Month: July 2016

The Republican Party’s official 2016 platform, released on Monday, is wholly out of touch with reality. The plan would exacerbate the dual problems of rising inequality and continuous annual federal budget deficits with tax cuts that essentially put more money into the pockets of wealthy people and corporations and reduce federal revenues.

Some of the most troubling tax policy proposals:

1. Move the U.S. to a territorial tax system.

Under the heading “A Competitive America,” the GOP platform calls for the United States to “switch to a territorial system of taxation,” stating that such a system would help drive more investment and economic growth. In reality, a territorial tax system would create greater incentive for companies to shift profits and jobs offshore.

Under a territorial tax system, U.S. companies would no longer be required to pay tax on offshore profits. Such a system would encourage U.S. companies to move jobs and investments because they could take advantage of low- or zero-tax rates in tax haven countries. On top of this, U.S. companies would have more opportunities to avoid taxes under a territorial tax system because once they are able to artificially shift their U.S. profits offshore, they would never face any U.S. tax on these profits.

One striking thing about the GOP embrace of a territorial tax system is that Donald Trump proposes the opposite. His plan would end deferral and implement a full worldwide tax system.

2. Substantially lower corporate tax rates.

The GOP platform claims that American businesses face “the world’s highest corporate tax rates” and that the U.S. should lower its rate to be “on par with, or below, the rates of other industrial nations.” The key issue is that the GOP platform writers are only paying attention to the statutory U.S. rate, while ignoring the plethora of tax breaks and loopholes that enable most companies to pay well below the top rate. In fact, according to data from the OECD, the U.S. already has an effective corporate tax rate that places it just below the average rate of industrial nations. If the GOP succeeded in lowering the statutory rate to 25 or 20 percent, the most likely result would be a massive loss in revenue from one of the country’s most progressive sources of funding.

3. Enact a strict balanced budget amendment and require a supermajority vote to increase taxes.

One the more understated yet critically important tax policy proposals in the GOP platform is its call for a radical version of a balanced budget amendment that would not only require the budget to be in perfect balance each year, but would also place a cap on total spending and require a supermajority vote for any tax increase. A balanced budget amendment would cause a myriad of problems, but the most important is that it would restrict the ability of government spending to counteract recession through stepped up government spending.

The spending restraints would place a stranglehold on lawmakers’ ability to make any additional public investments and would likely require substantial spending cuts. In addition, it could make closing even the most egregious of tax loopholes impossible because closing such loopholes could require a supermajority vote. Many state governments have found themselves continuously hamstrung by such spending and revenue-raising restrictions.

4. Repeal FATCA

The GOP platform takes aims at the Foreign Account Tax Compliance Act (FATCA) anti-tax evasion 2010 legislation by specifically calling for its repeal. The key provision of the law is a requirement that foreign banks and foreign branches of U.S. banks share information on the accounts of U.S. citizens and residents with the IRS or face a harsh withholding tax. Access to this information will allow the IRS to track down those individuals who have been evading U.S. taxes by holding their assets in undeclared offshore accounts. The Joint Committee on Taxation (JCT) estimated that FATCA will help the IRS claw back $8.7 billion that would otherwise have been lost to tax evasion over the next decade.

In other words, the GOP platform is effectively advocating for tax evaders who would benefit to the tune of billions of dollars if the legislation is repealed.

5. Oppose any further increase in the gas tax.

In its section on transportation policy, the GOP platform opposes any increase in the federal gas tax, despite the fact that the federal gas tax has not been raised since 1993. Because of inflation, this means that the value of the 18.4 cent per gallon level has eroded nearly 40 percent over the past two decades. This erosion in value has led to a perpetual lack of revenue to adequately fund the infrastructure spending programs that lawmakers support, which has led them to embrace less- than-ideal funding sources for making up the difference. Last year for example, Congress essentially searched under the couch cushions for infrastructure funding by paying for it with things like higher user fees on unrelated transactions and selling off oil from the strategic petroleum reserve.

Rather than continuing its piecemeal approach, Congress should shore up transportation funding by increasing the gas tax now and indexing it to inflation. 

The theme of day two of the Republican National Convention was “Make America Work Again,” but there was mostly fire and brimstone (even a mention of Lucifer) and little concrete discussion about how to boost workforce participation rates, create more good-paying jobs, and ensure more American workers have the skills necessary to access good-paying jobs.   

For now, the only tangible details the public has about how a Trump Administration allegedly would put Americans to work are his business record and his economic policy proposals. Others have done a keen job of dissecting his business record and projecting what it could mean for a Trump Administration. So we won’t opine on that. But we’ll continue to trumpet the fact that Trump’s tax proposals will not benefit working people, the constituency on whose behalf he claims he is campaigning.

Earlier this year, CTJ released an analysis of Trump’s national debt-inflating tax proposal. Since then, the candidate has been cagey about his real intentions. And a few people affiliated with the campaign have said he’s cooking up a revised plan (that will still focus on tax cuts, of course).  For now, rather than submit to frequent whiplash and reading tea leaves, we’ll assume the proposal that remains on his campaign website is the one he intends to pursue if elected president.

And that proposal, aside from inflating the national debt, would deliver a windfall to the top 1 percent of taxpayers. If Franklin Roosevelt was a traitor to his class, then Donald Trump is an ally to his class whose tax policies would accelerate a reprehensible, slow return to the gilded age. 

Watch:

This week we bring you tax and budget news in Alaska, North Dakota, Massachusetts, Mississippi, and Cleveland, Ohio. Be sure to check out the What We’re Reading section for a grab bag of tax-related op-eds, new research and even a mention of Pokémon Go.  Thanks for reading the Rundown!

— Meg Wiehe, ITEP State Policy Director, follow me @megwiehe

• Alaska legislators officially ended the second special session called by Gov. Bill Walker this year with no solution to the state’s multi-billion deficit. Three days after the House adjourned, the Senate followed their lead. Any movement on budget reform or revenue options will be put on hold until after the November elections. Gov. Bill Walker’s administration released a report last week detailing the consequences Alaskans will face as a result of legislative inaction.
• North Dakota‘s legislature will go into special session on August 2 to deal with a projected $310 million revenue shortfall that continues to widen due to the state’s high reliance on tax revenues from a struggling energy industry. The focus is expected to be on budget cuts and use of reserve funds rather than revenue solutions, even after 4 percent across-the-board cuts were ordered in February to fill a similar gap in the last budget and 10 percent cuts have already been ordered for the upcoming biennium.
• Massachusetts lawmakers have ruled out holding a back-to-school sales tax holiday this year due to an ongoing revenue shortfall. It is the first time they have chosen not to hold the holiday since 2009. Our recently updated policy brief explains why sales tax holidays are poorly targeted and ineffective tax policy.
• Mississippi leaders have announced plans to study further overhauls to state’s tax code this summer, with a focus on exploring shifting reliance on income to sales taxes. That’s an ominous proposition considering the state entered the 2016 session with a revenue shortfall and a need for transportation funding, and passed massive income tax cuts anyway.
• Residents of Cleveland, Ohio will be asked to approve an increase in the city’s income tax at the ballot in November.  While some of the $80 million raised from the change would be used to enhance city services including police department reforms, the hike is also needed to plug a revenue gap brought about by the hands of state policymakers.  Under the leadership of Governor John Kasich, the Buckeye state has cut billions of dollars in state taxes paid for in part by also cutting state aid to local governments.  And, to make matters worse for local governments, state lawmakers recently eliminated local revenue sources including the estate tax.

 What We’re Reading… 

• New Jersey Policy Perspective’s recent op-ed soberly reflects on the fiscal and political realities surrounding the urgent need for transportation funding in the Garden State.
• Ohio Policy Matter’s research director, Zach Schiller, makes the case against the state’s continual attempt to gut the income tax in a recent op-ed.
• The North Carolina Budget and Tax Center’s director, Alexandra Sirota, explains the many problems with the state’s new rigid budgeting practices in this op-ed.
• A recent study shows that municipal debt is increasingly owned by wealthy households. This article from Financial Planning looks at potential implications of this shift for tax policy.
• A new academic paper examines the relationship between sales taxes on groceries and food insecurity.
• “The Fiscal Ship” is an online computer game that allows users to select from over 100 tax and spending options to achieve their policy goals and manage the federal debt. The Wall Street Journal reports that to date, players overwhelmingly have chosen tax increases over spending and tax cuts.
• Did you take a break from Pokémon Go to read this? Take a look at the tax aspects of the game 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 Kelly Davis at kelly@itep.org. Click here to sign up to receive the Rundown in via email. 

The good news: Pennsylvania lawmakers took steps to fund state services, supporting an increase in basic education and likely guarding the state from a credit downgrade.

The bad news: rather than doing so through broad-based tax changes, they opted to rely on revenue-raisers that fall hardest on the average Pennsylvanian.

Last week Pennsylvania lawmakers enacted a revenue package that funds the state’s $31.5 billion spending plan that went into effect the week prior without Gov. Tom Wolf’s signature or veto. While the complete package, including both a spending and revenue plan, came together after the state’s June 30th deadline, Pennsylvanians’ were thankful to avoid another drawn out budget standoff after last years’ nine-month impasse.

Most notably, the state’s budget agreement marks the first time under Gov. Wolf that lawmakers agreed to raise revenue, but it lacks any broad-based tax changes and relies too heavily on regressive tax options, dubious revenue raisers, and one-time funds. The revenue package draws primarily from expanded sales and excise taxes. In particular, it includes a $1 per pack cigarette tax increase, bringing the tax from $1.60 to $2.60, a $0.55 per ounce tax on self-rolled and smokeless tobacco, and a 40 percent tax on the wholesale price of electronic cigarettes and other vaping devices. As the share of the overall population that smokes continues to decline, the cigarette tax is often seen as one of the more politically feasible revenue options available to states. But the tax’s regressive nature, and the fact that it is a declining source of revenue, make it an imperfect tax.

Pennsylvania’s move to include digital downloads under the state’s 6 percent sales tax is a move in the right direction. A broad base is key for a successful sales tax, and in today’s increasing digital economy there’s no reason for the exemption on the download of digital videos, books, games, music and applications to remain. However, the $47 million raised under that change is far from what was needed. Early last year Gov. Wolf put forth an extensive proposal to raise the sales tax and expand it to dozens of items and services. A more recent iteration of that plan narrowed the reach, broadening the base to include cable television services, movie theater tickets, and digital downloads (mentioned above). While one was broad and the second much more narrow, both of these approaches coupled with a proposed increase to the state’s flat personal income tax from 3.07 to 3.4 percent serve as much more significant revenue raisers, and good tax policy.

Also of note was lawmakers’ decision to end the “vendor discount” under the sales tax—an unnecessary giveaway that allowed retailers to keep a portion of the tax they collected from their customers.

Additional state funds will be raised through changes to the state system for wine and liquor sales, expanded gaming, a tax amnesty program, and an extension of the personal income tax to state lottery winnings. These, coupled with a $200 million loan from the state’s medical malpractice insurance fund surplus and a few expected revenue raisers that have yet to become law, largely close the state’s $1.3 billion revenue shortfall.

While raising some new revenue in Pennsylvania represents real progress, the extensive use of one-time funds will likely result in another debate next year over long-term sustainability and how to permanently close what has become a structural revenue gap. Further, the choice to use of regressive tax options – that have a far greater impact on the state’s low- and middle-income families – is a disservice to most Pennsylvanians. According to ITEP’s Who Pays? report, Pennsylvania has the 6th most unfair state and local tax system in the country. That ranking will not improve unless lawmakers enact more equitable revenue solutions in the years ahead.

Of all the principles of good tax policy, none should be less controversial than “neutrality.”  Rather than picking winners and losers, tax systems should strive to treat similar situations in a similar way.  It makes no sense, for example, to charge tax on a DVD while offering an exemption for a movie theater ticket to view that same film.  Likewise, there’s no reason that hotel guests should pay tax on their room while fellow travelers that book rooms or homes through websites like Airbnb are allowed to stay in a city tax-free.

Apparently, lawmakers in both Pennsylvania and the city of Cleveland agree on this last point—though it took a major surge in Airbnb bookings to spur them to act.  This week Cleveland plays host to the Republican National Convention and next week Philadelphia will be doing the same for the Democratic National Convention.  The number of Airbnb bookings made in Cleveland this week is roughly four times above normal, while in Philadelphia bookings have increased threefold.  Not wanting to miss the potential tax revenue gain associated with these bookings, Cleveland and Pennsylvania both took action, just in the nick of time, to ensure that their lodging taxes will apply to room rentals booked via Airbnb.

Airbnb’s agreement with Pennsylvania to begin collecting the state’s 6 percent lodging tax was struck barely a month ago.  The city of Philadelphia, for its part, has been collecting its 8.5 percent tax from Airbnb guests for over a year.  Philadelphia’s tax was initially proposed by Councilman Bill Greenlee after he realized that Airbnb bookings were going to “hit the roof” last September during Pope Francis’ visit to the city.

In Ohio, Cleveland extended its 3 percent occupancy tax to include Airbnb rentals in a vote just last month, though Cuyahoga County (in which Cleveland resides) managed to work out an agreement regarding its 5.5 percent tax a bit earlier, taking effect in April.  Unlike in Pennsylvania, however, it does not appear that the state government will be receiving any direct tax revenue from Airbnb rentals.  While the state does apply its 5.75 percent general sales tax to hotels, Airbnb offers no indication that this tax is currently being charged on its bookings.

Nonetheless, most applicable taxes will be charged on Airbnb rentals during the conventions in Cleveland and Philadelphia.  This is a victory for good tax policy, but most jurisdictions still lag behind.  Far too many states and localities still need to update their tax systems (and regulations) to account for Airbnb and similar companies.

The lesson learned from Cleveland and Pennsylvania is that, at least in regard to tax policy, reform is within reach.  But while the revenue gain associated with a major event such as a political convention is helpful in focusing lawmakers’ attention, other state and local governments should not continue procrastinating until such an event comes to town.  With the current boom we’re seeing in the sharing economy, it’s time for lawmakers across the country to begin dealing with these issues.

The upcoming week undoubtedly will yield a plethora of articles on Donald Trump and VP pick Gov. Mike Pence’s differences and similarities. From a tax policy perspective, a review of the Indiana governor’s record reveals he and Donald Trump are on the same page.

Whether in his current position as governor of Indiana or as a member of the House of Representatives for more than a decade, Pence (who is a devotee of Arthur Laffer and has signed Grover Norquist’s no tax pledge) has fought time and again to enact extremely regressive and unaffordable tax cuts.

He has been a longtime advocate of the discredited supply-side economic policies that purport tax cuts for the rich will generate rapid economic growth. In one particularly telling television appearance in 2010, Pence made the bizarre claim that raising income tax rates would “actually reduce federal revenues,” a claim that the fact checkers at PolitiFact rated as simply “False.”

In picking Pence, Donald Trump has chosen someone whose tax policy positions fall in line with his recent tax policy declarations. While Trump has been inconsistent on tax policy in the past, his most recent tax plan would cut taxes by $12 trillion over the next decade and direct 70 percent of that tax cut to the top 20 percent of taxpayers, a skewed tax policy approach that Pence’s record indicates he would support.

Member of the House of Representatives

As a member of the House of Representatives from 2001-2012, Pence advocated and voted for a series of unaffordable tax cuts for the wealthy. For example, Pence earned an “F” on CTJ’s 2006 congressional tax policy scorecard for his votes for the extremely costly and regressive Bush tax cuts as well as an additional measure that would have repealed the very progressive federal estate tax.

Building on this, when the Bush tax cuts expired in 2010 and at the end of 2012, Pence fought to have those tax cuts fully extended, even though they would be twice as costly in the second decade as they were in the first. When pressed about the huge unpaid for cost of the tax cuts, Pence resorted to supply-side rhetoric saying that revenue would in fact expand as the economy expands due to the tax cuts. Unfortunately, Pence and congressional Republicans largely got their way in 2013 when Congress passed a tax deal that made 85 percent of the Bush tax cuts permanent. In other words, Pence not only advocated for tax cuts for the rich, he was part of a majority of representatives who passed them into law.

Besides his support for the Bush tax cuts, Pence also supported a series of other extremely regressive tax cuts. Mostly strikingly, Pence repeatedly co-sponsored the radically regressive “Fair Tax Act,” a bill that would replace the entire federal tax system with a national sales tax. According to an analysis of this plan by the Institute on Taxation and Economic Policy (ITEP), a national sales tax would raise taxes on the bottom 80 percent of taxpayers by an average of $3,200 a year, while cutting taxes by an average of $225,000 annually for the top 1 percent.

In addition, Pence has been a vocal opponent of the capital gains tax, which is overwhelmingly paid by the wealthiest Americans. To this end, Pence was the lead sponsor of legislation in 2003 that would have cut the capital gains tax from its already low rate of 15 percent at the time to 10 percent. A few years later, Pence sponsored another piece of legislation that would have allowed a partial exemption for capital gains income based on inflation that had taken place since the asset’s purchase.

Pence’s last notable position on federal tax policy was his staunch opposition to any legislation supporting clean energy and reducing fossil fuel emissions. For instance, Pence repeatedly voted against measures that would have ended tax subsidies for oil and gas companies. More broadly, Pence strongly opposed any kind of carbon tax or cap-and-trade legislation and called 2009 cap-and-trade legislation an “economic declaration of war.”

Governor of Indiana

Following very much in line with his time in the House of Representatives, Pence made a huge cut in the state’s income tax one of the main planks of his platform when running for governor of Indiana in 2012. An ITEP analysis of his campaign tax proposal found that it would have cost the state as much as $453 million a year, while cutting taxes on average by $2,264 for the top one percent and only $102 for the middle 20 percent of taxpayers.

After Hoosiers elected him governor, Pence failed to muster the political will to pass a tax cut as large as the one he proposed during his campaign. Still, he pushed through a tax cut in 2013 with an annual price tag of $250 million, roughly half the size of his original plan. At the time, an ITEP analysis found the plan would overwhelmingly benefit the top 1 percent of taxpayers. In addition, the legislation accelerated the repeal of the state’s progressive inheritance tax. In other words, Pence supported tax cuts that not only deprived Indiana of sorely needed revenue, but also further cemented Indiana’s status as one of the states with the most regressive tax systems in the country.

In 2014, Pence pledged to make additional tax code changes his priority for that year during a conference that also included speakers like the infamous anti-tax advocate Grover Norquist and the father of supply-side economics himself, Arthur Laffer. Pence’s push for tax cuts that time took aim at the corporate income tax rate and business personal property taxes. Ultimately, the legislature passed and Pence signed into law a cut in the corporate tax rate from 6.5 to 4.9 percent and another measure that allowed counties to cut business personal property taxes. Given the progressivity of corporate taxes, this cut further increased the regressivity of the state’s tax system and reduced much-needed revenues.

In 2016, many Republican lawmakers in Indiana pushed for raising the state’s gas and cigarette taxes as a fiscally prudent, though regressive, move to shore up the state’s transportation funding. Rather than allow for the possibility of new revenues, however, Pence and state lawmakers eventually passed legislation that depended on merely shifting revenue, including transferring ‘surplus’ revenue from the state’s general revenue fund to the state highway fund. The practical result of this shell game will be more funding for infrastructure, but only at the expense of less funding for other areas of the budget such as education and health.

Pence’s decision to join Trump on the presidential ticket might actually be good news for tax fairness in Indiana since he will no longer be able to run for a second term as governor and continue to push aggressively for more regressive tax cuts. The bad news is that Trump and Pence are on the same page when it comes to regressive, trickle-down tax policies. Given the nation’s current budget situation, it can ill afford tax cuts for the very rich or supply-side tax experiments that falsely promise long-term economic gains for the masses in exchange for huge tax cuts for the rich today.

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. 

Why Sales Tax Holidays Fail to Make the Grade
Back to school shopping season is just around the corner, which means it’s also time for our annual lesson on the follies of “sales tax holidays,” a tax policy idea that fails to make the grade. 
Read the Blog Post.
Read the Policy Brief.

Income Tax Offers Alaska a Brighter Fiscal Future
Alaska was once so awash in oil tax and royalty revenues that state residents received annual average dividend payments of about $2,000. And the state didn’t levy personal income or sales tax. Now, lower oil prices and, thus, revenue has Alaska’s governor and lawmakers scrambling to figure out how to fully fund the state government. In a new brief, ITEP outlines why a personal income tax is the most sustainable, progressive option.
Read the Blog Post.
Read the Report.

Corporations Are Lobbying Hard to Keep Tax Loopholes
Corporate deserters don’t have a leg to stand on in the court of public opinion when it comes to corporate inversions, the practice of claiming their headquarters are in other countries to avoid U.S. taxes. But it hasn’t prevented them from loudly arguing that Treasury regulations intended to curb inversions are “bad for business.” CTJ recently submitted comments to the Treasury that outlines why we shouldn’t cry corporations a river—and why Treasury should take bolder action.
Read the Blog Post.
Read Our Comment Letters.

How Gilead Sciences Is Cheating U.S. Taxpayers
Already, Gilead Sciences has been called out by health advocates for price gouging consumers for a drug that U.S. taxpayers subsidized the development of. So, it’s not surprising that the company has one-upped its own unethical behavior by shifting profits it earned from price gouging into offshore tax havens to avoid U.S. tax.
Read more about this shameful practice.

Tax Cuts Pay for Themselves, Dynamic Scoring and Other Fairytales
The theory that cutting rich people’s taxes will grow the economy is disproven, not to mention exhausting. Yet the rightwing Tax Foundation continues to perpetuate this myth with dubious analyses that will always claim tax cuts are good. The organization’s latest dynamic scoring chicanery? A dubious analysis of Speaker Paul Ryan’s tax proposal that claims the plan’s trillions in tax cuts (mostly for the rich) will be mitigated by massive economic growth. Also, they have a bridge to nowhere to sell. Read more
 

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

Sharable Tax Analysis

ICYMI: CTJ Director Bob McIntyre’s Op-Ed at CFO.com: The Case for a Corporate Tax Cut Doesn’t Hold Up

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

This week we bring you tax and budget news in Alaska, Pennsylvania, New Jersey, and Massachusetts plus look at the growing trend in states turning to cigarette taxes. Check out the What We’re Reading section below for a piece on the impact tax cuts in Kansas have had on the Sunflower State’s budget. Thanks for reading the State Rundown! 

— Meg Wiehe, ITEP State Policy Director, @megwiehe  

• Gov. Bill Walker called Alaska lawmakers back to Juneau this week for yet another special session to weigh options to fill the state’s multi-billion dollar revenue gap. ITEP released a report “Income Tax Offers Alaska a Brighter Fiscal Future” to inform the debate over the merits of a personal income tax vs a general sales tax. Sneak preview: four out of every five Alaskans would pay less under an income tax. Read the report here. (PDF) 
• Yesterday Gov. Tom Wolf signed a revenue package to fund Pennsylvania‘s $31.5 billion spending plan. It includes an increase to the cigarette tax ($1/pack) and other tobacco products, liquor modernization, expanded gambling, and an extension of the sales tax to digital downloads. The second half of the puzzle is now complete. Earlier this week, before the legislature reached agreement on how to fund the budget, the governor allowed the state’s spending plan to become law without his veto or signature.

• “Nonessential” road and bridge repair and construction continues to be shut down across New Jersey as lawmakers and Gov. Christie were unable to reach a gas tax deal before the end of June. They now project they can run the Department of Transportation on a shoe-string budget until the end of August, and negotiations could go that long. Lawmakers are back in session now and hoping to reach a compromise this week that restores the Transportation Trust Fund to solvency without blowing too large a tax-cut hole in the rest of the budget.  
• More states are looking to the cigarette tax to provide fast cash while promoting public health objectives. West Virginia and Louisiana both raised their cigarette taxes during special sessions to plug budget holes. A $2 per pack increase has qualified for the ballot in California and a $1.75 per pack increase has just been proposed in Colorado. Signatures have been gathered to put a $1.76 per pack increase on the ballot in North Dakota and efforts are underway to get a 60-cent per pack increase on Missouri‘s ballot as well. 
• The Massachusetts Senate Ways and Means Committee has proposed increasing the state’s Earned Income Tax Credit from 23 to 28 percent of the federal benefit (the state increased the tax break for working families last year as well). They would partially pay for the improved credit by applying the state’s 5.7 percent hotel tax to short-term rentals, most notably those via Airbnb. For more information, check out the Massachusetts Budget Project’s brief. 

 What We’re Reading…   

• Bloomberg BNA reports on the increasing significance of capital gains income to high-income taxpayers based on 2015 IRS data. 
• The Kansas Center for Economic Growth explains how state income tax cuts broke the budget. 
• Arkansas Advocates for Children writes about the uncertain impact recent and potential new tax cuts could have on funding public investments.  
• Villanova Professor Maule on potholes and the long-term financial costs to individual taxpayers when lawmakers cut, freeze, or avoid tax increases. 

Gilead Sciences has been the subject of lawsuits, political rebuke and public ire for the last few years as health advocates have called out the drug maker for price gouging after it purchased a smaller pharmaceutical firm and hiked the price of Sovaldi, a cure for Hepatitis C.

Now, a new report by Americans for Tax Fairness finds that not only is the company charging U.S. consumers an exorbitant amount for a critical, life-changing drug, it is shifting the profits it earns in the United States to offshore tax havens and avoiding taxes on a massive scale.

Of the report’s many findings, a few stand out. Between 2013 and 2015, Gilead’s profits more than quintupled from $4.2 billion to $21.7 billion. The explosion in profits can be attributed to Gilead’s 2011 acquisition of Pharmasset and its drug Sovaldi, a cure for hepatitis C (HCV). Gilead shifted the patent for this medicine to Ireland to avoid paying taxes on profits generated from that drug. In fact, Gilead’s untaxed offshore earnings rose by $12.9 billion, from $15.6 to $28.5 billion, between 2014 and 2015, the fourth largest offshore profit shift among Fortune 500 companies. Gilead Sciences reports that it has paid a tax rate of one percent on these billions in profits, a clear indication the company is using the magic of accounting to claim these profits are in low or zero-tax countries.

If Sovaldi had been developed by Gilead exclusively or in Ireland, perhaps there would be an argument for the company’s low tax rate on billions in profits. But what makes this case exceedingly egregious is that U.S. taxpayer dollars subsidized the research that helped create Sovaldi in the first place. Pharmasset’s founder, Raymond Schinazi, was an almost full-time worker at the Department of Veterans Affairs (VA) for almost three decades. During that time, he and Pharmasset received nearly $11 million in grants for research on viruses, including HCV, from the National Institutes of Health. Making matters worse, the HCV drug that Americans can end up paying $1,125 per pill for goes for one percent of that price in other countries. The price is so high that government agencies and programs, such as the VA and Medicaid, have been forced to ration the limited quantities they have and only treat a tiny portion of the total number of people they could help.

In addition to receiving major government subsidies for research activity, Gilead lowered its tax bill by $2 billion over the last decade by taking advantage of a loophole that allows stock options offered to corporate executives to be tax-deductible. If Gilead used the money it saved on taxes to significantly increase investment in research and development on new drugs, its tax dodging would seem far less egregious; however, the company spent nearly 20 percent more on stock buybacks than research and development between 2005 and 2014, greatly inflating the value of the company and the former CEO’s paycheck by almost 600 percent.

To be clear, Gilead Sciences is just one of many price gougers and tax dodgers of the corporate world. Multi-national pharmaceutical companies are some of the most egregious corporate price gougers and tax dodgers in the world, charging exorbitant rates for lifesaving drugs and circumventing countries’ tax codes all in the name of profits and their shareholders’ financial wellbeing.

More broadly, a recent CTJ analysis found that Fortune 500 companies are avoiding $695 billion in U.S. federal income taxes on the more than $2.4 trillion in profits they are holding offshore. As long as Congress refuses to act, it is complicit in this large-scale tax dodging. Neither Gilead Sciences nor any other major company should be allowed to avoid paying their fair share in taxes, particularly when those large profits are made possible by U.S. taxpayer investment in the first place.

The nation’s lawmakers should act immediately to shut down this tax avoidance behavior by ending deferral, making corporate inversions harder, increasing corporate transparency and closing egregious tax loopholes like the stock option loophole.

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

Back to school shopping season is just around the corner, which means it’s also time for our annual lesson on the follies of “sales tax holidays,” a tax policy idea that fails to make the grade. In our newly updated brief on the subject, we look at recent developments in this area and provide some insight on why the 17 states currently using sales tax holidays should drop them in favor of more effective alternatives.

Sales tax holidays suspend or reduce sales taxes on a particular set of items at a particular time of year. The most common use is for a weekend-long back to school holiday on certain clothing and supplies, but some states also have holidays for severe weather season, hunting season, and energy efficient products.

As our brief explains, sales tax holidays fail in several subjects:

• In Math, sales tax holidays just don’t add up. The amount of savings going to the families most in need is small compared to the hit that state budgets take.
• In Social Studies, it becomes even more clear that sales tax holidays are poorly targeted to the families that could use the help the most. Low-income families are less likely than their higher-income neighbors to be able to schedule their shopping trips around the brief time windows.
• In Economics, sales tax holidays violate one of the central lessons of taxation: consumption taxes should apply low rates to broad bases, and generally not attempt to encourage particular choices in the market. They also increase administrative difficulties and costs for the businesses that have to figure out what is taxed and what is not. And sales tax holidays do not provide a boost to retailers or state economies. Families are not likely to buy significantly more school supplies than they otherwise would have; they simply buy them at a different time.
• In Government, sales tax holidays score political points but are not effective tax policy. This is no more clear than in Louisiana, where a serious revenue crunch led cost-cutting lawmakers to cancel their hurricane-preparedness holiday but keep their “Second Amendment Weekend” for guns and hunting supplies. Sadly, the revenue loss from holidays usually hits states’ general funds that also pay for K-12 education, and much of the benefit flows to nonresidents who just happen to be passing through on summer vacation.

But we also note that many states have taken these lessons to heart. Although the concept has reached more than 20 states over the years and proposals to expand it continue to arise, no states enacted new sales tax holidays this year and several states have reduced or canceled theirs in the last few years. Lawmakers in Kansas, Maine, Nebraska, Rhode Island, and Wisconsin recently rejected new back to school holidays and North Carolina decided not to reinstate its “holiday.” Florida lawmakers pared back the state’s back to school holiday and rejected proposals to create new holidays for hunting and fishing gear, items bought from small businesses, and all purchases by veterans.

We hope states lawmakers and families will add our brief to their summer reading lists!