Month: June 2016

A new review of 27 major American financial firms’ corporate filings finds that some of the nation’s big banks fail to report the vast majority of their tax haven subsidiaries in their annual Securities and Exchange Commission (SEC) corporate filings. This brazen omission gives even more credence to previous studies about how Fortune 500 companies, banks included, are using tax haven subsidiaries to avoid U.S. taxes on a grand scale.

The companies analyzed include banking and financial services giants such as J.P. Morgan Chase, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley. All told, the 27 firms collectively reported 401 tax haven subsidiaries to their shareholders and the SEC in 2015. However, when these same companies reported more complete information to the Federal Reserve, they revealed they own more than 2,800 corporate subsidiaries in notorious tax haven countries such as the Cayman Islands, Bermuda, Luxembourg, and the Netherlands. In other words, these major corporations are reporting to the SEC, their shareholders and financial analysts at least 85 percent fewer subsidiaries companies than what’s on their actual books. It’s hard to believe such an omission on this vast scale is accidental. The more likely answer is that these tax haven subsidiaries are shell corporations that are part of a broader strategy to stash earnings abroad to avoid paying U.S. corporate income taxes.

How Do They Get Away With This?

Corporations can avoid disclosing subsidiaries to shareholders due to the SEC’s requirement that companies only have to disclose their “significant” subsidiaries. Even the Federal Reserve doesn’t require all subsidiaries to be reported, but does apply a stricter set of criteria for disclosure. CTJ analysts discovered the gross discrepancy between what these financial firms report to the SEC and what they report to the Federal Reserve by reviewing disclosures released to both entities.

Consumers should be concerned about this partial reporting for a few reasons. First, the SEC-mandated annual financial reports are the main source of information readily available to American shareholders who want to understand the financial health—to say nothing of the ethical standards—of the companies in which they invest. Incomplete disclosure means shareholders are routinely receiving a very incomplete view of the structure of the firms they’ve chosen to invest in. Second, if corporations are using shell companies on a mass scale to avoid paying taxes, it ultimately means ordinary working people are going to have to contribute more or the nation will not have enough resources to fund priorities as varies as education, health and transportation.

This finding is doubly troubling because the financial sector is likely not alone in failing to reveal tax haven subsidiary companies. We were only able to discern this information about the financial sector because such companies have both SEC and Federal Reserve reporting requirements. But most U.S. corporations outside the financial sector aren’t regulated by the Federal Reserve, so it is impossible to know the extent to which corporations in other sectors are concealing their tax haven subsidiaries.

Across the Fortune 500, the scope of this non-disclosure is potentially staggering. CTJ’s 2015 “Offshore Shell Games” report found that Fortune 500 companies disclosed over 7,600 tax haven subsidiaries to the SEC in 2014. If the underreporting seen in the financial sector is representative of what is happening with Fortune 500 companies in general, the actual number of tax haven subsidiaries held by this larger group could be closer to 50,000! However, the only way we will be able to discover whether this is the case is if the SEC broadens its requirements so that companies have to report all their subsidiaries and not just the “significant” ones.

Read the Full Report.

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. 

Speaker Paul Ryan Proposes “A Better Way” Giveaway to the Super Wealthy

This week CTJ analyzed Speaker Ryan’s so-called “A Better Way” tax plan. In a related blog post, CTJ Director Bob McIntyre writes that “Ryan’s view of tax policy has much in common with the regressive, budget-busting plan Trump sketched out last fall — and in some ways is even more extreme.

As Suspected, Inverted Companies Are Already Engaging in Accounting Tricks to Avoid Taxes

ITEP Director Matt Gardner delves into the latest financial release from Medtronic. The health care giant successfully inverted (AKA renounced its citizenship) in early 2015 and now claims it is headquartered in Ireland. The company’s financials confirm what advocates had suggested would happen: it is likely using accounting tricks to shift U.S.-earned profits into tax haven subsidiaries to avoid taxes.

Financial Companies Don’t Reveal All When it Comes to Tax Havens

This week CTJ released a new report that finds 27 American financial companies are concealing the existence of thousands of tax haven subsidiaries in the financial reports they file annually with the Securities and Exchange Commission (SEC). The 27 companies studied reported a total of 401 tax haven subsidiaries to the SEC, but thanks to other disclosures CTJ found that those same companies own at least 2,800 subsidiaries. Read more here.  

Battered Roadways During Your Independence Day Drive Courtesy of Stagnant Gas Taxes

Independence Day weekend isn’t the only thing arriving tomorrow. Most states will be starting new fiscal years on July 1, and a handful of them will be adjusting their gas tax rates to mark the occasion. Even more states have gas taxes that are frozen in time. In this blog post ITEP Research Director Carl Davis highlights why it’s necessary for states to keep their gas taxes up to date.

Guest Blog Post Louisiana’s Unfinished Business

Jan Moller from the Louisiana Budget Project describes the disappointing outcome of the three legislative sessions held in his state this year. In this guest blog post, Mr. Moller writes, “While elected officials raised enough revenue to avoid the most serious cuts, they left major holes in the budget.” 

State Rundown

In this week’s Rundown we highlight state tax news in New Jersey, North Carolina, Pennsylvania, California, and Wisconsin. Read the Rundown and check out our new “What We’re Reading” section here.

Policy Brief: State Corporate Tax Disclosure

Check out ITEP’s newly updated policy brief on why state corporate tax disclosure is needed here.

Shareable Tax Analysis:

ICYMI:

Last week’s 4-4 decision by the U.S. Supreme Court on President’s Obama’s 2012 and 2014 executive actions on immigration means the President’s executive actions won’t become law. ITEP analyzed the state tax implications of the President’s proposals and found that undocumented immigrants would pay $805 million more in state and local taxes if his executive actions were upheld.

 Our best wishes for an enjoyable Independence Day! If you have any feedback on the Digest or tax stories you’re watching that we should check out too please email me  kelly@itep.org 

Sign up to receive the Tax Justice Digest

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

Aside from the ethical concerns around corporate inversions, the clearest case for establishing legislation to prevent this practice is the $2.4 trillion that U.S. multinationals have stashed offshore, and the potential for inversions to help these companies avoid up to $695 billion in U.S. tax on these profits.

But those of us who find the copious corporate tax loopholes that enable corporate inversions problematic also worry that these tax-motivated moves could result in a bigger, longer-term fiscal drain. Newly inverted companies could more easily engage in “earnings stripping,” which occurs when companies use accounting tricks to shift their profits from the United States to foreign tax havens. A new financial release from Medtronic, which successfully inverted in early 2015 and now claims it is headquartered in Ireland, suggests that the health care giant may be engaging in these accounting tricks.

Like many multinationals, Medtronic sells products and services around the world, and the company’s financial reports disclose the location of both the company’s sales and profits. Over the past decade, U.S. sales consistently have accounted for about 58 percent of Medtronic’s worldwide revenue. But since the company inverted last year, the U.S. share of pretax income has fallen precipitously: the company’s last pre-inversion disclosure showed the U.S. representing 54 percent of sales and 46 percent of income, but the company’s newest annual report, covering 2015, shows that while the company derives 58 percent of its revenues from U.S. sales, those revenues only translated into 8 percent of the company’s worldwide income

Earnings stripping is the likely culprit. This scheme typically takes the form of intra-company borrowing: a U.S. subsidiary borrows cash from its foreign parent, and pays interest on the loan to the parent. The interest payments reduce the company’s U.S. taxable income, and the interest income boosts the company’s foreign income — even though the entire transaction amounts to nothing but shifting profits from one corporate pocket to another.

Earlier this year, the U.S. Treasury issued regulations that are designed to reduce the tax benefits of earnings stripping, by treating interest payments of this as non-deductible dividends, rather than as taxable-deductible interest. If the dramatic shifts in the location of Medtronic’s income over the past two years are due to earnings stripping, one can only hope that the new rules will crack down on such tax avoidance schemes in the future.

We’ve got a jam-packed Rundown for you with legislative action coming down to the fiscal year wire. Read about tax happenings in New Jersey, North Carolina, Pennsylvania, California, and Wisconsin. Thanks for reading the State Rundown!

— Meg Wiehe, ITEP State Policy Director, @megwiehe

•  New Jersey lawmakers are coming up against a hard deadline at the end of the month to raise the state’s gas tax and shore up its Transportation Trust Fund (TTF), but continue to insist on pairing it with cuts in other taxes. They appear to have abandoned the weird mix of tax policies they were considering last week, but the new plan backed by Gov. Christie and Assembly leadership is even more destructive. The plan would slash the state sales tax rate from 7 percent to 6 percent and quintuple an existing tax break for retirement income, and is a net revenue loss for the state as a whole, draining the General Fund of more than $17 billion over 10 years.
• The North Carolina Senate gave final approval on Tuesday to its radical measure to enshrine in the state constitution a 5.5 percent cap on the personal income tax rate.  If the House signs off, the fate of the state’s ability to fairly and adequately fund vital public services will be in the hands of voters in November.   As our guest blogger Cedric Johnson wrote earlier in the month, the cap would forever lock in recent tax decisions that have primarily benefitted wealthy North Carolinians, force higher sales and property taxes, tie the hands of future lawmakers, and cut off a vital source of revenue needed to invest in education and healthy communities. 

• Up against tomorrow’s budget deadline, Pennsylvania lawmakers are charging ahead with a budget bill. The bill passed the House Tuesday evening and now moves to the Senate where it will likely face scrutiny over whether it is truly balanced. The $31.6 billion budget includes a dollar per pack increase to the cigarette tax, revenue gains from changes to liquor laws, expanded casino gambling, and a one-time tax amnesty program.

• California Gov. Jerry Brown signed the FY17 budget bill on Monday, which includes added investments in higher education and child care, an additional $3 billion for the state’s rainy day fund, and a $1.75 billion cushion to account for lower-than-expected revenues or higher-than-expected costs. While in good standing this year, the state faces a $4 billion deficit if higher income tax rates for the wealthy aren’t extended in November.
• Deficits, delays, and more short-term borrowing appear to be Wisconsin Gov. Scott Walker’s continued approach to the state’s transportation funding crisis. The governor recently reiterated his opposition to raising the gas tax or vehicle registration fees without an equal cut elsewhere when advising agencies on their 2017-2019 budget requests, signaling that the long-term transportation funding solution lawmakers have been working for over the past several years is likely still a ways off. 

What We’re Reading…

• The Washington Post on a growing trend among states to explore mileage taxes to address inadequate gas tax revenues.
• With growing income inequality, the Institute for Policy Studies identifies significant tax reform campaigns to watch.
• Mayors grapple with new economy player Airbnb and how to respond to disruption of hospitality industry tax collections.
• The annual KIDS COUNT Data Book identifies the EITC as one of the best policies to encourage work while improving the lives of children in low- to middle-income families.
• Check out ITEP’s updated policy brief on state corporate tax disclosure. 

Since House Speaker Paul Ryan signaled his support of Republican presidential candidate Donald Trump earlier this month, the pundit class has continually speculated whether Trump is “conservative enough” and how Trump’s policy agenda would align with the party’s standard bearers.

With last Friday’s release of Ryan’s blueprint for tax overhaul called “A Better Way”, it is apparent Ryan’s view of tax policy has much in common with the regressive, budget-busting plan Trump sketched out last fall — and in some ways is even more extreme.

The most obvious similarity between the two plans is their cost. At a time when the nation faces pressing budget shortfalls in both the short- and long-run, further reducing our already low tax receipts is a recipe for fiscal disaster. Yet both Ryan and Trump seem unconcerned by this. While the $4 trillion, 10-year estimated cost of Ryan’s tax cuts is dwarfed by the $12 trillion cost of Trump’s plan, any tax reform proposal with a price tag that includes the word “trillions” is exceedingly out of touch with the harsh fiscal realities facing the federal budget going forward.

Speaker Ryan and Trump also appear to have similar philosophies about who should be the biggest beneficiary of their tax largesse. Ryan’s proposal raises the stakes, taking Trump’s top-heavy approach to a new level. CTJ’s analysis finds that candidate Trump would give 37 percent of his tax cuts to the top 1 percent of Americans. Our analysis of Ryan’s plan finds it would reserve a staggering 60 percent of its tax breaks for this small privileged group. In fact, the top one-tenth of the top 1 percent would enjoy 35 percent of the Ryan tax cuts.

Candidate Trump and Speaker Ryan also appear to have similar views about corporate taxes. Trump’s plan would reduce the yield of the corporate tax by $2 trillion over the next decade. Ryan’s plan outdoes Trump’s, with an estimated price tag of $2.5 trillion over 10 years. To put this in context, the price tag of Ryan’s plan is more than half of what the corporate income tax is projected to bring in over the next 10 years. While both candidates would sharply reduce corporate tax rates, Ryan would make matters worse by moving to a territorial tax system that would allow multinational corporations to indefinitely continue the charade of pretending that a large share of their profits are earned in foreign tax havens. Both proposals to slash corporate tax collections come at a time when profitable Fortune 500 companies are paying only about half the current statutory tax rate, federal tax collections are at record low levels and U.S. corporate taxes as a share of the economy are substantially smaller than corporate tax collections in most other developed nations.

To be sure, there are differences between the approaches Ryan and Trump would take to cripple our revenue-raising capacity. But the two blueprints for tax change outlined by Ryan and Trump are notable both for their stark favoritism toward the rich and the yawning budget holes they would create for our nation in years to come.

Read the full analysis of Ryan’s tax plan.

Thanks to Jan Moller from the Louisiana Budget Project for guest posting for us about the end of Louisiana’s three legislative sessions held this year. Find a more detailed commentary on what was and wasn’t accomplished here (PDF).

The three sessions that comprised the 2016 Louisiana Legislature should be remembered as much for what was accomplished as what wasn’t. While elected officials raised enough revenue to avoid the most serious cuts, they left major holes in the budget that will impact students from kindergarten through college and set back the state’s efforts to reform its criminal justice system.

Perhaps more importantly, legislators failed to make the long-term structural reforms needed to put Louisiana’s budget back on solid footing. That means the work of building a fairer and sustainable revenue and budget structure must continue next year, as many of the revenue measures that were passed in 2015 and 2016 come with expiration dates. The Legislature didn’t fix Louisiana’s fiscal problems so much as it bought some time for real reforms to be made.

Gov. John Bel Edwards and the Legislature deserve credit for ending the pernicious practice of balancing the budget using “one-time” dollars that have no replacement source in future years. The 2015-16 budget was built with $826 million in one-time dollars, which contributed greatly to the initial $2 billion shortfall in the fiscal year that starts July 1. Next year’s budget is free of such “funny money,” and represents a more honest balance between revenues and expenses.

UPDATE: New Jersey did not increase its gas tax on July 1 because of disagreement over tax cuts that many legislators wanted to tie to the gas tax increase.  Lawmakers continue to search for a solution to the state’s infrastructure funding shortfall.

Independence Day weekend isn’t the only thing arriving this Friday.  Most states will be starting new fiscal years on July 1, and a handful of them will be adjusting their gas tax rates to mark the occasion.  And depending on the actions of New Jersey lawmakers over the coming days, it’s possible that the Garden State could overshadow the rest by implementing the largest gas tax increase in recent memory—and the state’s first in 26 years.

Aside from New Jersey, the rest of the 21 states that have waited a decade or more since last raising their gas tax rates will continue to hobble along as their transportation revenues stagnate.  In total, nineteen states will witness gas tax “anniversaries” on Friday when their gas tax rates will officially become a full year older.  Of that group, Tennessee’s 27 years of inaction leads the pack.  The Volunteer State has been collecting the same 20 cents in tax per gallon of gas since July 1, 1989—a few months prior to the fall of the Berlin Wall.

Gas Tax Increases

For the moment, Washington State has the largest gas tax change scheduled for this Friday.  There, the tax rate on gasoline and diesel fuel will rise by 4.9 cents per gallon, bringing the state’s overall rate to 49.4 cents.  This is the second and final stage of an 11.9 cent increase enacted last year to fund improvements to the state’s transportation network.

Meanwhile, Maryland’s gas tax rate will rise by just under a penny per gallon (0.9 cents).  This represents the final stage of a reform signed by then-Gov. Martin O’Malley in 2013, though the state’s tax rate will continue to vary in the years ahead alongside both inflation and fuel prices.

Given the enormous economic importance of our transportation network, both of these increases are steps forward for these states.  But both would also pale in comparison to the 23 cent increase under consideration in New Jersey.  For years, lawmakers in the Garden State have struggled to fund their state’s infrastructure with a meager 14.5 cent per gallon gas tax, ranked second lowest in the nation behind only Alaska.  Boosting that rate to 37.5 cents per gallon would allow for enormous improvements to the state’s infrastructure while still leaving its rate below that of its two largest neighbors—New York and Pennsylvania.  But the cuts to general fund taxes (including income, sales, and estate taxes) that key lawmakers are insisting must accompany a gas tax hike would result in a major erosion of funding for education, health care, and the state’s notoriously underfunded pension system.

Gas Tax Cuts

Three states will see their transportation funding situations deteriorate later this week when gas tax rate cuts take effect.

In California, the 2.2 cent per gallon cut taking effect on Friday represents the third cut in as many years.  Altogether, this series of reductions has pushed the Golden State’s gas tax rate 11.7 cents lower than where it stood in the summer of 2013.

In Nebraska, the situation is somewhat better as the state’s more modest 1 cent per gallon cut is bookended by an increase that took effect in January and another increase expected to take effect next January.  But even so, the state’s gas tax rate is still lower than it was a decade ago.

And finally, the 1 cent per gallon gas tax cut taking place in North Carolina actually represents a smaller decline than was originally scheduled.  Last year, lawmakers intervened to curb reductions in the gas tax rate triggered by low gas prices.  At the same time, they also implemented a new formula that will allow the state’s tax rate to grow alongside its population starting this January.

Given how gas prices have declined as of late, it is remarkable that more states aren’t cutting gas tax rates on Friday.  Kentucky, Vermont, and Virginia all have gas tax rates linked to fuel prices that often undergo automatic adjustments on July 1, but the tax rates in each of these states have already fallen so low that they’ve reached the minimum, or “floor,” level specified in law.  Similarly, had Georgia not reformed its gas tax last year, it’s possible that a gas tax cut would have taken effect there as well.

Decades of Procrastination

Sometimes, inaction can be just as significant as actual changes in policy.  In total, nineteen states will see gas tax “anniversaries” arrive on Friday.  Unless New Jersey lawmakers act, for example, the state’s 14.5 cent per gallon fuel tax rate will have been frozen in time for exactly 26 years come Friday.  The last time the state’s tax rate on fuel went up was on July 1, 1990 when the four cent Petroleum Products Gross Receipts Tax took effect.

Other states where gas tax rates officially become one year older on Friday include Tennessee (27 years), New Mexico (23 years), Montana (22 years), Arkansas (15 years), Kansas (13 years), North Dakota (11 years), and Ohio (11 years).  At the other end of the spectrum, states such as Idaho and Rhode Island saw their gas tax rates increase exactly one year ago under reforms recently enacted by those states’ lawmakers.

As we explain in a newly updated brief identifying the number of years that have elapsed since each state last raised its gas tax rate:

If the gas tax is going to provide an adequate amount of revenue to fund transportation in the medium- and long-term, the tax rate needs to be periodically adjusted to at least keep pace with the rate of growth in the cost of infrastructure maintenance and construction. State gas tax rates that have gone ten to twenty years, or more, without an increase clearly do not live up to this bare minimum test of sustainability.

Read the brief 

Since 1989, a magazine published in New Jersey called Weird N.J. has chronicled all things quirky, strange, unusual, and absurd in the Garden State. Weird N.J. could do an entire issue about the bizarre mix of tax policies floated in New Jersey this year.

The New Jersey Legislature is considering a proposal to increase the state’s gas tax but at the same time some lawmakers are insisting that that tax increase be paired with tax cuts for the wealthiest New Jerseyans. Perhaps most bizarre is that the state is considering providing a tax cut for retirement and pension income (a move that would benefit the best-off state residents) while also weighing cuts to the revenue that funds state pensions.

Gas Tax Increase?

New Jersey’s antiquated gas tax has been frozen since 1990 and at 14.5 cents per gallon is the second lowest state gas tax rate in the nation. Meanwhile, cars have gotten more fuel efficient and inflation has increased the cost of building and maintaining roads and bridges. As a result, the state’s Transportation Trust Fund (TTF) is facing a serious funding shortage and lawmakers are scrambling to replenish it by finally updating the gas tax.

A proposed gas tax update would raise $1.4 billion annually to replenish the TFF and boost transportation funding. The update would add about 23 cents per gallon to the rate paid at the pump, and include a mechanism to adjust that rate in future years to always hit the $1.4 billion target by increasing the rate when fuel prices and consumption are down, or decreasing it when they are up.

Tax Cut Ideas Galore

Yes, it’s absurd that the Garden State’s gas tax has been locked for almost 30 years, but the even bigger absurdity is the insistence by some lawmakers that the need for additional gas tax revenue to shore up the TTF is an occasion for massively cutting other taxes and revenues. At least one lawmaker said he would only consider proposals that are “revenue neutral or better,” meaning he will only support revenue-raising proposals that do not raise revenue.

Most policymakers have not gone that far, but in all, lawmakers are weighing about $850 million worth of tax cuts, more than half the size of the revenue raised through the gas tax increase in the first place. This would be a major blow to the state’s General Fund, which does not receive any gas tax revenues and has to fund important state investments such as education and health care. The current package of tax cuts being discussed includes eliminating the estate tax, increasing tax benefits for retirees, creating a new deduction for charitable contributions, and increasing the state’s Earned Income Tax Credit (EITC). More on some of these individual items below:

Tax Cuts for the Wealthy

Many in New Jersey have continued to adhere to the nonsensical notion that any increase in the gas tax – which lands most heavily on low- and middle-income families – must be paired with tax cuts for the wealthiest New Jerseyans in the name of “tax fairness.” Gov. Christie has focused particularly on eliminating the state’s estate tax, which would cost the state $540 million per year and benefit only a very small number of very wealthy estates.

Give to Pensioners with One Hand, Take Away from Them with the Other

Yet another oddity in the mix is a major increase in the state’s tax benefits for retirement and pension income. This tax cut would cost about $130 million per year and does essentially nothing for the low- and middle-income New Jerseyans who will be most affected by the gas tax increase. But what’s particularly strange about this is that it targets retirees and pensioners for tax breaks while simultaneously cutting the very revenues that go toward the state’s notoriously underfunded pension fund for its retirees.

EITC

In this bizarre landscape of outlandish tax ideas, one component stands out for being so normal it’s weird: lawmakers are also discussing increasing the state’s Earned Income Tax Credit. Increasing the state EITC is a perfectly sensible way of offsetting the gas tax increase for those low-income working families who will be most affected, and it comes at a reasonable cost that does not undo a significant share of the revenue gain achieved. In fact, an ITEP analysis shows that increasing the EITC to 40 percent of the federal credit, as proposed, would on average fully offset the gas tax increase for the lowest-income fifth of New Jerseyans, while reducing the overall revenue gain by only about $130 million of the $1.4 billion total.

New Jersey legislators should embrace their sensible side this time: raise the gas tax to shore up the TTF, expand the EITC to keep their tax structure from falling even harder on low-income families than it already does, and leave the absurdities to the experts at Weird N.J.