Month: August 2016

In spite of Apple’s protestations, today’s European Commission ruling that the tech giant received billions in illegal tax breaks from the Irish government and must pay $14.5 billion in back taxes has been a long time coming.

Three years ago, the U.S. Senate’s Permanent Subcommittee on Investigations issued a report that found Apple used a network of offshore subsidiaries to not only avoid paying the 35 percent U.S. tax rate on its profits, but also to dodge Ireland’s 12.5 percent corporate tax rate. The commission’s investigation reveals more clearly how effectively Apple has used its Irish subsidiary to avoid taxes. In a press release, the commission stated that in 2014, “Apple paid a tax rate of just 0.005 percent on its European profits.”

Based on Ireland’s 12.5 percent rate, the EU ruling that Apple owes $14.5 billion implies the company holds as much as $115 billion in profit essentially tax free in Ireland. This figure represents just over half of the total $215 billion in earnings that Apple holds in offshore subsidiaries, according to its latest financial filings.

Before the ruling, Citizens for Tax Justice estimated that Apple is avoiding up to $66 billion in U.S. taxes on these earnings, meaning that even if Apple paid the $14.5 billion the EU Commission has declared it owes enitrely to Ireland, the company would still be avoiding about $51.5 billion in U.S. taxes.

The new European Commission ruling finds that Ireland violated EU rules that prohibit giving tax breaks to specific companies. In particular, the commission says the Irish government issued two tax rulings that gave Apple the green light to shift most of its nominally Irish profits to a subsidiary that was a resident of no country, and therefore paid no income tax to any country. While the commission says the agreement is “perfectly legal” under Irish national laws, it is nonetheless “illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules.”

On its face, this looks like a $14.5 billion tax windfall for Ireland. But the EU release makes clear that Ireland doesn’t have to be the sole beneficiary of this ruling, noting that “[i]f other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.” In particular, the EU points out that some of this tax penalty could go to the United States, rather than Ireland, “if the US authorities were to require Apple to pay larger amounts of money to their US parent company for this period to finance research and development efforts. These are conducted by Apple in the U.S. on behalf of Apple Sales International and Apple Operations Europe, for which the two companies already make annual payments.”

However, the U.S. government has not reacted to this news with anything resembling joy. Last week, President Obama’s Treasury Department preemptively released a report (PDF) arguing that the EU’s recent efforts to claw back illegal tax subsidies from large multinational corporations are a departure from prior law, and would undermine international tax reform efforts. And a Treasury spokesperson responded to the EU’s announcement today with a statement that the penalties against Apple “are unfair, contrary to well-established legal principles and call into question the tax rules of individual Member States.”

This is an odd reaction, to say the least, given the incontrovertible evidence that Apple has systematically organized its Irish affairs in a way designed solely for tax avoidance. It’s doubly troubling given the high likelihood that much of Apple’s nominally Irish profits are really earned in the United States, and should be treated as domestic profits. Rather than criticizing the EU for taking on tax avoidance among their member countries, the United States should instead focus on collecting the taxes on the more than $2.4 trillion in earnings that Apple and many companies are holding offshore.

But the Treasury’s harsh reaction may reflect the inability of the Obama administration to unilaterally take the necessary tax reform steps to claim the nation’s rightful share of Apple’s unpaid tax bill. The administration received verbal blowback from many members of Congress when it attempted to scale back corporate inversions via administrative action. It’s hard to imagine the current Congress requiring Apple, or any major U.S. corporation, to pay taxes it has successfully avoided by shifting tens of billions of dollars in profits offshore each year.

The U.S. Treasury and the Obama Administration should remain steadfast and consistent in its efforts to crack down on corporate tax avoidance.

The EU’s finding reiterates what CTJ has argued for years: it’s entirely within the power of Congress to restore our corporate tax by ending deferral and requiring U.S. corporations to keep their U.S. profits where they belong.

“Don’t blame me, blame the system.”

This is a typical refrain from corporate CEOs when they are the subject of public outcry for unsavory business practices. So it came as no surprise on Thursday when Mylan CEO Heather Bresch, under fire for exponentially increasing the price of a life-saving drug, blamed Congress and the insurance and health care industries for her company’s price gouging.

“No one is more frustrated than me,” she said.

It is easy enough to pick apart that flimsy defense by highlighting how Bresch’s compensation has soared to $18 million while ordinary working families who require access to the life-saving allergy medication in the EpiPen have faced huge price increases. But, in truth, Mylan’s price gouging and brazen corporate greed is part and parcel of a larger, systemic problem that we cannot count on corporations to self-police.

Sen. Charles Grassley noted in an Aug. 22 letter to Mylan that in many cases, “taxpayers are picking up the tab” for the company’s skyrocketing profit margins because children using Epipens are often covered by Medicaid. But this isn’t the only way consumers and U.S. taxpayers are subsidizing Mylan’s profits.

In 2015, the Pittsburgh-based company completed a corporate inversion, a scheme in which a U.S. company buys a smaller, foreign multinational and subsequently claims the merged company’s headquarters are housed abroad. Such maneuvers are widely derided as a transparent effort to avoid U.S. taxes by claiming legal tax domicile in another country. In the case of Mylan, it now claims to be based in the Netherlands although, practically speaking, corporate executives manage the company from its U.S. base.

As a long-time U.S.-based multinational, Mylan routinely earned more than half its worldwide sales in the United States. Now, a year after abandoning its U.S. citizenship, the company’s latest annual financial reports reveal that Mylan continues to earn a majority of its revenue in the United States, and is earning huge profits domestically as well, with $466 million in U.S. income in 2015. The company, therefore, still benefits handsomely from the public infrastructure that U.S. tax revenue make possible. Further, the pharma company also benefits from U.S. tax breaks. For example, thanks in part to production tax credits, Mylan paid a measly 2.9 percent federal income tax rate on its U.S. profits last year.

When corporations invert and claim foreign residency for tax purposes, it is sensible to ask whether these companies should be allowed to continue to enjoy all the advantages of U.S. citizenship. Mylan’s shameless effort to use U.S. taxpayers as a profit center, both by avoiding federal income taxes and by jacking up prices of medical supplies, should prompt policymakers to closely examine all benefits lavished directly and indirectly on Mylan and its fellow corporate inverters and, if possible, revoke them.

The Obama administration has worked hard over the past two years to prevent corporations from engaging in tax-motivated corporate inversions. These efforts are built on the sensible principle that when companies remain American in practice, they should not be able to engage in the legal fiction that they are “foreign” for tax purposes. Yet, administrative action can only go so far. Congress can stop shady inversions once and for all by passing measures such as the Stop Corporation Inversions Act, which would shut down domestic companies’ ability to pretend that they are foreign for tax purposes.

Mylan’s recent corporate inversion and EpiPen price gouging are fairly damning evidence that the company is maximizing its profits at the expense of the American taxpayer. During her CNBC interview, Bresch said, “facts are inconvenient to headlines.” It’s a sentiment that, in context, made little sense in part because it’s a monumental challenge to defend the indefensible.

But we agree, Ms. Bresch. Facts are important. And no matter what the headlines say or don’t say, if a company heavily relies on the largesse of the federal government, as Mylan in fact does, it should be treated as a U.S. citizen for tax purposes – and it warrants intense public scrutiny over the pricing of its products.

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.

In Spite of Tim Cook’s Protests to the Contrary, Apple is a Champion Tax Dodger

Apple has been in the news a lot lately and not because a new iPhone is about to be released, but because of the tech giant’s tax-dodging ways. CTJ Director Bob McIntyre makes the case that Apply is the poster child for why we need to close offshore tax loopholes. Apple CEO Tim Cook recently tried to justify his company’s $215 billion in offshore cash. Read CTJ’s take on Cook’s disingenuous argument here. 

2016 in State Tax Policy

2016 was quite the year in state tax policy. The tax-cutting craze sparked by the election of many anti-tax lawmakers in November 2010 has subsided somewhat—at least for now. Read about state tax debates in 2016 and ITEP tax policy debate predictions for 2017.

Updated ITEP Policy Briefs!

ITEP analysts recently put together an updated explanation of how the “federal offset” makes state tax cuts a lousy deal for many taxpayers. ITEP also updated its primers on the importance of indexing state income taxes to inflation, and on the folly of regressive tax preferences that favor capital gains income over salaries and wages. Stay tuned for more updates on topics ranging from estate taxes to “neovoucher” tax credits for private K-12 education.

State Tax Rundown

This week’s Rundown highlights tax and budget news in New Jersey, Minnesota, Illinois, California and Colorado. Be sure to check out the What We’re Reading section for the latest on marijuana laws, state film tax credits, and a new income inequality report. Read the Rundown.

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

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

While multinational corporations frequently avoid taxation by shifting profits to offshore tax havens, big businesses have increasingly exploited one onshore tax-avoidance trick: the pass-through loophole. By registering as S corporations and partnerships, businesses boasting revenues in the tens of millions of dollars can enjoy benefits originally reserved for C corporations while avoiding the corporate income tax. A new report released by the Center for American Progress (CAP) notes that the U.S. government lost as much as $790 billion of revenue from 2003 to 2012 from this loophole.

The Problem with the Pass-Through Loophole

It’s intuitive to equate “big business” with C corporations, which are required to pay the corporate income tax and, in the past, were the only ones to have their shareholders shielded from business liability. Pass-through entities, including sole proprietorships, S corporations, and partnerships, aren’t subject to business income taxes. Instead, these businesses pass income “through” to the owners of the business, who then pay individual taxes.

The reasoning behind taxing C corporation income at the individual and entity levels is that this form of business receives specific benefits not available to other businesses, such as limited liability, the ability to be publicly traded and other legal rights normally reserved for individuals. However, legal changes throughout the United States in the late 1980s and 1990s allowed pass-through entities to enjoy many of the same legal benefits as C corporations without being subjected to the corporate income tax. This explains why the Joint Committee on Taxation (JCT) found that the number of pass-through entities (in particular, S corporations and partnerships) for the first time outpaced the number of C corporations in 1987 and has nearly tripled since then.

Pass-through entities with limited liability represent the best of both worlds for a business: they can reap the benefits of a traditional corporation without having to pay taxes at the entity level. A recent Treasury report found that the average federal income tax rate on pass-through business income is only 19 percent, far lower than the average rate that C corporations face.

Defenders of the pass-through tax break often style pass throughs as “small businesses,” using the small, local law firm or medical practice as an example. But larger businesses are aggressively using the pass-through loophole as well: a National Bureau of Economic Research (NBER) study found that more than 100,000 big U.S. businesses (with revenue of more than $10 million each) avoided the corporate income tax in 2012 by registering as pass-through entities. Additionally, 70 percent of partnership and S corporation revenue goes to these big businesses.

All of this has troubling implications for the effectiveness and equitability of the U.S. tax code; in 2011, the pass-through loophole cost the U.S. government $100 billion in lost revenue that could have improved schools or funded much needed infrastructure projects.

Closing the Pass-Through Loophole

Pass-through tax reform must focus on holding large businesses accountable without harming legitimate small businesses. One solution would be to distinguish large pass-through businesses and treat them as C corporations in the tax code. One way that CAP suggests to do this is to make it so that any pass-through entity with gross receipts of more than $10 million will be treated as a C corporation in the tax code. According to a Congressional Research Service (CRS) report, such a rule would only affect the largest 1.1 percent of partnerships and 2 percent of S corporations.

Additionally, greater efforts should be taken to ensure that the corporate income tax is applied to companies that receive the benefits of incorporation. One approach would be to lower the threshold for the number of owners a pass through entity can have to either 25 or 10 from the current level of 100. A second complementary change would be to not allow companies to receive the benefit of limited liability without paying the corporate income tax.

Due to loopholes in our business tax code, more than half of all U.S. business income isn’t subjected to the corporate income tax with more and more businesses finding a way to circumvent the tax each year. Enacting the reforms mentioned above would help reverse this trend and ensure that businesses pay their fair share in taxes.

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

The Institute on Taxation and Economic Policy (ITEP) this week published a new policy brief whose conclusions may be surprising to those who don’t spend their days analyzing the intersection of state and federal tax policy.

The brief, How State Tax Changes Affect Your Federal Taxes, outlines how the “federal offset,” or the deductibility of state taxes from federal taxes, affects taxpayers’ bottom line. The brief recommends that, when debating tax changes, state lawmakers consider how federal tax deductions for income, sales and property taxes affect taxpayers. 

“If lawmakers want to cut their state income tax, they should consider the fact that a significant percentage of that tax cut will not end up in their constituents’ pockets because they will have a lesser amount of state taxes to deduct from their federal taxes and, thus, will have higher federal tax bills,” said Carl Davis, research director at ITEP. “And even if it is sometimes politically unpopular, increasing income taxes has the opposite effect. Policymakers should keep in mind that if they raise state taxes, the federal government will shoulder some of that increase because state residents will receive larger deductions from their federal income taxes.”

The bottom line is if a state cuts its income tax, it is sending more of its residents’ money to the federal government, and if a state raises its income tax, it will bring more federal dollars to the state. The same is true to a lesser extent with regressive sales and property taxes. But the fact that state taxes are only deductible for those who earn enough to itemize their deductions means that regressive state tax changes—including tax cuts that benefit top earners—are a lousy deal for states relative to progressive reforms. 

With this in mind, Davis cautions that the federal offset is only applicable for taxpayers who earn enough money to itemize deductions. Further, he stated, because of the generally regressive nature of all state tax systems, most states are not receiving as much benefit from the federal offset as they potentially could.

“When lawmakers enact targeted low-income tax cuts, they’re targeting all or nearly all of their tax reductions to state residents,” he wrote.  “Instead, states too often levy the highest effective tax rates on their poorest residents.”  

Read the brief

This week we are highlighting tax and budget news in New Jersey, Minnesota, Illinois, California and Colorado. Be sure to check out the What We’re Reading section for the latest on marijuana laws, state film tax credits, and a new income equality report. Thanks for reading the Rundown!

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• The refusal to raise gas taxes to fund road and bridge construction, maintenance, and repair in New Jersey will now start harming other services in the state  sinceGov. Christie has issued an executive order that will divert general fund dollars away from other state priorities to keep the roads department from shutting down.
• Hopes for a special session to address tax, bonding, and transportation bills in Minnesota were put to bed by Gov. Dayton last week due to failed negotiations over a light rail transit line. Expect to see all of these issues again during the 2017 legislative session.
• Illinois became the third state this year to repeal sales taxes on feminine hygiene products. Lawmakers in California  approved similar legislation last week, the fate of which will be decided by Gov. Jerry Brown.
• A proposed constitutional amendment to raise the Colorado cigarette tax has been approved for the November ballot, putting the decision to increase the tax from $0.84 to $2.59 per pack in the hands of voters.

What We’re Reading…

• As more jurisdictions consider liberalizing their marijuana laws, the co-director of the RAND Drug Policy Research Center explains the importance of adopting tax structures that can flexibly respond to lessons learned through the implementation of this new tax.
• A new report from the University of Southern California reiterates the failure of state film tax credits to bring about meaning economic return.
• A new income inequality report from CBO looks at the uneven distribution of wealth across the country.

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 via email. 

Tim Cook is a persuasive CEO. In a wide-ranging interview published earlier this week in the Washington Post, he discussed his vision for the company, thoughts about leadership succession, and humbly admitted he has made mistakes.

So it would be very easy to view as reasonable his declaration that Apple will not repatriate its offshore profits until the United States enacts a “fair” tax rate. Apple, he asserted, pays “plenty of taxes” and is justified in keeping profits offshore to avoid U.S. taxes because it “sells products everywhere.”

A review of the company’s latest public filing reveals that it holds $215 billion offshore, avoiding up to $66 billion in taxes. Just last year, Apple moved a record $50 billion offshore, far more than any other company has achieved in a single year.

Apple cemented its status as a champion tax avoider in 2013 after a U.S. Senate Permanent Subcommittee on Investigations (PSI) found that the tech giant exploits loopholes in the tax code to shift its U.S. profits to an Irish subsidiary where those profits will not be taxed. CTJ analysts outlined how it does this in a 2013 report.

When Cook  justifies Apple’s offshore cash stash by declaring that the company sells products everywhere, he is carefully conflating the political controversy over whether the U.S. should have a territorial tax system with the real issue—the fact that Apple is aggressively moving U.S. profits offshore to avoid taxes. It’s a clever PR strategy intended to make Apple’s tax avoidance scheme seem reasonable.

The U.S. has a global tax system in which it taxes all corporate profits (at the statutory rate less whatever rate the corporation pays to a foreign government) of U.S.-based companies no matter where said profits are earned. Corporations and their allies continue to push for legislation that would move the United States to a territorial corporate tax system in which only the profits they earn in the United States would be subject to taxation here. CTJ has written extensively about why this should not be a top priority for tax reform.

Shifting questions about Apple’s tax avoidance to political discourse over whether the U.S. should move to a territorial tax system is a ruse. As the Senate PSI investigation found, Apple shifts a significant percentage of U.S.-earned profits offshore so that it doesn’t have to pay taxes on its U.S.-earned profits.

Cook’s assertions are further bunk as it appears the company is paying a miniscule amount, if any, in taxes to any nation on these profits. ITEP’s Matt Gardner last year reviewed Apple’s corporate filings and found that the company has an effective tax rate of “about 2.2 percent on its permanently reinvested foreign profits.” This means a significant percentage of those profits are in tax havens where they will not be taxed at all.

Tim Cook’s declarations that Apple will not repatriate profits until the United States has a “fair” rate and that the company pays “plenty of taxes,” appears to mean that the company has determined an upper limit of U.S. profits that should be taxed (plenty) and the rest should be moved offshore because the company has decided it’s paid enough.

Apple Inc. is not only the world’s leading cell phone designer, it is also number one when it comes to falsely asserting that most of its profits are earned in tax havens. The company has $215 billion in profits that it pretends are offshore, thus is avoiding an estimated $66 billion in U.S. taxes. Apple’s enormous stash alone accounts for nearly 10 percent of the $2.4 trillion in profits that multinational companies claim are offshore for tax purposes.

Tim Cook, CEO of Apple, feels no shame about his company’s tax-avoiding ways. On the contrary, he’s proud of it. In a recent interview with the Washington Post, he vowed that Apple will never pay taxes on the profits it has artificially shifted offshore until the U.S. enacts a “fair” tax rate. What does he think is “fair”? Well, at a 2013 Senate hearing, he suggested that a 5 percent tax rate might be acceptable.

That’s a far cry from the statutory 35 percent tax rate that Apple has avoided paying through its tax shenanigans.

Apple is not alone in believing that it should be able to avoid its tax responsibilities, although it may be the most arrogant about it. Many, many other multinational corporations, especially those with valuable trademarks, patents, copyrights, and other “intellectual” property, have found ways to pretend that those assets are located in tax havens, and that the profits they generate should therefore be tax-exempt.

The tax laws that allow such preposterous claims — written, of course, with the help of the tax-avoiding companies — need to be changed. You and I can’t decide that we should be allowed to pay a ridiculously low tax rate. Neither should multinational corporations.

With the exception of New Jersey, the dust has now settled on most state legislatures’ 2016 tax policy debates.  Many of the conversations that took place in 2016 were quite different than those that occurred over the last few years.  Specifically, the tax cutting craze sparked by the election of many anti-tax lawmakers in November 2010 has subsided somewhat—at least for now.  For every state that enacted a notable tax cut in 2016, there was another that took the opposite path and opted to raise taxes.  And contrary to what you may expect, the distinction between tax-cutting and tax-hiking states did not always break down along traditional partisan lines.

The most significant theme of 2016 was one we’ve written about before: the plight of energy-dependent states whose budgets have been battered by falling oil and gas prices as well as the growing cost of tax cuts enacted during the “boom” years. In conservative-leaning energy states such as Louisiana, Oklahoma, and West Virginia, lawmakers raised taxes to help deal with these issues in the short-term, but long-term solutions are still needed.

Tax increases elsewhere were enacted to fund health programs (California), raise teacher salaries (South Dakota), and expand tourism subsidies (Oregon).  In Pennsylvania, meanwhile, a significant but flawed tax package was enacted to cope with a large general fund revenue shortfall.

On the tax cutting side, the “tax shift” craze was less pronounced than usual this year. Again, however, New Jersey lawmakers may be the exception as they continue to debate a shift toward gas taxes and away from some combination of income, estate, and sales taxes.  Moreover, some of the tax cuts that were enacted this year may ultimately set the stage for future “tax shifts,” as lawmakers in states such as Mississippi and Tennessee search for ways to fund tax cuts whose full cost won’t be felt for many years.

Looking ahead, debates over tax increases in Alaska and Illinois are likely to resume once the November elections have passed.  On the other hand, lawmakers in Arkansas, Mississippi, Nebraska, and elsewhere are already positioning themselves for tax cut debates in 2017.  But before that happens, there are also a significant number of revenue raising ballot proposals to be voted on in California, Colorado, Maine, Massachusetts, Missouri, Oklahoma, and Oregon.

Below is our summary of 2016 state tax happenings, as well as a brief look ahead to 2017.

Tax Increases

Louisiana: Tax increases of varied sorts were among the strategies lawmakers employed this year to address billion dollar deficits for FY16 and FY17. The most significant was a one cent increase to the sales tax, a regressive hike that gives the state the highest combined state and local sales tax rate in the country. Given the severity of Louisiana’s revenue shortfall, much of the appeal of this approach came from the fact that it could be implemented quickly. But while a higher sales tax will generate hundreds of million of dollars in needed revenue, it is also set to expire in July 2018 and is not a permanent solution to the state’s fiscal stress. Over the course of two special sessions, lawmakers also: increased cigarette and alcohol excise taxes; extended, expanded, or reinstated taxes on telecommunications, hotel, and auto rentals; cut vendor discounts; limited deductions and credits that benefit businesses; and increased a tax on the health insurance premiums of managed care organizations. All of these incremental changes buy the state some time in the short-term, but the need for more substantive reform remains.

Oklahoma: To fill the state’s $1.3 billion shortfall, Oklahoma lawmakers enacted a number of policy changes that will harm the state’s poorest residents and set the state on an unsustainable fiscal path. Oklahoma’s 2016-17 budget relied heavily on one-time funds. Lawmakers opted to change the state portion of the Earned Income Tax Credit (EITC) from refundable to non-refundable, meaning that poor families earning too little to owe state income taxes will now be ineligible for the credit. While this will have a noticeable impact on those families’ abilities to make ends meet, the $29 million saved as a result of this policy change is a drop in the bucket compared to the $1 billion in revenue lost every year from repeated cuts to the state’s income tax. Thankfully, though, cuts to the state’s sales tax relief credit and the child tax credit were prevented, and full elimination of the state EITC was avoided. Lawmakers also capped rebates for the state’s “at-risk” oil wells, saving the state over $120 million. On another positive note, Oklahoma lawmakers eliminated a nonsensical law, the state’s “double deduction,” that allowed Oklahomans to deduct their state income taxes from their state income taxes. 

Pennsylvania: Pennsylvania lawmakers avoided broad-based tax changes, largely relying instead on regressive tax options, dubious revenue raisers, and one-time funds—most of which fall hardest on the average Pennsylvanian—to fill the state’s $1.3 billion revenue shortfall. The state’s revenue package draws primarily from expanded sales and excise taxes. In particular, it includes a $1 per pack cigarette tax increase and a tax on smokeless tobacco, electronic cigarettes, and other vaping devices along with changes to the state’s sale of wine and liquor. State lawmakers also opted to include digital downloads in the sales tax base and put an end to the “vendor discount”—an unnecessary sales tax giveaway that allowed retailers to keep a portion of the tax they collected from their customers.

West Virginia: Lawmakers in West Virginia punted, for the most part, on solving their fiscal problems this year. Instead, they addressed the state’s $270 million shortfall with budget cuts, tobacco tax increases, and one-time funds. The state increased cigarette taxes by $0.65 per pack and will tax electronic cigarettes and vaping liquids. Even with this $98 million revenue gain, shortfalls are not last year’s news. Ill-advised tax cuts and low energy prices will again put pressure on the state’s budget in 2017.

South Dakota: South Dakota lawmakers enacted a half-penny sales tax increase, raising the rate from 4 to 4.5 percent. The increase will fund a pay raise for the state’s teachers, who are currently the lowest-paid in the nation. Though they rejected a less regressive plan to raise the same amount of funding by raising the sales tax rate a whole cent and introducing an exemption for grocery purchases, progressive revenue options are very limited in states like South Dakota that lack an income tax, and lawmakers can be applauded for listening to public opinion that consistently favors raising revenues to fund needs like education.

California: This past session, California lawmakers were able to drum up the two-thirds majority support needed to extend and expand the state’s health tax levy on managed care organizations. The prior tax expired on July 1, 2016 and was deemed too narrow to continue to comply with federal requirements. By extending the tax to all managed care organizations, California lawmakers were able to preserve access to over $1 billion in federal match money used to fund the state’s Medicaid program.

Oregon: Lawmakers approved an increase to Oregon’s tourist lodging tax from 1 to 1.8 percent in order to generate more revenue for state tourism funds, specifically to subsidize the World Track and Field Championships to be held in the state in 2021.

Vermont: Vermont’s 2016 revenue package included a few tax changes and a number of fee increases. Tax changes included a 3.3 percent tax on ambulance providers and the conversion of the tax on heating oil, kerosene, and propane to an excise tax of 2 cents per gallon of fuel. The move from a price-based tax to one based on consumption was meant to offset the effect of record low fuel prices.

Tax Cuts

Mississippi: Mississippi lawmakers made some of the most irresponsible fiscal policy decisions in the country this year. For one, they opted to plug their growing transportation funding shortfall with borrowed money rather than raising the necessary revenue. And at the same time, despite those funding needs and the fact that tax cuts enacted in recent years caused a revenue shortfall and painful funding cuts this very session, legislators enacted an extremely costly new round of regressive tax cuts and delayed the worst of the impacts for several years. By kicking these two cans down the road at once, lawmakers have avoided difficult decisions while putting future generations of Mississippians and their representatives in a major fiscal bind.

Tennessee: Tennessee legislators, who already oversee one of the most regressive tax structures in the nation, nonetheless opted to slash the state’s Hall Tax on investment and interest income. The Hall Tax is one of the few progressive features of its tax system. After much debate over whether to reduce, eliminate, or slowly phase out the tax, an unusual compromise arose that will reduce the rate from 6 to 5 percent next year and repeal the tax entirely by 2022. While the stated “legislative intent” of the bill is to implement the phase-out gradually, no specific schedule has been set, essentially ensuring five more years of similar debates and/or a difficult showdown in 2021.

New York: New York lawmakers approved a personal income tax cut that will cost approximately $4 billion per year. The plan, which is geared toward couples earning between $40,000 and $300,000 a year, will drop tax rates ranging from 6.45 to 6.65 percent down to 5.5 percent. The tax cut will be phased-in between 2018 and 2025. Gov. Andrew Cuomo said that the plan “is not being paid for” since its delayed start date pushes its cost outside of the current budget window.

Florida: The legislative session in the Sunshine State began with two competing $1 billion tax-cut packages and ended with a much more modest result. In the end, the state made permanent a costly-but-sensible sales tax exemption for manufacturing equipment, reduced its sales tax holiday down to three days, and updated its corporate income tax to conform with federal law, along with several other minor changes. Ultimately, the plan is expected to reduce state revenues by about $129 million. The legislature also increased state aid to schools, which is expected to reduce local property taxes and bring the total size of the tax cuts to $550 million if those local reductions are included.

North Carolina:  Billed as a “middle-class” tax cut, North Carolina lawmakers enacted an increase in the state’s standard deduction from $15,500 to $17,500 (married couples).  This new cut comes on top of four years of tax changes that are slowly but surely moving the state away from relying on its personal income tax and towards a heavier reliance on consumption taxes. 

Rhode Island: While an increase in the state’s Earned Income Tax Credit (EITC) from 12.5 to 15 percent of the federal credit was a bright spot in Rhode Island this year, lawmakers also found less than ideal ways to cut taxes. Specifically, they pared back the corporate minimum tax to $400, down from $450 in 2016 and $500 the year before. The state will also now provide a tax break for pension/annuity income for retirees who have reached their full Social Security age. It exempts the first $15,000 of income for those earning up to $80,000 or $100,000, depending on filing status.

Hawaii: Hawaii legislators made changes to their state’s Child and Dependent Care Tax Credit this year, slightly expanding the credit by altering the method for determining the percentage of qualifying child care expenses.

Oregon: Lawmakers increased the state’s Earned Income Tax Credit from 8 to 11 percent for families with dependents under 3 years old. Qualifying families will be able to claim this larger credit starting in tax year 2017.

Arizona: There was much talk of tax reform in Arizona this year. Gov. Doug Ducey expressed interest in a tax shift that would phase out the income tax over time and replace it with a regressive hike in the state’s sales tax. That plan, thankfully, did not come to fruition this year. Rather, state lawmakers enacted a grab bag of (mostly business) tax cuts, including an expansion of bonus depreciation and sales and use tax exemptions for manufacturing.

Stalled Tax Debates Likely to Resume in 2017

Alaska: Faced with a multi-billion revenue hole, state lawmakers weighed and ultimately punted on a range of revenue raising options—including, most notably, the reinstatement of a personal income tax for the first time in 35 years. Notably, however, Gov. Bill Walker did scale back the state’s Permanent Fund dividend payout through the use of his veto pen.                                         

Georgia: Ambitious plans to flatten or even eliminate Georgia’s income tax ultimately stalled as advocates showed (PDF) these measures would have amounted to enormous giveaways to the state’s wealthiest residents, drained $2 billion in funding for state services over five years, and even threatened the state’s AAA bond rating.

Idaho: Lawmakers in the House enthusiastically passed a bill that cut the top two income tax rates and gave the grocery credit a small bump, but the bill stalled in the Senate where lawmakers were more interested in addressing education funding than a tax break for the state’s wealthiest residents.

Illinois: After a year of gridlock, Illinois lawmakers passed a stopgap budget. Unfortunately, this “budget” amounts to no more than a spending plan as it is untethered from actual revenue figures or projections. Its main purpose is to delay the work of much needed revenue reform until after the November election.

Indiana: An effort to address long-standing needs for infrastructure improvement in Indiana resulted in lawmakers abandoning all proposals to raise new revenue, relying instead on a short-term plan of shifting general revenue to the state highway fund. Over the next two years this change will generate some $230 million in “new money” for transportation projects at the expense of other critical public services.

Maryland: Maryland lawmakers rejected two tax packages that included more bad elements than good. While the plans included an innovative expansion of the state’s Earned Income Tax Credit (EITC) for childless low- and middle-income working families, this valuable reform would have been paired with income tax cuts that would have unnecessarily benefitted the very wealthiest.

What Lies Ahead?Key Tax-Related Measures on the Ballot in November

California: State officials have announced that seventeen (and possibly more) initiatives will appear on California’s 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 per pack, and the implementation of state, and potentially local, taxation on the sale of marijuana if legalized.

Colorado: A campaign is underway to gather the signatures required to place a proposal to raise tobacco taxes on the ballot this November. The measure would raise the tax on cigarettes from $0.84 to $2.59 per pack and increase the tax on other tobacco products by 22 percent. If approved, the proposal would raise $315 million each year for disease prevention and treatment and other health initiatives.

Maine: The Stand up for Students campaign is behind a ballot measure in Maine that would enact a 3 percent income tax surcharge on taxable income above $200,000.  If approved, the additional tax would bring in well over $150 million annually to boost support for K-12 classroom instruction.

Missouri: Three tax-related questions will be posed to Missouri voters in November.  Two are competing tobacco tax increase measures of 23 and 60 cents per pack.  The third measure would prevent state lawmakers from reforming their sales tax by expanding its base to include services in addition to currently taxed tangible goods.

Oklahoma: Oklahoma state question 779, to increase Oklahoma’s sales tax 1 cent to fund teacher pay increases and other educational expenses, will appear on the state’s ballot this November.

Oregon: Voters in Oregon will have the final say on a proposal to increase taxes on corporations this fall. Measure 97 (previously known as 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 tax on income (6.6 percent on income up to $1 million and 7.6 percent on income above $1 million) or a minimum tax on sales ($150 to $100,000). Measure 97 would eliminate the $100,000 cap on the sales-based portion of corporate minimum tax and apply a 2.5 percent rate to sales above $25 million.  If passed the measure would generate $3 billion in new revenue earmarked specifically to education, health care, and services for senior citizens.

Laying the Groundwork for Significant Tax Cuts, Tax Shifts, and Tax Reform in 2017:

The saying “after the calm comes the storm” may prove true for state tax policy debates next year.  Lawmakers in more than 20 states have already begun to lay the groundwork for major tax changes in 2017, most with an eye towards cutting personal income taxes and possibly increasing reliance on consumption taxes.  Lawmakers in energy dependent states including Alaska, Louisiana, West Virginia and New Mexico will need to continue to find long-term revenue solutions to their growing revenue problems.  Illinois and Washington lawmakers will also be debating significant revenue raising options.  Governors in Nebraska, Arkansas, Kentucky, Ohio, Arizona and Maryland will take the lead on tax cutting (and possibly income tax elimination) proposals.   Mississippi lawmakers are currently meeting to discuss ways to shift the state’s reliance on income taxes towards “user- based” taxes (i.e. regressive consumptions taxes).  And, Kansas lawmakers will likely revisit the disastrous tax changes under Governor Brownback.