Month: June 2016

Hamilton’s 16 nominations and the 11 Tony awards it received last Sunday came as no surprise after months of critical and popular acclaim. What was unforeseen during Sunday night’s Tony’s telecast were the shout outs to New York Sen. Chuck Schumer, who was wholly uninvolved in the production of Hamilton or any other live theater production. What exactly did Schumer do to earn such accolades?

Year after year, Congress has renewed a package of temporary tax provisions known as the “tax extenders.” Most of the tax extenders are simply costly tax breaks designed for special interest groups and contribute very little to the nation’s economy. Sen. Schumer is receiving so much praise from Broadway recently because he managed to get “live theatrical productions” added to the film credit, which allows investors to immediately deduct the full cost of production in lieu of a longer depreciation schedule.

Broadway producers argue that including “live theatrical productions” in the film credit will protect their finances from under-performing shows. The fact that taxpayers shouldn’t be on the hook for protecting the economic well-being of wealthy theater producers notwithstanding, there are hits and there are flops every season (just as there are ups and downs in the financial markets), regardless of whether investors have a favorable tax credit. The industry has done just fine without the tax credit, employing tens of thousands of workers and has an economic impact of $12.57 billion in New York alone. While proponents of the tax break claim it is as an easy way to free up investment capital, in reality it is just another special interest tax break that disproportionately benefits a small number of wealthy individuals.

After officially premiering on Broadway in August 2015, Hamilton earned $61.7 million by April 2016, easily recouping the original $12.5 million investment. Investors’ return could add up to $300 million within a few years by some estimates.

Hamilton’s success has been used by proponents of the live theater tax break to promote the economic and cultural importance of enacting and extending the tax break. This makes no sense: Investors financed Hamilton well before Congress passed the tax break, and the production owes none of its success to the credit. In other words, Hamilton seems a better example of why the credit is unnecessary rather than a reason for its enactment.

The film credit is just one example of a variety of special interest tax breaks in the extenders package that distort American markets and give very little back to the economy. There are niche extenders including tax breaks on rum, hard cider, NASCAR, and race horses, but there are also larger tax breaks that have significantly detrimental effects on our economy and only serve to boost the profits of large corporations. These tax breaks include bonus depreciation, the research credit, and offshore loopholes such as the active financing exception and the look-through rule. In total, full extension of the tax extenders will cost the American tax payer $740 billion over a decade. Congress should allow provisions like the live theater production tax break to expire in the coming years and also reverse course on its fiscally disastrous decision to make several other tax extenders permanent.

The irony, of course, is that all of those in favor of this tax break are pointing to a musical that was produced before the tax break took effect and is about a strong advocate of federal taxes. To quote our first Secretary of the Treasury, “[taxes] are evidently inseparable from Government. It is impossible without them to pay the debts of the nation, to protect it from foreign danger, or to secure individuals from lawless violence and rapine.”

Aaron Medelson, a CTJ intern, contributed to this report.

Louisiana lawmakers are in the second special session of the calendar year to once again address significant budget shortfalls—this time for the coming fiscal year starting July 1.

ICYMI, here’s a brief recap of events leading up to this extraordinary session: short-sighted income tax cuts under the Blanco and Jindal administrations followed by stagnating sales tax revenues and declining oil prices left lawmakers facing a $900 million gap in the current fiscal year (ending June 30) and about twice that for the coming fiscal year. Lawmakers were able to most of close the FY 2016 and substantially narrow the FY 2017 gaps during the first special session in March through a mix of spending cuts, one-time fiscal measures, and mostly temporary tax changes—most notably a regressive 1 cent sales tax hike, giving LA the highest combined state and local sales tax rate in the country. While the legislature recently passed a FY 2017 budget, it is still $600 million short.

As the governor stated in his remarks opening the second session, this unresolved fiscal crisis presents Louisiana the opportunity to “get ahead of the game” on reforms they will need to not only fund essential services this year but also to create stability going forward. Not all proposals under consideration will move Louisiana in the right direction—here’s our take on some of the key proposals:

1.       Eliminate the federal income tax deduction—but don’t blow the savings on a capped flat tax 

The deduction for federal income taxes paid is an unusual personal income tax break that allows taxpayers to subtract the value of the federal income taxes they pay in a given year from their Louisiana taxable income. It is incredibly costly to the state (and expected to balloon as the federal income taxes paid by wealthy tax payers increase) and provides very little benefit to low- and middle-income families. A recent ITEP analysis found that this reform alone would more than close LA’s current budget gap, saving the state over $950 million a year, 83 percent of which would come from households in the top 20 percent of income. 

Elimination of this deduction has been proposed as a part of contingent bills HB 7 and HB 17, which would also flatten Louisiana’s personal income tax to a single rate of 3.8 percent (applied starting at $25,000 of taxable income for married couples) and constitutionally cap this rate at 4.75 percent. These bills blow the savings from eliminating the deduction for federal income taxes on a flat tax system that raises no additional revenue to address the current budgetary gap and may even, according to an ITEP analysis, be a revenue loser. 

Under the maximum rate set by the proposed cap, we estimate HB 7 and HB 17 would raise $750 million, which would be enough to plug the budgetary gap for the coming year, but $850 million short of what is needed to replace the $1 billion in revenue when the temporary sales tax increase expires in 2018. Given that Louisiana already has the highest combined state and local sales tax rate in the country, limiting the ability of lawmakers to raise needed revenue in the future through the more progressive income tax is terrible tax policy. 

2.       Make steps toward restoring sensible income tax brackets and rates

In 2003, Louisiana enacted progressive reforms by exempting food and residential utilities from the regressive sales tax and raising the income taxes paid by higher income earners. Lawmakers kept the sales tax changes but repealed the income tax reforms (aka the Stelly Plan) post-Katrina when the state budget was flush with federal recovery dollars, leaving the state short an estimated $1 billion annually once those dollars dried up.   

Rather than moving to a flat tax structure, the sensible and fiscally responsible thing for lawmakers to do is to take steps to restore the Stelly income tax brackets, under which the highest marginal rate of 6% applied to income over $50,000 for households married filing jointly (MFJ) ($25,000 if single) rather than $100,000 ($50,000 if single).

ITEP’s analysis found that adoption of the governor’s proposal to change the individual income tax brackets in the first special session (HB 34 which was a modified Stelly bracket applying the top rate to taxable income above $60,000 for MFJ filers) would have raised over $380 million, which is over 60 percent of the revenue needed to close the FY 2017 gap.

3.       Reduce the excess itemized deductions on individual income taxes

A proposal to limit the itemized deductions individuals can claim on their state personal income taxes above the federal standard deduction will be given a second chance today in the House Way and Means Committee. The first version of the proposal would have allowed individuals to take 57.5 percent of the deduction instead of 100 percent. The bill is expected to be reintroduced with amendments.

An ITEP analysis of a similar proposal found that reducing excess itemized deductions to 50 percent would bring in $115 million in revenue (20 percent of what is needed to close the FY 2017 gap) and impact fewer than 20 percent of all Louisiana households.

HB 7 and HB 17, mentioned above, would entirely eliminate these deductions, but the estimated $300 million in savings to the state is zeroed out by the problematic capped flat tax structure. 

If lawmakers adopted only the second and third of these suggested reforms, they could close more than 80 percent of the budget gap facing the state next year—saving college tuition assistance, low-income hospitals, and other social services from devastating cuts—and would also be making critical steps toward enacting longer-term, more progressive reforms.

Are the days of “patching [the] budget together through duct-tape solutions, maxed out credit cards and misguided fund sweeps” over? They should and can be. Here’s to hoping LA lawmakers will take these steps to move the state in the right direction. 

LinkedIn has a tax avoidance problem: the company is generating tax breaks faster than it can use them. Between 2010 and 2014, the company used the “excess stock option” tax break to virtually zero out its federal income taxes, paying an average tax rate of just 1.1 percent on $453 million of U.S. income. But even after doing so, the company is in the enviable position of having a huge pile of unused stock-option tax breaks that can be exercised in years to come.

In the footnotes of its annual financial report, LinkedIn discloses that it has enough unused stock option tax breaks to zero out income taxes on the next $463 million of U.S. profits it earns. The bad news is that you have to earn a profit to use the stock option tax break, and LinkedIn itself has not appeared especially confident that it will do so going forward. This is one reason why Microsoft’s recently announced acquisition of LinkedIn appears especially fortuitous: When Microsoft buys LinkedIn, it is also buying LinkedIn’s stockpile of unused tax breaks. And as a consistently profitable company, Microsoft will certainly be able to make full use of its newly acquired stock option tax breaks.

As explained in a recent Citizens for Tax Justice report, companies that pay their executives in stock options instead of cash can pretend, for tax purposes, that they actually “spent” the value of these options, and can reduce their taxable profits by (most of) the amount of this alleged “cost.” The stock option tax break is a favorite of Microsoft as well, reducing the company’s tax bills by $1.17 billion over the past five years.

LinkedIn, like a number of other prominent tech companies, is notorious for relying heavily on stock options as a way of paying its employees without incurring an actual cash expense. Microsoft’s acquisition is a reminder that as long as the excess stock option tax break remains on the books, the use of stock options by companies such as LinkedIn can also be a remarkably effective way to become an attractive takeover target. 

Update 6/29/2016:The new rules have been officially released. For more see the FACT Coaliton release here.

In the wake of new research revealing that offshore corporate tax avoidance has cost governments worldwide hundreds of billions of dollars in lost revenue, leaders of the world’s 20 largest economies have started to crack down on this behavior. As part of its action plan to counter tax avoidance, the OECD has advocated mandatory country-by-country reporting (CBCR) as a crucial tool needed to end the practice of base erosion and profit-shifting by multinational corporations. Following the OECD’s lead, the Internal Revenue Service put out rules to enact private CBCR, which would require U.S. parent companies that reported an annual revenue of at least $850 million to share information on profits, tax rates, and subsidies received in every country in which they do business.

While this new rule is a major step toward bringing an end to corporate tax dodging, it falls short by making these disclosures private instead of available to the public. As Heather Lowe, Director of Government Affairs at Global Financial Integrity, explained in her testimony before the IRS, making this information publicly available would give both Congress and advocacy groups the information they need to analyze solutions to the problem of base erosion and profit-shifting, instead of relying on the already over-burdened IRS.

Four U.S. senators have echoed Lowe’s concern. On June 7th, Senators Al Franken (D-Minn), Sheldon Whitehouse (D-RI), Bernie Sanders (I-Vt), and Ed Markey (D-Mass) signed a letter urging the IRS to require public CBCR, arguing that this change would strengthen the IRS rules by empowering the American public with knowledge about corporate offshoring. 

Shielded by a prior lack of federal transparency requirements, multinational corporations have been able to exploit loopholes in both U.S. and international tax laws to shift their profits to subsidiaries in low or no-tax nations; a recent CTJ report found that American Fortune 500 companies are avoiding up to $695 billion in federal income taxes this way. Expanding CBCR through a public disclosure requirement would put information about corporate behavior in the hands of citizens around the world who can hold both these corporations and their governments accountable.

A comment issued by the FACT Coalition highlights other ways in which the IRS rules on CBCR could be strengthened. For instance, the OECD has estimated that the $850 million annual revenue threshold would exempt between 85 and 90 percent of all multinational entities from reporting requirements; lowering this threshold to $45 million would provide a broader picture of multinational corporation behavior. Additionally, since corporations often label independent contractors as employees to give an illusion of legitimacy in tax haven countries, changing the definition of “employee” for CBCR as one for whom the corporation pays payroll or other taxes would bring about even more transparency.

As the world grows increasingly concerned about the expensive problem of corporate tax avoidance, the U.S. should lead the fight for international transparency by adopting expansive CBCR that holds all multinational corporations accountable. 

Thanks to Cedric Johnson from the North Carolina Budget and Tax Center for guest posting for us about the budget debate in North Carolina. For more information we urge you to visit the North Carolina Tax and Budget Center’s website. 

By: Cedric Johnson, Policy Analyst North Carolina Budget and Tax Center

North Carolina Senators are pushing to make changes to the state constitution, and, in doing so, would sacrifice things we need to help ensure that communities across the state thrive. The proposal, Senate Bill 817, would change the state’s constitution to prevent the rate of the state income tax from ever going up. This would lock in and forever guarantee the large income tax cuts pushed through by state leaders since 2013 that have largely benefited the wealthy and powerful corporations.

North Carolina Senators are pushing to make changes to the state constitution, and, in doing so, would sacrifice things we need to help ensure that communities across the state thrive. The proposal, Senate Bill 817, would change the state’s constitution to prevent the rate of the state income tax from ever going up. This would lock in and forever guarantee the large income tax cuts pushed through by state leaders since 2013 that have largely benefited the wealthy and powerful corporations.

The bill permanently caps the state’s personal income tax rate at 5.5 percent. With the personal income tax rate already set to fall to 5.499 percent on Jan. 1, 2017, the cap would cut off a vital source of revenue. This is just the next phase of state leaders’ efforts to drastically alter the state’s tax system – which means that North Carolina cannot make sure that communities from the mountains to the coast can thrive. It also means that middle- and low-income communities are pushed into further economic straits because they have to carry a heavier tax load than the powerful.

Here are reasons why this proposal is bad for North Carolina.

• Would lead to increased sales and property taxes. Proposal will force lawmakers to rely on other revenue sources—like the sales tax and property tax—and raise those rates to offset the loss of the income tax as a revenue source. Or it will just further drive an increased reliance on fees or other ways of financing public services like privatization or borrowing.

• Would risk our state’s respected AAA bond rating. States that have set in place these kinds of tax and budget restrictions often face higher borrowing costs as their bond ratings are downgraded. This is a bad business decision for our state. It would mean higher costs to borrowing for everything from ConnectNC projects to local governments’ school construction.

• Would make North Carolina unable to ensure communities thrive. We are already losing more than $1.5 billion per year due to deep income tax cuts, which primarily benefit the wealthy. The cuts are reducing opportunity—as illustrated by long waiting lists for early childhood education programs and in-home services for older adults, too few textbooks and teacher assistants, overburdened courts, and the gutting of environmental protections. The revenue loss is preventing us from catching up after the recession, let alone keeping up with growing needs.

• Wouldn’t give lawmakers power to do anything they can’t already do through the legislative process. Policymakers have already cut income taxes and held the current budget proposals to the formula of population plus inflation growth. Changing the state constitution in this way would limit the tools available for future lawmakers to make fiscally responsible and timely choices. It would make lawmakers less accountable to North Carolinians. If this proposal goes into effect, it’s not going away, no matter how future voters feel.

• It would lock in the tax decisions that have primarily benefited the wealthy. Low, flat income tax rates deliver the greatest benefit to the wealthiest North Carolinians, and this proposal to make the income tax rate structure permanent locks in the tax decisions made in recent years that have benefited the powerful.

We elect our legislators to use their judgment to make North Carolina a stronger, more prosperous state – not to take away from future lawmakers the ability to use their judgment to meet needs as they arise. This proposal threatens our future.

Here’s a link to BTC’s fact sheet on Senate Bill 817.

Learn more about how Senate Bill 817 would put N.C.’s AAA-bond rating at risk.

Learn more about how Senate Bill 817 would lock in tax giveaways for the powerful. 

Find out more about how we need to #GetNCBackonTrack.

Thanks for reading the State Rundown! Here’s a sneak peek: Oregon officials approve ballot initiative to increase corporate taxes. Rhode Island legislative committee approves state budget. Local officials in Delaware worry about state shifting costs, need to raise property taxes. Minnesota special session looks less likely.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

Voters in Oregon will have the final say on a proposal to increase taxes on corporations this fall after state elections officials certified that Initiative Petition 28 (IP-28) has enough support to appear on the ballot. IP-28 would increase the state’s corporate minimum tax for businesses with annual Oregon sales over $25 million. Under current law, corporations pay the greater of a minimum tax on sales ($150 to $100,000) or a tax on income (6.6 percent on income up to $1 million and 7.6 percent on income above $1 million). IP-28 would eliminate the $100,000 cap on the corporate minimum tax and apply a 2.5 percent rate to sales above $25 million.  If passed IP-28 would generate $3 billion in new revenue earmarked specifically to education, health care and services for senior citizens. Gov. Kate Brown released a plan this week that outlines her vision for how the money should be spent if IP-28 is approved. The governor would spend more on vocational and technical education, expand the state’s Earned Income Tax Credit, and reform business taxes by creating new deductions and closing existing loopholes.

A Rhode Island House committee approved a state budget this week. The House Finance Committee approved the $9 billion measure in the wee hours of Wednesday morning, rejecting Gov. Gina Raimondo’s proposed cigarette tax increase but embraced her recommendation to increase the state’s earned income tax credit from 12.5 to 15 percent of the federal.  The budget also included a $15,000 exemption on retirement income for taxpayers who have reached full Social Security retirement age and have less than $100,000 of income.

County officials in Delaware worry that the state could shift costs to them due to a revenue shortfall. State legislators want county governments to assume more responsibility for public services in the face of lower-than-expected tax revenue. Lawmakers have $75 million less than anticipated when Gov. Jack Markell released his budget in January. While the revenue outlook is not as dire as that faced by other states – Delaware will spend $200 million more this year than last year – most of the new revenue will be eaten up by automatic cost increases (school enrollment, state employee health insurance, and other categories). A panel of state and county officials is studying which state services counties could absorb. Local officials could be forced to increase property taxes.

Talk of a special session in Minnesota to tackle tax reform and public works funding was dead on arrival in St. Paul this week. Gov. Mark Dayton and legislative leaders were unable to reach a deal on holding a special session following Dayton’s pocket veto of a tax package that would have reduced state revenues by $100 million. The bill included tax breaks for farmers, working families, businesses, college graduates and professional sport stadiums. Amazingly, the revenue reduction came down to a wording error in the bill’s language (“or” instead of “and” in a crucial clause) due to the rushed nature of the bill’s passage at session’s end. Dayton refused to sign the bill and initially said the measure could be taken up again in special session. Legislative leaders balked, wary that the governor would use the session to win passage of a larger package of public works spending. The impasse makes the prospect of a state EITC expansion this year – a measure included in the bill vetoed by the governor –  far less likely.

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 new report by Citizens for Tax Justice (CTJ) found that 315 Fortune 500 companies have managed to avoid $64.6 billion in taxes over the past five years due to a single tax provision known as the stock option loophole.

The loophole allows companies to deduct the market value of stock options provided to their employees, even though the provision of these stock options comes at no real expense to the company. In other words, issuing stock options allows companies to take a huge tax deduction, and thus significantly lowering their taxes, without expending any resources. This practice encourages companies to make already excessive executive compensation packages even larger.

Over the past few years, Facebook has become the poster child of the stock option loophole for its extensive use of the break. CTJ’s new report affirms this status, finding that the company received $5.7 billion in tax breaks over the past five years from this singular loophole. To put this in perspective, the stock option loophole allowed the company to slash its total federal and state incomes taxes by 70 percent and even pay nothing in taxes in 2012.

Facebook is no means alone in receiving a huge tax break from the loophole. Apple and Google received $4.7 billion and $1.9 billion respectively in tax savings from the loophole. While tech companies are some of the biggest recipients of the breaks, many financial firms take huge advantage of the break as well. For example, Goldman Sachs, JP Morgan and Wells Fargo received $1.8 billion, $1.7 billion and $1.5 billion in breaks from the loophole.

At a time when the average compensation for a company CEO is 335 times the compensation of the average worker, we need a tax code that curbs income inequality rather than making it worse. Eliminating the stock option loophole by no longer allowing companies to deduct stock options for which they pay no expense would raise much needed revenue and represent a positive step in countering income inequality.

Read the Full Report.