to weather the recession thanks to the oil boom. Instead of sound fiscal management, leaders there cut taxes repeatedly when times were good and severance tax revenues were high. Now, the governor refuses to consider tax increases. Agency budgets were already reduced by $245 million in February to help balance a mid-biennium $1.03 billion revenue shortfall.

After an extended session, Arizona lawmakers have reached a budget deal. The Arizona Legislature approved a $9.6 billion budget that includes $29 million in (mostly) business tax cuts. If the budget is signed by Gov. Doug Ducey, corporations will get a number of perks, including $8 million in bonus depreciation and $7 million in sales and use tax exemptions for manufacturers. However, the budget does not include a children’s health insurance program for 30,000 kids that would have been funded by the federal government at no cost to the state.

Missouri legislators will consider legislation that would cut taxes for working families in the state. Senate Bill 1018 and House Bill 1605 would both create a state Earned Income Tax Credit (EITC) based on the federal credit. Households that qualify for the federal EITC would receive a non-refundable state EITC equal to 20 percent of the federal EITC. Most of the benefits would support families with income ranging from $20,000 to $37,000 annually. The Missouri Budget Project, citing ITEP numbers, estimates that these families would see an average tax cut of $54 to $289, giving a needed boost to these families and Missouri businesses.

In wackier Missouri tax news, the Missouri Supreme Court ruled against pastry purveyor Krispy Kreme. In what some observers termed the “doughnut hole loophole,” Krispy Kreme demanded a state refund on sales taxes paid after arguing its products were groceries. State law places a 1 percent tax rate on groceries but a 4 percent sales tax on foods made to be immediately eaten. The firm noted that many customers take their doughnuts home to consume later, but the judges didn’t buy it. 

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. Here’s a rundown of what we’ve been working on lately:

Honest Taxpayers Get Stuck with $406 Billion Tax Bill
A new IRS report finds that $406 billion in federal taxes are owed each year but go unpaid. This so called “tax gap” is due in large part to the underreporting of business income. Beefing up IRS funding would help solve this problem. Read more.

No-Brainer: Corporations Should Pay What They Owe Before They Go
New legislation introduced in the U.S. House by Texas Rep. Lloyd Doggett requires any company that attempts to invert (aka claim foreign residency for tax purposes) to immediately pay taxes on its offshore income. Read CTJ’s take on this important legislation.

Yap, Yap: All Talk but No Appropriate Action in Kansas
Despite clear evidence that Gov. Sam Brownback’s supply-side economics “real live experiment” hasn’t produced the promised economic jolt, the Kansas legislature adjourned by passing a series of budget band aids that will only make future budgeting more difficult. Read ITEP Analyst Lisa Christensen Gee’s commentary here.

Congress Doesn’t Get It: The American People Want Real Business Tax Reform
Last week the Senate Finance Committee held a hearing that focused almost exclusively on lowering corporate tax rates and expanding loopholes, but poll after poll reveal the American people want corporations held accountable for the taxes they owe. Here’s CTJ’s read about the disconnect between Congress and the public on business tax reform.

Shareable Tax Analysis:

ICYMI: What would President Trump’s tax plan look like? It’s a budget buster. The presumptive GOP nominee’s tax proposal would cost $12 trillion, and when the tax cuts are paid for only the top 5 percent of Americans will see a decrease in their taxes. Read CTJ’s full analysis here.

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.

It could have been different, but it wasn’t different.

Gov. Sam Brownback’s supply-side economics “real live experiment” in Kansas has not lacked critics since the unprecedented tax cuts for the wealthy and elimination of taxes on certain business income went into effect in 2012. However, even in the midst of slashed spending, regressive tax raising to balance budgets, stagnating job growth, and month after month of disappointing revenue reports, “seldom was heard a discouraging word” from those lawmakers who supported the governor’s tax plan.

Until recently. Mounting tension between GOP lawmakers and the administration was first evident in votes this legislative session to override a few of the governor’s vetoes. Subsequently, the Senate president said that lawmakers are “growing weary” and would “prefer to see some real solutions coming from the governor’s office.” And former allies in the Senate introduced a bill to partly roll back the governor’s tax exemption for business pass-through income.

While opposition to Brownback’s approach to the economy is not news, disagreement from these actors is significant as it brought tax reform into the realm of conceivability this legislative session. This proved to be short-lived, however, as lawmakers wrapped up the session with a vote against reforming the business pass-through income exemption and the passage of a budget early Monday that relies on delayed pension payments, raiding the State Highway Fund, and budget cuts to be made by the governor.

Kansas remains among the list of states willing to compromise the current needs of its residents and its future financial well-being simply to avoid raising taxes. It’s possible that the opposition that arose this legislative session is indicative of a tide change among conservative lawmakers that may surge in the coming months or that fed up Kansas voters will demand change this November. In the meantime, not only will Brownback’s policies fail to yield promised economic benefits, they will also continue to erode the foundation of the state’s economic future with further cuts to critical investments in higher education, transportation infrastructure and human services. States that haven’t already taken the appropriate course corrections to avoid a similar fate would be wise to do so. 

We all know you shouldn’t leave a restaurant without paying your bill. Unfortunately, our corporate tax laws don’t adhere to this principle, and allow corporations to exit the United States (at least on paper) without paying their full tax bill. New legislation introduced in the U.S. House last week by Texas Rep. Lloyd Doggett would halt this corporate “dine and ditch” practice by requiring any company that claims foreign residency for tax purposes to immediately pay taxes it owes on offshore income.

Doggett’s aptly named “Corporate EXIT Fairness Act” comes at a time when U.S. companies are increasingly taking advantage of a tax code provision called deferral, which allows companies to defer paying taxes on offshore income until it is repatriated back to the United States. A recent report from Citizens for Tax Justice (CTJ) found that companies are now deferring an estimated $695 billion in taxes on $2.4 trillion in accumulated offshore earnings.

While deferral provides companies with a very generous tax benefit, many are not satisfied and have sought to permanently exempt their offshore income from U.S. taxes through inversion, a process in which a U.S. company merges with a smaller foreign company and claims the newly merged company is managed from the overseas address. Because the new combined company is domiciled in a foreign country, current law allows that company to have nearly full access to its untaxed offshore profits without having to pay anything it owed on these profits.

In other words, our current system creates a huge incentive for companies to invert by allowing them to permanently avoid paying taxes on their accumulated offshore earnings. Doggett’s proposal would take away this tax advantage by requiring that companies settle the taxes they owe before they leave.

The idea of imposing an exit tax on companies would bring the corporate tax code closer to the individual tax code. When individuals decide to expatriate , the tax laws already sensibly require them to pay any deferred taxes owed on capital gains that they have deferred paying.

Although not specified in detail, Hillary Clinton has also proposed an exit tax as part of her presidential campaign that mirrors Doggett’s proposal.

One thing that distinguishes Doggett’s latest proposal from an earlier incarnation and a related bill in the Senate is that it would apply the exit tax to all expatriating companies rather than just those that meet the definition of an inversion. This change represents a significant improvement because it would eliminate the tax incentive to expatriate across the board. In addition, this legislation includes language from the Stop Corporate Inversions Act, which would not allow inverted companies to be considered foreign if they are still majority owned by stockholders of the original U.S. company.

The damage from offshore tax avoidance and corporate inversions is growing. Congress can and should put an end to these practices. Enacting the Corporate EXIT Fairness Act would be a good start.