Tax Justice Digest: Offshore Cash, Gas Tax and BAT

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. 

Corporations Offshore Cash Hoard Grows to $2.6 Trillion
U.S. corporations now hold a record $2.6 trillion offshore, a sum that ballooned by almost $200 billion over the last year as companies moved more aggressively to shift their profits offshore. A new report by ITEP finds that this growing offshore cash stockpile is allowing profitable companies to avoid up to $767 billion in U.S. taxes. Read more

About That Proposed Border Adjustment Tax
The business community is not unified on the proposed Border Adjustment Tax (BAT). ITEP examined tax rates paid by companies in pro- and anti-BAT lobbying coalitions and found that companies opposing the tax, on average, already pay close to the statutory tax rate, while companies supporting the BAT, on average, pay an average rate of 14.5 percent. Read more

April 1 Marks Record-Breaking Procrastination on the Federal Gas Tax
Not sure who the joke is on, but April Fool’s Day marks the 8,584th consecutive day (23.5 years) since Congress raised the federal gas tax. The previous record of 8,583 days was set on March 31, 1983, the day before lawmakers doubled the gas tax from 4 to 9 cents per gallon. The current rate of 18.3 cents a gallon was set during Bill Clinton’s first term. Now that infrastructure funding is back on the agenda in Congress, revisiting this extraordinarily outdated area of the tax code is a logical place to begin the search for revenue, writes ITEP research director Carl Davis. Read more

Seeking the Right Balance in Alaska
It’s been a little more than a year since Alaska Gov. Bill Walker proposed implementing a state personal income tax for the first time in 35 years, and the idea is now receiving close attention in the Alaska House of Representatives. Alaska is the only state to repeal a personal income tax, having done so after it struck oil at Prudhoe Bay in the 1970s. Since then, the state has funded its public services primarily with oil tax and royalty revenues. Read more

EITC on the Move in States
In 2015, six states adopted or strengthened their EITC (California, Colorado, Massachusetts, Maine, New Jersey and Rhode Island) followed by more expansions in Rhode Island and New Jersey in 2016. By the end of 2016, 27 states offered a state EITC, 22 of which were refundable. So far in 2017, we’ve seen proposals to establish EITCs in Georgia, Hawaii, Missouri, Montana, South Carolina, Utah, and West Virginia, and a proposal to expand Minnesota and Maryland’s credits for adults without children in the home. Read more

State Rundown: More States Looking to Protect Revenues
This week West Virginia, Georgia, Minnesota, and Nebraska continued to consider regressive tax cut proposals, as the District of Columbia considered cancelling tax cut triggers it put in place in prior years, and lawmakers in Hawaii, Washington, Kansas, and Delaware pondered raising revenues to shore up their budgets. Meanwhile, gas tax debates continued in Oklahoma, West Virginia, and South Carolina. Read more

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All Is Peachy in Georgia, for Now

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Georgia lawmakers ended their legislative session Thursday by enacting a few tax credits and smartly choosing not to pass a major income tax cut that had been working its way through the legislature. Policymakers in other states should take note and follow Georgia’s lead by rejecting costly and inequitable flat-tax and other high-income tax cut proposals.

The bill, HB 329, started out as a mixed bag. It included positive aspects such as a new nonrefundable state Earned Income Tax Credit (EITC), elimination of Georgia’s nonsensical state income tax deduction for state income taxes paid, and indexing of standard deductions and exemptions for inflation to ensure that their value to Georgians does not erode over time. But at the heart of the bill was a dramatic and damaging change in the structure of the state’s income tax, from a set of graduated rates to a 5.4 percent flat rate. Even with the EITC and other helpful provisions, this initial proposal would have raised taxes on many low- and middle-income families, particularly those without children, while handing out large tax cuts to wealthy Georgians.

Later, in an attempt to hold lower-income and childless Georgians harmless, lawmakers replaced the flat tax component of the bill  with a version that would have cut the top income tax rate while keeping the basic progressive structure in place and slightly increasing the personal exemption. Lawmakers also added a provision to index the tax brackets for inflation and combined the bill with a separate effort to collect taxes owed on online purchases. With these changes, the package became less inequitable but also much more costly, projected to reduce revenues by $292 million in FY 2018-19 and $526 million by FY 2021-22.

Ultimately, time ran out on the 2017 session with HB 329 left on the drawing board. Georgia’s legislative calendar is based on a two-year cycle, so the bill could be revived next year. If lawmakers resurrect the bill next year, they should remove costly income tax cuts for Georgia’s wealthiest families, keep the provision that strikes the deduction for state income taxes paid, and bring back the EITC that was abandoned along the way. 

A Comparative Analysis: Tax Rates Paid by Companies for and Against the Border Adjustment Tax

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It’s often noted that corporate tax reform is difficult, in part, because it creates so many winners and losers. As Congress turns its attention to federal corporate tax reform, the House GOP’s proposed border adjustment tax, which is intended to raise enough revenue to justify cutting the corporate tax rate from 35 to 20 percent, is quickly demonstrating the truth of this statement. Corporate lobbyists representing different business sectors have created competing coalitions to lobby for and against the border adjustment: Americans for Affordable Products, a coalition of retail giants, opposes the plan, while the American Made Coalition supports it.

A close examination of average tax rates paid by companies in each coalition reveals the counterintuitive reality that those supporting the border adjustment tax are generally already paying low corporate tax rates, while those opposing the proposal are generally paying higher rates.

A recent analysis by the Institute on Taxation and Economic Policy (ITEP) revealed large profitable corporations paid an average effective federal income tax rate of 21.2 percent over the past eight years. Companies in the pro-border adjustment tax American Made Coalition paid an even lower rate. The 10 coalition members that were consistently profitable over the eight years between 2008 and 2015 paid an average tax rate of just 14.5 percent, a substantially lower rate than the Fortune 500 average of 21.2 percent. These companies likely pay relatively low tax rates because they benefit from a substantial number of tax breaks and can engage in more offshore tax avoidance. For example, American Made Coalition members are avoiding taxes on more than $600 billion in earnings that they are holding offshore.

In spite of their low average tax rate, members of the American Made Coalition argue that U.S. companies pay the highest effective tax rates in the world, even though the tax rates paid by many of its members are a stark reminder that many U.S. companies are in fact paying extremely low or even negative tax rates on billions in profits.

In contrast, an ITEP analysis finds that the companies in the Americans for Affordable Products coalition paid a comparatively high effective tax rate on average over an eight-year period. In fact, for the 20 companies in the coalition that were profitable over the same eight-year period, their average effective tax rate was 30.6 percent, substantially higher than the 21.2 percent rate for all large profitable companies and more than double the 14.5 percent rate paid by companies in the American Made Coalition. The likely explanation for these companies’ tax rates is that the bulk of the companies in the coalition are retailers, which have fewer opportunities to shift their profits offshore or take advantage of major tax breaks such as accelerated depreciation.

Ideally, tax reform would close the gap between the low-tax rates paid by those in the American Made Coalition and the higher rates paid by those in Americans for Affordable Products. In reality, the House GOP tax reform blueprint would likely make the gap between the companies substantially worse through its border adjustment provision.

Under the border adjustment tax provision, revenue earned by companies from exports in the United States would be exempt from taxation, and the cost of imports to companies in the United States would no longer be deductible. What this means in specific terms is that companies with lots of exports, such as Boeing or General Electric, could end up with zero or substantially negative tax rates since they would be able to deduct the expense of producing their exports but would not have to pay any tax on the income that they generate from these exports. Alternatively, companies with a lot of imports, such as Wal-Mart or Target, could end up paying tax rates significantly higher than the 35 percent rate since they will not be able to deduct the cost of imports.

Given these dynamics, it is no wonder that export heavy groups are lining up in favor of the border adjustment tax, while import heavy groups are lining up against it. What is surprising is that so many lawmakers in Congress are pushing a policy that would make our tax code more unfair by heaping even more tax breaks on profitable corporations that aren’t even paying half the federal statutory tax rate.

Corporate tax reform should not create more winners and losers. Instead, Congress should focus on closing tax loopholes and raising more revenue from corporations overall. 

State Rundown 3/29: More States Looking to Raise or Protect Revenues Amid Fiscal and Federal Uncertainty

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This week we see West Virginia, Georgia, Minnesota, and Nebraska continue to deliberate regressive tax cut proposals, as the District of Columbia considers cancelling tax cut triggers it put in place in prior years, and lawmakers in Hawaii, Washington, Kansas, and Delaware ponder raising revenues to shore up their budgets. Meanwhile, gas tax debates continue in Oklahoma, West Virginia, and South Carolina, among other news.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

  • It’s been another whirlwind week for tax policy in West Virginia. Down to the wire on “crossover” day, the West Virginia Senate voted down the party line to overhaul the state tax system. SB 409 would raise the state sales and use tax to 7 percent (increasing the food tax to 3.5 percent) and step-down the state income tax, phasing it out over time. Ultimately this would shift the state’s reliance on the personal income tax to the sales tax, benefiting those most well-off.
  • Georgia lawmakers will end their session Thursday and may pass a major income tax cut then. The plan, which was initially a very regressive flat tax proposal, has morphed into a more fair but also more costly package that eliminates the state deduction for state income taxes, lowers the top personal income tax rate to 5.65 percent, and indexes tax brackets and other provisions for inflation. It is projected to reduce state funding for services by $292 million in 2019, growing to $526 million annually by 2022.
  • Minnesota lawmakers have no shortage of plans for the state’s surplus—with House Republicans proposing $1.35 billion in cuts and Senate Republicans aiming for $900 million. Both plans include exempting portions of Social Security income, tax breaks for student debt, and reducing the statewide property tax on business. The Senate plan also includes a provision to cut the lowest marginal tax rate—a policy change that is sold as providing tax relief to low income families but that disproportionately benefits the wealthy while undermining the progressivity of the income tax.
  • The current situation in the District of Columbia highlights two major trends in tax policy this year: tax-cut triggers and federal uncertainty. A trigger has been tripped that will cut DC taxes to the tune of $100 million unless the city council and mayor’s office cancel those cuts, and at the same time, the city estimates it will lose at least $100 million under federal budget cuts outlined by President Trump. Such arbitrary automatic cuts undermine states’ ability to respond to changing circumstances such as federal policy changes.
  • Nebraska legislators may be inching closer to a destructive tax-cut package that would use triggers like those in DC to ratchet down the state’s income tax rates.
  • Advocates for low-income families in Hawaii are hopeful as bills that would boost taxes on the wealthy to pay for tax breaks for low-income people continue to move through the Legislature.
  • The Washington House released a budget that requires $3 billion in new revenues over the next two years from new taxes on capital gains and increases in business taxes. New revenues are necessary for the state to be in compliance with court mandates to adequately fund public education in the state.
  • In other state budget news, the Kansas House budget similarly requires $800 million in new revenues over the next two years in order to remain in the black and Gov. Walker’s proposed budget in Wisconsin would increase the state’s structural deficit to over $1 billion by 2021. While agitation for tax reform continues in Kansas, there is no similar activity in the Badger state.
  • Delaware Gov. Carney presented his budget-balancing proposal last week after holding “budget reset” listening sessions throughout the state and settling on an approach based on a mix of funding cuts and revenue increases. The tax proposal includes small rate increases of 0.2 to 0.4 percentage points, elimination of itemized deductions, and an increase in the standard deduction, while also raising the cigarette tax and a cap on corporate franchise taxes.
  • Oklahoma‘s Senate passed a measure that would increase teacher pay through a fuel tax increase (from $0.17 to $0.23 for unleaded gas and $0.14 to $0.21 for diesel). Similarly, West Virginia‘s Senate approved a gas tax increase of 4.5 cents, coupled with vehicle fees, to fund the state’s Road Fund. Both bills now head to their respective Houses for consideration.
  • Chances diminished this week of South Carolina passing a needed gas tax update without tacking on harmful tax cuts that will shift taxes to low-income residents and undermine funding for schools, public safety, and other needs, as advocates for such cuts voted against giving the gas tax update priority status.
  • Idaho lawmakers in both chambers have approved legislation that would eliminate the sales tax on groceries along with a $100 grocery credit. The bill now goes to the governor who is opposed to eliminating the tax on food but who has not said he will veto the bill.
  • The Minnesota Revenue Department released its 2017 Tax Incidence Study, showing that while the overall state and local tax system remains regressive, there was a significant decrease in overall regressivity from 2012 to 2014, thanks in large part to refundable income tax credits and property tax refunds for homeowners and renters.
  • Iowa legislators have settled on $118 million in budget cuts to balance the current year budget.
  • Maryland, Virginia, and the District of Columbia are considering a regional sales tax to improve public transit in the area, an idea that people surveyed in Maryland narrowly support.

Governors’ State of the State Addresses

  • Most governors have now given their addresses for the year. The next scheduled address is Gov. Kasich of Ohio on April 4.

What We’re Reading…  

  • A new brief from the Corporation for Enterprise Development (CFED) outlines steps legislators can take to make the federal EITC even more successful at reducing poverty and encouraging work.
  • Tulsa World’s editorial board asks Oklahomans to “eliminate the false idea that prosperity comes from whittling away at state income tax rates.”
  • Ted Boettner, executive director of the West Virginia Center on Budget and Policy explains how the state’s tax proposals result in a tax shift from the wealthy to low-income families.
  • A new paper to be published in the N.Y.U. Law Review explores the political popularity and danger of marginal rate cuts at low levels of income and how these policy changes actually disproportionately benefit the wealthy and undermine progressivity while being perniciously sold as “low income tax cuts.”


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 Click here to sign up to receive the Rundown via email. 

The April Fool’s Joke Is on Consumers: April 1 Marks Record-Breaking Procrastination on Federal Gas Tax Policy

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It’s only appropriate that April 1 will mark a new milestone in foolish federal transportation infrastructure policy.

On Saturday, the nation’s federal gasoline tax rate will have been stuck at 18.3 cents per gallon for 8,584 days in a row—or more than 23.5 years. This surpasses the previous record of 8,583 days without an update set on March 31, 1983—the day before lawmakers more than doubled  the federal gas tax from 4 to 9 cents, under legislation signed by President Ronald Reagan. (A full history of federal gas rates is available in Figure 1.) Now that infrastructure funding is back on the agenda in Congress, revisiting this extraordinarily outdated area of the tax code is a logical place to begin the search for revenue.


Frequent updates to the gas tax are critical to ensuring that the tax retains its purchasing power over time. Just as a business that refused to raise its prices for 23 years would likely find itself facing financial difficulties as its costs grew, the federal government is finding it increasingly impossible to fund a 21st century infrastructure with a gas tax rate set in the first year of President Bill Clinton’s Administration.

Figure 2, below, shows that the cost of building and maintaining our nation’s roads has risen by 62 percent since 1993. As asphalt, machinery, labor, and other inputs have become more expensive, an infrastructure project that could have been completed for $4 million in 1993, for example, would cost closer to $6.5 million today.

At the same time, most consumers are now paying less gas tax per mile driven than in 1993 because vehicles have become more fuel-efficient. While the average light duty vehicle could travel 19.3 miles per gallon in 1993, that figure crept up to almost 22 miles per gallon in 2015 (the most recent year for which data are available). This 14 percent improvement means that most drivers are now able to travel further on each tank of gas before they must refuel and pay any gas tax to fund the roads on which they have been driving.

Congress isn’t doing the American public any favors by refusing to update the very low, and very outdated federal gas tax. The extra potholes and traffic congestion that come with an underfunded transportation network are a major drain not only on the national economy, but on individual drivers’ pocketbooks and free time. The American Society of Civil Engineers (ASCE) reports that traffic congestion alone is costing consumers the equivalent of $160 billion in wasted time and fuel every year.

If there’s one bright spot in this story, it’s that state lawmakers have increasingly realized that a higher gas tax is a price worth paying to improve infrastructure. Since 2013, 19 states have raised or reformed their gas taxes, and more than a dozen additional states are considering doing the same right now. If Congress took a page out of state lawmakers’ playbooks, the nation’s infrastructure would be better off for it.

Seeking the Right Balance in Alaska

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It’s been a little over a year since Alaska Gov. Bill Walker proposed implementing a state personal income tax for the first time in 35 years, and the idea is now receiving close attention in the Alaska House of Representatives.

Alaska is the only state to repeal a personal income tax, having done so after it struck oil at Prudhoe Bay in the 1970s. Since then, the state has funded its public services primarily with oil tax and royalty revenues. But this unusual setup has proven unsustainable now that oil prices and production levels have both dropped. Alaska is confronting a $3 billion shortfall—a massive amount in a budget of just $4.3 billion.

To end this fiscal calamity, the co-chairs of the Alaska House Finance Committee unveiled a plan (House Bill 115, Version L) that would, among other things, implement a personal income tax with graduated rates ranging up to 7 percent. In an analysis provided to the committee, ITEP found that this tax would collect less than 1.7 percent of Alaskans’ overall personal income, making it the fourth lowest among the 41 states with broad-based personal income taxes.

Despite its small size, the income tax would play at least two very important roles. First, it would generate roughly $680 million in revenue to put toward closing the state’s $3 billion budget shortfall. Second, the progressive nature of this income tax would add some much-needed balance to a plan that also includes a change heavily impacting the state’s low- and moderate-income residents: a significant reduction in the state’s Permanent Fund Dividend (PFD) payout.

Alaska’s PFD is unique among the states. The payment, which typically ranges from $1,000 to $2,000 per person, per year, is received by the vast majority of Alaska households as a way of allowing them to share in the state’s natural resource wealth. But while Alaskans of all stripes are eligible for the PFD, low-income families typically find the income that the PFD provides to be much more important to their ability to make ends meet. Researchers at the University of Alaska Anchorage estimated that the PFD lifts between 15,000 and 25,000 Alaskans out of poverty each year. Among Alaska’s children, the PFD is responsible for reducing the state’s poverty rate from 16.4 to 10.0 percent. For a family of four on the brink of poverty in Alaska (with a household income of $30,750 in 2017), the difference between a receiving a $1,000 PFD payout versus a $2,000 payout represents a sizeable 13 percent gain, or loss, in their household budget.

It appears that a consensus is forming that despite the PFD’s benefits, the payout will have to be scaled back as part of a plan to remedy the state’s dire fiscal situation. Gov. Walker cut the state’s 2016 PFD payout roughly in half, and the Alaska Senate is hoping to rely heavily on reductions in future PFD payouts to fund the state’s budget. But as the Governor and House leadership have recognized, leaning too heavily on PFD cuts would amount to balancing the state’s budget primarily on the backs of low- and middle-income families. A robust personal income tax is vital if lawmakers are to ensure that the state’s most affluent residents also chip in toward a solution to the state’s fiscal problems.

This fact is demonstrated in a new ITEP analysis showing that the House’s fiscal package “when fully implemented … achieves a relatively consistent impact across every income group in Alaska.” In other words, families at different income levels would be asked to contribute similar shares of their incomes toward putting the state’s budget back on a stronger footing. ITEP’s analysis finds that the long-run impact on Alaska families across the income distribution would vary between 1.8 and 2.8 percent of income, on average.

But the bill would take a heavier toll on low-income families in the short-run, when the cuts to the PFD would be the deepest. In a scenario where the PFD is cut by $950 per person, as this bill could do in its first year of implementation, the bottom 20 percent of Alaska families could expect to see their incomes drop by an average of 8.6 percent.

Nonetheless, this plan is more favorable to both low- and middle-income families than most of the alternatives. Unless Alaska adopts an income tax, deeper cuts in state spending or the PFD payout, or new sales or excise taxes, will be needed. Any of these options would have an even larger negative impact on families of modest means. Simply put, if legislators proceed with a fiscal fix that does not include an income tax, a lopsided outcome that asks far less of the wealthy and far more of everyone else is all but guaranteed.

Read ITEP’s analysis of House Bill 115 (Version L)

The $767 Billion Money Pot Driving Tax Reform

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With the failure of legislation to repeal the Affordable Care Act, the Trump administration and Republicans lawmakers are moving on to corporate tax reform. At the heart of this debate is the problem of corporations shifting their profits to foreign tax havens to avoid U.S. income taxes. A new report by the Institute on Taxation and Economic Policy (ITEP) helps clarify the scope of this problem, finding that Fortune 500 corporations now disclose more than $2.6 trillion in offshore earnings on which these companies have avoided as much as $767 billion of income tax.

The reason for this exodus of offshore cash is that the corporate tax code allows companies to avoid paying even a dime of U.S. taxes on their offshore earnings, which often includes domestic earnings moved offshore, until they officially repatriate these profits. This policy, known as deferral creates a huge incentive for companies to simply hold their money offshore indefinitely because it allows them to avoid paying taxes to the United States.

ITEP’s new report shows that offshoring profits is a widespread phenomenon: 322 Fortune 500 companies now report having some offshore earnings. But the data also show that the bulk of these earnings are held by a relatively small number of companies. In fact, just 10 companies, including Apple, Pfizer, Microsoft and General Electric, alone hold $1 trillion of the $2.6 trillion hoard.

Fifty-nine of the offshoring companies disclose, in their annual financial reports, how much federal income tax they’re avoiding by keeping their profits offshore. The unpaid tax rate for these 59 corporations averages 28.7 percent. Since the federal tax bill on repatriation is 35 percent minus any foreign tax already paid, this implies that these companies have paid an average tax rate of just 6.3 percent on these profits so far. This is a clear indication that much of this income is being reported in low-rate foreign tax havens like Bermuda and the Cayman Islands. If the other offshoring companies faced the same tax rate on repatriation, then these companies would owe an estimated $767 billion in unpaid taxes on their offshore earnings.

Rather than seeking to collect this $767 billion in unpaid taxes, many lawmakers on both sides of the aisle appear more interested in giving companies a tax break. In lieu of tackling corporate tax reform head-on by repealing unwarranted tax loopholes, some policymakers have noticed that even a small tax on offshore cash could bring in enough revenue to pay for infrastructure and/or lower corporate tax rates, at least in the short run. For his part, President Donald Trump has proposed a mandatory tax of 10 percent on offshore earnings. While he has pitched the idea as a revenue generator, the reality is that applying a 10 percent rate would represent a 70 percent tax break compared to the 35 percent rate that the law requires. Overall, this would mean that President Trump’s tax plan would give companies a tax break of over half a trillion dollars compared to the $767 billion that they owe.

President Trump is certainly not alone in proposing irresponsible repatriation proposals. Lawmakers and advocacy groups on both sides of the aisle have put out a variety of proposals to tax offshore earnings at rates even lower than 10 percent. The House Republican leadership’s plan would tax these earnings at rates of 8.75 percent for liquid assets and 3.5 percent for all other offshore earnings. Bipartisan legislation proposed during the last Congress would have allowed companies to voluntarily repatriate their earnings at a rate of 6.5 percent, though this effort ran into trouble when the non-partisan Joint Committee on Taxation (JCT) found that the legislation would lose $118 billion in revenue. More recently, Rep. John Delaney proposed a pair of bipartisan bills that would allow companies to repatriate their earnings at a zero percent or 8.75 percent to pay for infrastructure spending. These bills are striking for their support by a number of Democrats, despite the fact that they are proposing a tax break larger than the one offered by President Trump.

The one bill that stands in sharp contrast to others is the Corporate Tax Dodger Prevention Act proposed in early March by Sens. Bernie Sanders and Brian Schatz and Rep. Jan Schakowsky. This bill would require companies to pay the full 35 percent rate they owe (minus foreign tax credits) on their offshore earnings. Even better, the bill would permanently close the deferral loophole, which would effectively shut down offshore tax avoidance once and for all. This approach would not only make the tax system more fair, it would also raise a substantial amount of revenue that could be used for public investments.

What to Watch in the States: State Earned Income Tax Credits (EITC) on the Move

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While every state’s tax system is regressive, meaning lower income people pay a higher tax rate than the rich, some states aim to improve tax fairness through a state Earned Income Tax Credit (EITC). Federal lawmakers established the in 1975 to bolster the earnings of low-wage workers, especially workers with children and offset some of the taxes they pay. State EITCs generally match a portion of the federal credit—ranging from 3.5 percent of the federal credit in Louisiana to 40 percent in Washington, D.C.

State EITCs can also be refundable or non-refundable, but the former is among the most effective and targeted tax reduction strategies to help offset states’ upside tax systems. If a credit is refundable, taxpayers receive a refund for the portion of the credit that exceeds their income tax bill. Refundable credits can therefore be used to help offset all taxes paid, not just income taxes, thereby offsetting some of the regressive effects of state and local sales, excise and property taxes.

In 2015, six states adopted or strengthened their EITC (California, Colorado, Massachusetts, Maine, New Jersey and Rhode Island) followed by more expansions in Rhode Island and New Jersey in 2016. By the end of 2016, 27 states offered a state EITC, 22 of which were refundable.

So far in 2017, we’ve seen proposals to establish EITCs in GeorgiaHawaii, Missouri, Montana, South Carolina, Utah, and West Virginia, and a proposal to expand Minnesota and Maryland’s credits for adults without children in the home. (For more details on EITC proposals this year check out this post from Tax Credits for Working Families.)

Unfortunately, sometimes EITC proposals are paired with other proposals that would hurt the most economically vulnerable. For instance, the Georgia House passed a bill with a new nonrefundable EITC in the same legislation that converted the state’s graduated income tax to a flat rate.  As a result, many low- and moderate-income taxpayers could still face a tax increase while wealthier taxpayers would see a tax cut.  Separate bills in Missouri would cut the state’s corporate income tax rate, and jeopardize long-term investments in the state.

In addition to making state tax structures more fair, a new study from the University of New Hampshire found that EITCs also serve as an important anti-poverty tool, helping to lift families, particularly children, out of poverty. The study evaluated 17 states that had a refundable EITC implemented from 2010 to 2014. Across the states in the study, the EITC pulled 0.3 percent of the population out of poverty, and 0.7 percent of children out of poverty. These results demonstrate that children in poverty stand to gain the most from refundable EITCs.

The study also estimated the potential poverty reduction if a state were to adopt an EITC. The five states with the greatest potential reductions to child poverty are Arizona, Arkansas, Georgia, Nevada, and Texas. For instance, Arizona’s child poverty rate would have been an estimated 20.2 percent in 2010–2014 rather than 22.0 percent if it had adopted a 30 percent federal match.

State lawmakers should stop thinking of EITCs as a bargaining chip to win over progressives when passing tax cuts for the rich, or as politically favorable enough to pass but not to fund (Colorado and Washington). State EITCs help poor working families stay afloat. Because of their effectiveness, state lawmakers should consider establishing a state EITC, expanding existing credits, or making the credit fully refundable.

Tax Justice Digest: 50-State Analysis of GOP Health Care Plan, Ensuring State Sales Taxes Keep Pace with Our Changing Economy

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. 

State-by-State Analysis of GOP Health Care Plan
By now, it’s widely known that the GOP health care plan includes a $31 billion a year tax cut that mostly benefits the top 1 percent of taxpayers. ITEP this week published a new analysis that examines the state-by-state impact of the plan. View how the proposal would  impact your state

Amazon Will Collect Sales Tax in Every State by April 1
For decades, helped its customers dodge the sales taxes they owed to gain an advantage over its competitors. But as the company’s business strategy has changed, so has its tax collection practices—and as of April 1, Amazon will collect sales taxes in every state. How did we get here—and what’s left to do? Read more

Taxing the Gig Economy
Speaking of state tax laws evolving to keep pace with our ever-changing economy, states are facing another sales tax challenge as the gig economy grows. Services such as Uber and Airbnb are presenting regulatory challenges as the growth of these services has outpaced lawmakers’ ability to update state and local tax codes. Read more

State Rundown: Springtime Debates Blossom Nationwide
This week in state tax news saw major changes debated in Hawaii and West Virginia and proposed in North Carolina, a harmful flat tax proposal in Georgia, new ideas for ignoring revenue shortfalls in Mississippi and Nebraska, an unexpected corporate tax proposal from the governor of Louisiana, gas tax bills advance in South Carolina and Tennessee, and property tax troubles in Missouri, Nevada, and New Jersey. Read more

If you have any feedback on the Digest or tax stories you’re watching that we should check out too please email me

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Taxing the Gig Economy

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Our ever-changing economy demands that lawmakers update our tax laws to keep pace.

Take, for example, the growth of online sales. As recently as six years ago, Amazon, the nation’s biggest online retailer, only collected sales tax on consumer purchases in five states. This meant that state treasuries were missing critical sales tax revenue, a problem destined to grow as more consumers shifted their shopping habits from brick and mortar stores to online purchases.

But Amazon’s tax collection habits have improved over the last few years, in part because Amazon changed the way it does business, but also because state lawmakers became increasingly frustrated by the sales tax revenue gap created by e-retail and decided to press for change. While online sales tax evasion remains a problem today, progress is being made.

Now, states are facing another challenge as the on-demand or “gig economy” grows. Companies such as Uber and Airbnb are presenting regulatory challenges and the growth of these services has outpaced lawmakers’ ability to update state and local tax codes. A new ITEP report explores tax policy issues related to the on-demand economy and recommends that state and local tax systems treat these companies in a manner similar to their competitors, especially taxis and hotels.

As background, most states exempt a broad range of services from their sales tax bases because of a historical accident. The revenue loss resulting from these exemptions—on services ranging from lawn care to haircuts—has grown substantially as the service sector has expanded, but lawmakers have been slow to update sales tax bases to reflect the shift toward a more service-oriented economy.

Taxi rides are one service that has long been among those typically exempt from most state and local sales taxes, but there are more than half a dozen states that apply their sales taxes to taxis and similar services. In the context of the on-demand economy, this matters because Uber and other transportation network companies (TNCs) are providing a service nearly identical to taxi rides. But their tax treatment has not always reflected this fact.

In Rhode Island, for example, taxis began collecting sales tax under a law enacted in 2012, but Uber delayed doing so until 2015, claiming the law was ambiguous. Today, the company has taken an even more confrontational stance in Georgia, urging its riders to tell lawmakers that the sales tax, which has long been collected on taxi rides, should not apply to Uber’s services. ITEP’s report indicates that a similar battle could soon come to Ohio, where taxis also collect sales taxes but where Uber appears not to be doing so. Uber has recently received negative publicity on a variety of fronts, ranging from allegations of sexual harassment among its engineers to reports of software designed to impede police investigations into its business in jurisdictions where it may have been operating illegally. Disputes over sales tax collection may seem bland by comparison, but they are important nonetheless.

Airbnb has taken a different approach to state and local tax collection. The company has often been willing to collect and remit lodging taxes (which range up to 15 percent) in exchange for regulations (or a lack thereof) favorable to its business model. Affordable housing advocates concerned about the loss of residential housing, and frustrated neighbors living next to what they call “neighborhood hotels,” by contrast, would like to see tighter restrictions on renting homes via Airbnb. Meanwhile, others have noted (PDF) the enforcement problems created by the high level of secrecy surrounding most Airbnb tax collection agreements.

Partly because of these ongoing debates, Airbnb’s tax collection practices are a patchwork. The company is collecting some state and/or local-level lodging taxes in 26 states, but in many of those states the company’s scope of collection is far from comprehensive. Hundreds of millions of dollars in lodging taxes are being lost each year as visitor preferences shift away from traditional hotels (which collect the applicable taxes) to Airbnb rentals (which often do not). For the time being, many of Airbnb’s customers are allowed to pay less than guests of traditional hotels for the public services they enjoy during their visits.

These issues are likely to remain a work in progress for some time to come. The regulatory questions that are often tied to these tax debates are far from trivial. And even if the tax laws related to these services are updated to reflect today’s economy, there is little doubt that new on-demand services with unforeseen tax policy implications will arise in the years ahead.

Nonetheless, the stakes are too high for lawmakers to delay action any longer. Both tax fairness and fiscal responsibility demand that states and localities update their tax codes to better reflect the realities of these on-demand services. Amazon and the e-retail industry are moving in that direction, though universal sales tax collection remains elusive. As a similar debate unfolds regarding the gig economy, states should move even more quickly to recognize change and update their sales tax practices accordingly.

Read Taxes and the on-Demand Economy.