Month: July 2016

The decline of oil tax and royalty revenues in Alaska, which once funded the state government with money to spare, has created a multi-billion-dollar revenue shortfall that the state’s lawmakers have struggled to address.

To shore up the state’s finances, lawmakers are weighing whether to institute a personal income tax for the first time in 35 years, enact a sales tax, which the state has never had before, or a combination of both.

Gov. Bill Walker called Alaska lawmakers back to the statehouse this week for yet another special session. Late last year, he put forth a New Sustainable Alaska Plan (PDF), including a proposal to reinstitute a personal income tax. He also recently broadened the scope (PDF) of the debate to include a proposal for a statewide sales tax, under HB 5004.

ITEP released a report today that weighs the pros and cons of a personal income tax versus a general sales tax as a means to address Alaska’s massive budget gap. The brief, “Income Tax Offers Alaska a Brighter Fiscal Future” lays out five key facts Alaskans and their elected officials should keep in mind as they weigh the merits of these two policy options:

1)      Most Alaskans would pay less under a personal income tax than a sales tax.

2)      Personal income taxes are more equitable than sales taxes.

3)      Personal income taxes generate a more sustainable revenue stream than sales taxes.

4)      Sales taxes ask far more of families living in rural Alaska.

5)      Personal income taxes lay the groundwork for economic growth.

Read the report to learn more about the benefits of a progressive income tax.

Alaska’s legislators have thus far shown little willingness to pursue sweeping tax changes. Rather than continue to delay action, Gov. Walker partially addressed the gap last month with cuts to state spending and a sharp reduction in tax breaks for the oil industry. He also capped the state’s Permanent Fund dividend–a flat dollar payment that most Alaskans receive each year–at $1,000 per person, a reduction of more than 50 percent relative to last year’s $2,072 dividend.

The governor’s hard choices will be painful for many Alaska families, but also will undoubtedly serve as a starting point to ease the state’s dire fiscal situation. Yet even with these deep cuts, the need for large-scale, comprehensive tax reform remains.

In a recent report, “Distributional Analyses of Revenue Options for Alaska,” ITEP warned that a dividend cut would be steeply regressive and disproportionately affect low- and middle-income families who rely on the income that payment provides. Now that Gov. Walker has moved forward with dividend cuts and is weighing a general sales tax that would fall more heavily on average Alaska families, the need to find revenue options that provide some balance is more important than ever.

Reinstating a personal income tax remains the single-most powerful counterbalance to all of the regressive options on the table. Rather than wait for a new oil boom, Alaska should  adopt a tax system that serves Alaskans in the short- and long-term, diversifies its revenue system, and shifts the state away from the boom-and-bust cycle of oil prices.

How the range of tax and spending changes under consideration will affect Alaskans of all income levels should be on the forefront of lawmakers’ minds as they resume work in Juneau this week. Unfortunately, the vast majority of available options would primarily impact low- and middle-income families. Given that reality, enacting a personal income tax alongside other policy changes will be essential if lawmakers are to have any hope of crafting an equitable, sustainable solution to Alaska’s budget woes.

Read the report here.

CTJ/ITEP Staff Summer Fun List Selections

We’re in the midst of summer and besides analyzing tax policies and scouring corporate financials, our staff is enjoying the warm temps, sunshine and time outside. Normally we provide summer book recommendations as a way to demonstrate that we are not all tax all the time. But this summer,  we’re really showing our non-wonk range and expanding our picks beyond books.  Enjoy this hodgepodge of staff suggestions and maybe add one or two of them to your things-to-do-this-summer list:

Watch the new documentary “The Price We Pay” by Harold Crooks
Harold Crooks’ “The Price We Pay” provides a deep dive into the offshore tax haven system that has allowed multinational corporations to dodge billions in taxes across the world. No other documentary in recent years has provided such an informative and engaging look into how corporations created the offshore tax system and what we as citizens need to do to stop this behavior. – Richard Phillips

Read Crazy Rich Asians and China Rich Girlfriend by Kevin Kwan

After his hugely successful 2013 book, Crazy Rich Asians, Kevin Kwan followed up with 2015’s China Rich Girlfriend. Both are of the ridiculous guilty pleasure genre. Kwan’s engaging storytelling skills are apparent, but it’s not the narrative arc that will make your jaw drop so much as the glimpse it provides into the lives of the world’s globe-trotting mega rich. Kwan says his books are works of fiction, though loosely based on experiences from his childhood in Singapore. Perhaps Kwan’s descriptions of the opulent lifestyle of super wealthy Singapore denizens are hyperbole. Nonetheless, for a progressive tax policy advocate like me, the books serve as reinforcement that the world’s richest citizens are doing more than just fine, and they most certainly can afford to pay their fair share in taxes. – Jenice Robinson

Read The Fire Next Time by James Baldwin

“God gave Noah the rainbow sign; no more water, the fire next time!” In this short but very heavy work that also inspired Ta-Nehisi Coates’s Between the World and Me, Baldwin writes to his young nephew, attempting to impart a message of hope and love without sugar coating the dismal reality of race relations in the United Sttes. The result is a powerful, poetic , and devastatingly honest confrontation with these issues and Baldwin’s own internal struggle to find the hope and will to push forward. Though it agitates more than inspires, The Fire Next Time will inevitably stir something in you, and you will certainly find it hard to complain about your taxes after reading it. – Dylan Grundman

Read The Green Boat by Mary Pipher

Like Baldwin, Pipher explores an issue that simultaneously threatens our society and our sanity: climate change. Writing that “humans have sailed into an emotional hurricane that no one knows how to navigate,” Pipher draws on her knowledge as a Psychology Ph.D. and her wisdom as a seasoned activist to help her readers get the sea legs and bearings required for this journey. Instead of allowing the enormity and abstractness of the issue to paralyze and depress us, “we can acquire the skills we need to overcome our sense of doom, and discover our capacities for transcendent coping.” Anyone working hard on changing intractable issues – whether they are social inequities, ecological challenges, or misguided tax policies – can learn and benefit from Pipher’s thoughtful and practical advice. – Dylan Grundman

Read Sick in the Head: Conversations About Life and Comedy by Judd Apatow

This is a collection of Judd Apatow’s intimate and candid conversations with big names in the comedy business over the past 30 years. They cover everything from the art of the trade, to contemplative thoughts on life, love, the trials and errors of being a comedy nerd. Given the intensity of the upcoming election and some of the dire budget situations states will face heading into 2017, who couldn’t use a good laugh? – Aidan Russell Davis

Read The Legend Series by Marie Lu

If you are growing weary of political boxing and want to enjoy escapism to a United States that is nearly unrecognizable, reading the Legend trilogy is a must read. Follow teens June and Day on various adventures as they team up to “save” their country. It’s a roller coaster of a young adult trilogy. The New York Times says of the first book “Legend doesn’t merely survive the hype, it deserves it.”  – Kelly Davis

Listen to Marc Maron’s WTF Podcast

I’m enjoying Marc Maron’s WTF podcast that offers Maron’s stand-up riffing accompanied with honest, though-provoking conversations with actors, comedians, directors, and more. He even gets into some juicy policy talk in his garage. – Aidan Russell Davis

Listen to The Mortified Podcast

As an avid journal writer, people watcher, and story lover, this is a delightful podcast full of both laughs and tears perfect for 20 minute walk or car ride. The tagline also works as a good mantra for those engaged in state tax policy debates, especially when things don’t seem to be going so well–“We are freaks, we are fragile, and we all survived.” – Lisa Christensen Gee

Listen to On Being with Krista Tippett

If you’re craving substantive conversations on big topics, look no further than On Being. Exploring the questions,  “What does it mean to be human, and how do we want to live?,” these conversations remind me that there are so many people working for good in the world and helps me connect to additional resources that nourish and keep me energized in my piece of the work towards social transformation. – Lisa Christensen Gee

Listen to The Longest Shortest Time and Mom and Dad are Fighting

I’ve had all the ups and downs and in-betweens of tax policy battles over the last decade plus. But it’s parenting travails that have been on my mind since bringing a second child into this world earlier in the year.  When I want to be reminded that I am not the only mom struggling to get my almost 5 year old to “listen to my words” or trying to remember what it’s like to get a full night of uninterrupted sleep, I turn to two highly recommended podcasts: The Longest Shortest Time and Mom and Dad are Fighting.  I especially appreciate that both are free of judgmental and dogmatic advice and instead focus on fresh stories and takes on parenting life that go far beyond answering mundane questions like “when can I start feeding my baby solids?” that I find myself googling as of late.   – Meg Wiehe

Listen to Lin-Manuel Miranda’s Hamilton

As both a musical fan and tax wonk, it does not get any better than Lin-Manuel Miranda’s wildly successful musical Hamilton. The musical provides a beautiful and entertaining introduction into the life of Alexander Hamilton, the founding father that did more than anyone to set up our nation’s federal tax system. While the musical focuses a lot on the Revolutionary Way and Hamilton’s love life, it does include a fair amount of policy wonkiness. One scene that especially set me aflutter is the battle rap between Alexander Hamilton and Thomas Jefferson over whether the newly formed national government should take on the wars debts of every state. – Richard Phillips

Happy Summer! If you enjoy any of our summer selections let us know! Write to kelly@itep.org or find us on twitter at @taxjustice or @iteptweets

Since the Treasury Department announced new rules in early April designed to stop corporate inversions, some corporate lobbyists have protested loudly. This likely is an indicator the proposed rules would have a real effect on the ability of big multinational corporations to avoid corporate income taxes. The new rules are designed to prevent U.S. companies from merging with a foreign company and reincorporating as a foreign entity in order to escape paying U.S. taxes, a practice known as a corporate inversion.

In recent years, corporate inversions have emerged as a real threat to the U.S. tax base. In fact, the Joint Committee on Taxation (JCT) now estimates that inversions will cost the U.S. Treasury at least $34 billion over the next 10 years. The American people should not have to make up for the revenue hole created by inversions, and in the absence of legislation to curb this problem, the Treasury is right to take whatever actions it can within its legal authority to curb inversions on its own.

Citizens for Tax Justice (CTJ) submitted comments this week in support of two parts of the Treasury’s proposed rules, the Serial Inverter Rule and the Earnings Stripping Rule, while also urging Treasury to take additional action to curb corporate inversions.

The Serial Inverter Rule

Serial inverters are multinational corporations created by repeated inversions. The proposed rule on Inversions and Related Transactions, also known as the “serial inverter” rule, disregards newer inversions in determining whether anti-inversion rules apply to a company, meaning that companies will find it more difficult to circumvent these rules through a series of successive inversions.

We’ve already seen the positive impact of the proposed serial inverter rule in the case of Pfizer, which abandoned its planned $125 billion merger with foreign company Allergan, a serial inverter, shortly after this rule was proposed. This action alone may have already saved U.S. taxpayers as much as $40 billion in taxes on offshore profits that Pfizer could have avoided by inverting.

The Earnings Stripping Rule

Earnings stripping is an accounting gimmick used by multinational corporations to avoid taxes by shifting profits from higher- to lower-tax jurisdictions. Usually, this practice involves a multinational giving subsidiaries in higher-tax jurisdictions (like the United States) loans from subsidiaries in low- or zero-tax jurisdictions (like the Cayman Islands). Because interest payments on these loans are tax-deductible in the higher-tax country and are paid out to the subsidiary in the lower-tax company, the company is able to artificially shift much of its income to the lower-tax jurisdiction.

Treasury’s proposed rule on Treatment of Certain Interests in Corporations as Stock or Indebtedness, or the “earnings stripping” rule, will inhibit multinational corporations’ ability to use this trick to shift profits out of the U.S. by increasing the cost of excessive intercompany loans. This action will curb the incentive for companies to invert because it will lower the amount that companies can permanently shift out of the U.S. tax system if they invert.

A particular strength of this rule is that it applies not only to inverted companies, but to all multinationals doing business in the United States. Cracking down on all earnings-stripping activities will raise badly-needed revenue and will also help level the playing field between multinational corporations that can take advantage of this gimmick and the many smaller domestic businesses that cannot.

More Action Needed

Although these two rules will undoubtedly help to prevent tax-motivated corporate inversions, Treasury should take additional steps to curb this practice. A good starting point would be putting an end to “hopscotch loans,” which occur when inverted U.S. companies escape paying taxes on dividends by making a loan directly to a foreign parent and bypassing the U.S. parent.

Unfortunately, Treasury action can only go so far, and only legislative action can stop inversions cold. The good news is that Congress has available several promising legislative options to shut down inversions, including enacting an exit tax, further cracking down on earnings stripping and requiring that post-merger companies be owned by a majority of the foreign company’s shareholders in order to be considered foreign. The bad news is that lawmakers have not yet shown the political will to take these sensible steps. 

Kelsey Kober, an ITEP intern, contributed to this report.

This week we bring you tax and budget news in Alaska, California, Illinois, New Jersey, North Carolina, and Pennsylvania. Check out the What We’re Reading section below for a good piece on Kevin Durant and the minor role tax rates played in his decision to take his talents to Golden State. Thanks for reading the State Rundown!

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• In advance of bringing the Legislature back for yet another special session next week, Alaska Gov. Bill Walker capped the state’s Permanent Fund dividend (a flat payment made to all Alaskans) at $1,000 next year, down from the 2015 payout of $2,072, and vetoed $1.29 billion in state spending. The dividend cap and service cuts will hit low-income Alaskans the hardest. However, an income tax, proposed in the governor’s New Sustainable Alaska Plan could provide some balance.

• Lawmakers in Pennsylvania agreed on a $31.5 billion spending plan in advance of the midnight June 30 deadline. SB 1073 increases funding to public schools and funds efforts to combat the state’s opioid crisis. However, there is little agreement over how to find the $1 billion plus in new revenue needed to fund it. Gov. Tom Wolf said he will sign the bill “as soon as there is a sustainable revenue package to pay for it…”, but lawmakers only have until Monday, July 11 to reach a compromise before the governor must start using his veto pen.
• On the last day of the 2016 fiscal year, Illinois lawmakers approved stop-gap measures providing long-overdue funding to higher education and human services for FY ’16, six months of FY ’17 funding for the above mentioned and state agency operations, and a full year of FY ’17 funding for K-12 education. While providing some relief for services that have been operating sans funding for the past year, these measures prolong uncertainty and instability by pushing the state’s day of revenue reckoning past the November elections.
• North Carolina lawmakers closed the state’s short session on July 1 without giving final approval to a proposal to enshrine a cap on the state’s income tax rate in the constitution via voter referendum.  However, the agreed upon budget for the new fiscal year includes a new, small income tax cut by increasing the standard deduction from $15,500 to $17,500 (married couples) continuing the state’s march away from reliance on the progressive tax.   

• In New Jersey, after rejecting a weird plan to pair a needed gas tax increase with a mish-mash of tax cuts that would have primarily benefited wealthy New Jerseyans, and then rejecting an even more destructive plan that would have slashed the state sales tax and blown a hole in the state general fund even bigger than the one they need to fill in the Transportation Trust Fund, lawmakers ultimately chose no plan at all and went on vacation. The state has been forced to declare a state of emergency and shut down most roads maintenance and construction. The bizarre saga will continue when the next scheduled Senate session begins on July 11.

• California officials have announced that seventeen (and possibly more) initiatives will appear on the ballot this November. Among them are several tax initiatives,  including extending the current income tax rates on high-income earners, raising the cigarette tax by $2 a pack, and state and potential local taxation on the sale of marijuana if legalized.

 What We’re Reading…

•  The Washington Post’s Wonkblog has a piece explaining that state tax rates were just one very small part of the calculation in Kevin Durant’s decision to sign with the Golden State Warriors over the Miami Heat or Oklahoma Thunder.
• Emmanuel Saez at the Washington Center for Equitable Growth has a new analysis on disproportionate income growth among the top 1 percent and the bottom 99 based on 2015 SOI data. Read the full analysis here.

The rightwing Tax Foundation today released an analysis of Speaker Paul Ryan’s tax plan. Not surprisingly, it found the plan would carry a relatively small price tag over the next decade, reducing federal revenues by only $191 billion. 

This dubious finding sharply contrasts with an analysis released by Citizens for Tax Justice last week, which pegged the 10-year cost of the Ryan plan at  $4 trillion, a figure 20 times larger than the Tax Foundation’s questionable estimate.

What explains the huge gap between these two sets of findings? The main driver is the Tax Foundation’s one-sided approach to “dynamic scoring,” the budgetary practice of assessing the fiscal impact of tax changes by looking not just at the direct effects on tax revenue, but the indirect effects of these tax policy changes on the economy. Before waving its “dynamic scoring” wand, the Tax Foundation assigns the Ryan plan a national debt-inflating $2.4 trillion ten-year cost. But the  magical dynamic effects of the Ryan plan, the Tax Foundation claims, would offset all but $191 billion of that.

An additional difference between the CTJ and Tax Foundation estimates has to do with the “border adjustments” that Ryan proposes for his corporate tax. This would amount to a 20 percent tariff on imports and a tax rebate on exports. There is some controversy about whether the World Trade Organization would find such a scheme acceptable. This means that the $1.1 trillion such a scheme might raise (on a net basis) should not be automatically included in a revenue analysis of the Ryan plan. The Tax Foundation breezily asserts that the tariff would be acceptable, while CTJ thinks that it is quite unlikely. This choice explains most of the remaining difference between the two organizations’ revenue estimates.

But Tax Foundation’s use of one-sided “dynamic scoring” explains the bulk of the difference. Under the best of circumstances, dynamic scoring is fraught with uncertainty. Cutting or increasing tax collections, and cutting or increasing government spending in a way that keeps budget deficits under control, can plausibly have an effect on economic growth.  But there is little or no agreement among economists on the direction of that effect, let alone its magnitude. So an economic model based on this unproven assumption is highly suspicious at best.  

The Tax Foundation’s approach to dynamic scoring notoriously assumes that while tax cuts always spur economic growth, government spending on education, roads and health care has no positive effect on the economy. This one-sided assumption effectively guarantees that any analysis from its model will always find that tax cuts are economically helpful–no matter how devastating their impact on the government’s ability to provide basic services–and tax increases are harmful. For example, studies have found that capital gains tax rates have no meaningful relationship to economic growth, yet the Tax Foundation has previously estimated that higher capital gains rates have such a huge negative impact on growth that raising them would lose revenue.

Further, the Tax Foundation model always finds that tax cuts for the rich will have a wildly unrealistic positive impact on the economy, in essence providing justification to policymakers who continually propose regressive tax policies that many academics have found contribute to growing income inequality.

A more clear-eyed approach to measuring the “dynamic” effect of federal tax changes would at least attempt to quantify the very real—and very beneficial—effect of public investments on the national economy. The Tax Foundation’s unwillingness to admit that government spending can be helpful renders its analysis of the Ryan plan’s revenue impact virtually meaningless.