Month: January 2017

There are a lot of troubling components of the tax reform packages being proposed by President-Elect Donald Trump and the House GOP, but one that especially stands out is the push to give companies a tax break on the earnings they are holding offshore. Unfortunately, proposals rewarding the nation’s most egregious tax dodging multinational corporations with hundreds of billions in tax breaks represent an area where lawmakers on both sides of the aisle seem to agree, making it a potential area of movement if broader tax reform efforts flounder.

Fortune 500 corporations collectively hold $2.5 trillion offshore. As long as corporations keep this money offshore, this massive stash remains an untapped source of tax revenue because a loophole in the tax code called deferral allows companies to avoid taxes on profits until they “repatriate” or bring those profits to the United States. Rather than requiring corporations to pay the full 35 percent rate (minus foreign tax credits) that they owe, lawmakers have introduced various proposals to lower the repatriation tax rate to 20, 8.75 or even 0 percent. Some of these proposals have bi-partisan support.

Corporations are avoiding up to $720 billion in taxes through this offshoring strategy. With such a significant sum at stake, any reduction in the repatriation rate would be a bonanza for multinational corporations. For example, under President-elect Trump’s revised tax plan, companies would be required to pay a 10 percent rate on their offshore earnings, meaning that they would get a 70 percent discount from the current rate owing an estimated $206 billion in taxes. In other words, President-elect Trump is proposing to give companies a $514 billion tax break on their accumulated offshore earnings.

A new ITEP report examines the benefit to the 10 companies with the most money offshore: Apple, Microsoft, Oracle, Citigroup, Amgen, Qualcomm, Gilead Sciences, JP Morgan Chase & Co., Goldman Sachs Group, and Bank of America Corp. The top 10 companies account for $182.8 billion of the potential $720 billion in tax revenue and would receive a $130.6 billion tax break under President-elect Trump’s proposal.

Giving companies a discounted tax rate of 10 percent on repatriation, or any rate below 35 percent, would disproportionally benefit companies that have most aggressively stashed profits offshore. For instance, Apple would receive a tax break of $48.1 billion on its $216 billion in unrepatriated earnings. Similarly, Microsoft would see a $28.1 billion break on its $124 billion in unrepatriated earnings. Wall Street firms such as Citigroup, JP Morgan and Goldman Sachs would receive breaks of $9.1, $5.9 and $4 billion respectively.

A one-time tax break on offshore earnings would provide a quick infusion of revenue, which is likely why lawmakers on both sides of the aisle have backed the idea. Many policymakers, including advisors to President-elect Trump, would like to use this one-time revenue to fund additional infrastructure investment. Alternatively, some conservatives would like to use any one-time repatriation revenue to help make lowering corporate tax rates appear revenue-neutral in the short term, even if over the long term the rates will lose revenue.

Rather than rewarding tax avoidance for a short-term revenue boost, lawmakers should pursue legislation that would require companies to pay the full $720 billion they owe on their unrepatriated earnings. In addition, Congress should end offshore tax avoidance once and for all by no longer allowing companies to indefinitely defer paying taxes on their foreign earnings. These two policies would be a huge win for the American public, raising hundreds of billions in much-needed revenue for public investments and making our tax system fundamentally fairer.

If the incoming Trump Administration and Republican-lead Congress have their way, fundamental changes to the tax code are afoot. The most important similarity between the Ryan and Trump tax plans are dramatic reductions in the corporate tax rate and across-the-board tax cuts whose benefits primarily flow to the richest Americans.

Because of their potentially catastrophic effect on federal revenue and tax fairness, neither plan should be the starting point for tax talks. Instead, lawmakers should  embrace tax reform plans that close down loopholes, increase the fairness of the tax code and raise more revenue.

One of the crucial dynamics in the upcoming debate over taxes will be whether Speaker Paul Ryan’s and President-elect Trump’s tax proposals can be combined in a way that will gain enough support from lawmakers to become law.

The plans have a lot in common, as this side-by-side comparison shows. Both Ryan and Trump would:

• Eliminate the estate tax
• Create an individual income tax rate structure of 12 percent, 25 percent, and 33 percent
• Limit itemized deductions (Ryan would eliminate all deductions except the charitable and mortgage interest deduction, Trump would cap deductions)
• Increase the standard deduction
• Eliminate personal exemptions
• Lower the tax rate on capital gains
• Eliminate the alternative minimum tax
• Cut the corporate tax rate
• Provide a lower top rate for pass-through business income
• Repeal the Affordable Care Act, which means repealing a series of tax provisions including higher taxes on investment income and tax credits for health insurance premium payments.

Ryan and Trump will still need to settle on the specifics of issues even where they embrace the same trajectory such as whether the corporate tax rate should ultimately be lowered to 15 (as Trump proposes) or 20 percent (as Ryan proposes).

There are a few areas in which the two plans differ meaningfully.

On corporate taxes, Ryan’s plan would eliminate the ability of companies to deduct interest, allow companies to immediately expense the full cost of their capital investments and enact a border adjustment which would exempt exports from taxation and not allow companies to deduct the cost of imports. In contrast, Trump would only allow full expensing (and disallow the interest deduction) for certain manufacturing firms. Also, Trump’s revised plan does not specify how it would deal with the treatment of international corporate earnings, though his original plan ended the ability of companies to defer taxes on these profits. In a recent interview, Trump specifically rejected the House GOP’s border adjustment plan, calling it too complicated, and arguing that its reliance on increasing the value of the dollar could be damaging to trade.

Another area where Trump’s plan is significantly different than Ryan’s is that it includes  substantial new tax breaks for dependent or childcare expenses. In fact, a top Trump representative is reported to have pushed Ryan to include these provisions during last week’s tax reform discussion between Ryan and the Trump tax team.

While the focus of the tax debate so far has been on Ryan’s and Trump’s tax plans, it is critical to remember that any tax plan must also go through the Senate. Unlike the House GOP, Senate Republicans do not have a blueprint detailed enough to serve as a starting point for tax reform legislation. The closest thing they have to a vision on tax reform is articulated in a lengthy primer (here’s a summary of the document) on tax reform put out by the Republican Senate Finance staff in December 2014.

The big initial question will be whether Senate leaders such as Majority Leader Mitch McConnell or Finance Chairman Orrin Hatch will use Ryan’s or Trump’s plan as a starting point for reform, or if they will start from scratch and create their own plans. It is important to note that the Senate is likely to face different pressures that the House because it will have a lot less room for party defections in a vote on tax reform. Specifically, tax reform legislation could be defeated in the Senate if as few as three Republicans Senators vote against it (assuming all Democrats vote against it). In contrast, the House could lose as many as 23 defections from their party and still pass legislation.

Regardless of the vagaries of legislative wrangling, the fact is that the majority of Americans do not support tax cuts for corporations and the wealthy. Recent polling shows that 64 percent of Americans think that corporations and upper income people are paying too little in taxes. In fact, only a tiny sliver of the population, less than 14 percent, share the belief of Ryan and Trump that the wealthy and corporations are paying too much in taxes. Even among Trump voters specifically, only 18 percent favor lower taxes on the wealthy and only 39 percent favor them for corporations, with significant majorities saying that they should stay the same or be raised.

Members of Congress have floated fundamental changes to the tax code for years, but last week marked a ramping up of these efforts as Republican Speaker of the House Paul Ryan met with President-elect Donald Trump and his advisors to discuss how to move forward with tax reform in 2017.

Plans floated by the incoming administration and Trump would dramatically cut taxes for the wealthy and corporations and eliminate revenue necessary to meet the nation’s most basic priorities. In other words, if either the blueprint for Ryan or Trump’s plans (or some combination of both) becomes law, the outcome will likely be the furthest thing from true “reform” of our tax system.

In the last major successful federal tax reform effort in 1986, lawmakers stood by the principle that any tax reform legislation should be revenue and distributionally neutral. The basic idea was that these two principles would allow Democratic and Republican lawmakers to put aside their broader ideological disputes and focus on making the tax code more efficient in ways that everyone could agree on. This approach resulted in the 1986 tax reform legislation, which is rightly heralded as a major milestone in improving the tax code.

More recently, former House Ways and Means Chairman Dave Camp sought to replicate this approach with his proposal for comprehensive tax reform in 2014. While the plan ultimately fell short of fully achieving revenue and distributional neutrality over the long run, Camp’s proposal at least laid out a path that lawmakers could revisit if they wanted to replicate 1986 tax reform efforts.

Ryan and Trump’s tax reform proposals are in sharp contrast to these previous reform efforts. At the heart of their tax plans is a major cut in the top income tax rates for the wealthy and corporations. As an ITEP analysis of Ryan’s “A Better Way” tax plan shows, his plan would lose $4 trillion in tax revenue over a decade, with as much as 60 percent of the tax cuts going to the top 1 percent. Similarly, ITEP found that Trump’s revised tax plan would lose $4.8 trillion, with 44 percent of the tax cut going to the top 1 percent. Rather than attempting to stay revenue or distributionally neutral, Ryan and Trump’s tax plans are chiefly a huge tax cut for the wealthy and corporations.

But even if Ryan and Trump chose to meet the lofty standards of the 1986 tax reforms, it would not be sufficient given our current fiscal and economic state. After decades of tax cuts, our nation faces an $8.5 trillion deficit over the next 10 years. It’s a hard truth for politicians to swallow, but the nation needs to roll back these tax cuts to help lower the growing debt and to create fiscal space for public investments in things like healthcare and infrastructure. In addition, our nation is facing an increasingly economically unequal society. For the past several decades income inequality has grown, with the top 1 percent now capturing more than 20 percent of all income. Increasing taxes on the wealthy and corporations would help counteract this trend.

Put simply, the guiding principles of tax reform should be to raise enough revenue to meet the nation’s priorities. Further, tax reform should be progressive and categorically avoid shifting more of the nation’s income to the wealthiest Americans, who already continue to capture a greater share of the nation’s wealth due to lawmakers’ past policy decisions.

Recent polling indicates the overwhelming majority of Americans (regardless of how they voted) neither want tax cuts for corporations nor the wealthy. Ryan and Trump’s so-called “tax reform” plans go against the will of the broader public. Our nation’s elected officials need to change course on tax reform. 

This week brings still more states looking for solutions to revenue shortfalls, multiple governors’ State of The State addresses, important reading on counter-transparency and local-preemption efforts, and more. 

— Meg Wiehe, ITEP State Policy Director, @megwiehe 

• A Nebraska legislator this week diagnosed the state’s $900 million revenue shortfall in plain terms, describing it as “self-inflicted misery” brought on mostly by repeated tax cuts in recent years, and adding that further tax cuts in this context would amount to “visionless activity.”
  
• Hawaii‘s tax revenue growth is down, resulting in $155 million less than expected for the upcoming legislative session. The state’s Council on Revenues predicts that low visitor spending and an increase in online shopping could be contributing to the shortfall.
  
• Ohio again this month saw tax revenues fall short of estimates. Legislators are gearing up for a difficult budget situation.
  
• North Dakota‘s 2016 budget woes will continue into the new year, as a new forecast has reduced projected revenues 7 percent just since the last forecast in December.
  
• New York‘s Gov. Andrew Cuomo proposed expanding the state’s child care tax credit. The proposal, another attempt to provide breaks to the middle-class, would benefit 200,000 families making between $50,000 and $150,000 and would cost $42 million.
  
• South Carolina lawmakers are putting forth a range of bills to address the state’s need for funding to improve roads and bridges. Unfortunately, as we saw in New Jersey last year, one of these ideas is to use the state’s infrastructure issues as an opportunity to force through regressive income tax cuts.
  
• Pennsylvania‘s Gov. Tom Wolf, again this session, is proposing a natural gas severance tax. This will be the governor’s third attempt to tax the industry since coming into office.

Budget Watch 

• Gov. Paul LePage’s budget would, among other things, cut 500 state jobs, broaden the sales tax base, and shift Maine to a flat tax by 2020, effectively rolling back the state’s recent referendum for an education tax surcharge on high-income Mainers.
  
• On the heels of his State of the State Address, Kansas Governor Sam Brownback is expected to release his budget proposal this week.  Based on his speech, don’t expect to see an expansion of Medicaid or elimination of his state’s costly pass through business income exemption in the proposal.  He will seek in his words “modest, targeted” tax increases including another hike in the state’s cigarette tax to help address a $342 million revenue shortfall. 

Governors’ State of the State Addresses 

• In the past week, Governors Ducey of Arizona, Hutchinson of Arkansas, Malloy of Connecticut, Otter of Idaho, Branstad of Iowa, Brownback of Kansas, Christie of New Jersey, Burgum of North Dakota, Daugaard of South Dakota, Scott of Vermont, and Walker of Wisconsin delivered their State of the State addresses.
• States with addresses scheduled through the end of next week are: Georgia, South Carolina, Virginia, and Wyoming today; Colorado and Nebraska on the 12th; West Virginia on the 16th; and Indiana, Michigan, Mississippi, Missouri, Nevada, New Mexico, and Rhode Island on the 17th. 

What We’re Reading…

• The Hill looks at a likely trend of Republican-led state governments passing “preemption” laws to reduce the flexibility of democratically dominated cities in areas such as local minimum wage laws, environmental regulations, and soda taxes.
  
• The Missouri Budget Project has created a Policy Framework for Building a Prosperous Missouri and a Strong Middle Class, which includes important tax reforms: creating a refundable state Earned Income Tax Credit, better evaluating tax credits going forward, and rolling back dangerous tax-cut triggers enacted in 2014.
  
• Governing reports on a troubling trend of states reducing transparency to avoid shining light on the negative consequences of their own short-sighted tax policies.
  
• At the kickoff of the Arizona Center for Economic Policy, Kansans offer a cautionary tale of the negative impacts of deep tax cuts.
  
• In a recent report citing ITEP data, Ohio Policy Matters finds that that a move toward a flat tax would mean more taxes for most Ohioans.

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 Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

This week we bring you updates on major revenue shortfalls looming in Nebraska, Oklahoma, and Pennsylvania, as well as gas tax changes taking effect in some states and being debated in others.

— Meg Wiehe, ITEP State Policy Director, @megwiehe 

• Oklahoma lawmakers are weighing options to close the state’s $870 million shortfall. Up for discussion are tobacco and gas tax increases, expanding the sales tax to a range of services, and enacting a soda tax. At the same time, there’s discussion among lawmakers and a push from the state Auditor to repeal the tax cut trigger that has been chipping away at the state’s personal income tax.
• Pennsylvania lawmakers are turning their attention toward the state’s budget deficit. However, steps to address it are unclear as Republicans renewed their pledge to avoid tax increases and Gov. Tom Wolf says he will not seek major tax increases to balance the budget.
• A new coalition in Nebraska is pushing for a shift from sales to property taxes, but most lawmakers remain focused on the state’s $900 million budget gap.
• Mississippi is in dire need of revenue to repair and maintain its crumbling roads and bridges, but there are doubts that the legislature can come to agreement on a fix despite two obvious options: raising the state’s outdated gas tax, or repealing last year’s misguided tax cuts.
• South Carolina continues to debate gas tax increases as well, with proposals that include  a slowly phased in 10-cent increase and an authorization of county-level gas tax increases.
• Several states saw increases in their gas taxes starting Jan. 1, including large increases in Pennsylvania and Michigan and smaller adjustments in Nebraska, Georgia, North Carolina, Indiana and Florida.
• Amazon began collecting sales tax on purchases made by residents of Iowa, Louisiana, Nebraska, and Utah on Jan.1.
• Californians saw a 0.25 percent sales tax cut take effect on Jan. 1 with the expiration of the temporary tax increase approved by voters as part of Proposition 30 four years ago.
• With Kansas Gov. Sam Brownback advocating that his failed tax policies should be adopted at the national level, federal lawmakers would be wise to follow the lead of Kansas lawmakers, the Kansas electorate, and pundits in not buying it.

What We’re Reading…

• Governing explores how federal-state tensions may play out in 2017, including federal budget and tax cuts that are likely to worsen state budget shortfalls. The magazine also offers a list of five public finance topics to watch: tax reform, budget shortfalls, tax break transparency, pension contributions, and online sales taxes.
• The Pennsylvania Budget and Policy Center released its Fair Share Tax Plan for Pennsylvania. The plan is intended to offer equitable revenue solutions to the state’s deficit and it received significant news coverage across the state. 
• Pew reviews the status of debates in various cities, and one state, considering a “Netflix Tax” on digital entertainment.

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 Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.