Month: April 2017

This week Alaska‘s House advanced a historic bill to reinstate an income tax in the state, Oklahoma‘s House voted to cancel a misguided tax cut “trigger,” West Virginia‘s governor colorfully vetoed his state’s budget, tax reform debate kicked off in Louisiana, and gas tax updates were considered in South Carolina and Tennessee, among other tax-related news from around the country. And in our “what we’re reading” section you’ll learn about a new book on American attitudes toward taxes and a new effort to make public finance data readily available online.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• The Alaska House voted 22-17 to reinstate a personal income tax for the first time since 1980. An ITEP analysis found that the income tax contained in House Bill 115 would be the fourth lowest in the nation when measured relative to overall personal income. But the progressive nature of the tax (with rates ranging from 0 to 7 percent) would play an important role in counterbalancing the regressive measures also being considered by Alaska lawmakers. The bill now moves to the Senate, where legislative leaders have expressed resistance to new revenues and would instead like to slash the state’s Permanent Fund Dividend (PFD) payout and hold out hope for a rapid increase in oil prices. Gov. Bill Walker, by contrast, supports enacting a state personal income tax.
• Oklahoma’s House passed a bill to repeal the arbitrary tax cut “trigger” created in 2014 that will worsen the state’s $878 million revenue shortfall if left in place.
• Calling it a “bunch of political bull you-know-what,” West Virginia Gov. Jim Justice vetoed the legislature’s budget, which relied on spending cuts and a withdrawal from the state’s Rainy Day Fund. All eyes are now on the “compromise plan” for tax reform that will play out in special session. It could potentially include the creation of a commercial activities tax, an increase and expansion of the sales tax, and lower reliance – and eventual elimination – of the state’s personal income tax.
• Lawmakers in Louisiana are beginning to chip away at tax reform, starting with examining various tax expenditures early this week. The state exempts almost as much as it collects in taxes, leaving significant holes in the tax structure. Closing these loopholes offers significant opportunities for filling the $1.3 billion revenue gap that the state faces upon the expiration of the temporary sales tax increases enacted in 2016.
• As Minnesota policymakers return from recess to finalize a budget, there are many divergent ideas regarding the treatment of the state’s surplus. In response to proposals for either large tax cuts or spending increases, the Star Tribune Editorial Board has a wise word of advice for lawmakers facing surpluses anywhere–“modest tax cuts and spending increases are affordable; big moves are not.” Among their list of priorities: targeted tax relief for low-income workers and families through expanding the Working Family and Child Care Credits.
• The Senate tax plan in North Carolina would worsen he state’s budget situation by $600 million and likely lead to dwindling reserves and funding cuts to education and other priorities.
• South Carolina‘s gas tax debate heated up today, with House lawmakers urging their Senate counterparts to follow their lead and vote to update the gas tax. Some in the Senate continue to hold out for income tax cuts to be added to the package, and Gov. Henry McMaster remains opposed, preferring to fix the roads with borrowed money.
• Tennessee Gov. Bill Haslam’s gas tax bill still has a fighting chance as well and is also being debated, and possibly voted on, in the both houses before the end of the week.
• Lawmakers in Rhode Island are considering a proposal to cut the state’s sales tax rate – from the current 7 percent to 3 percent. The impacts will be studied in a special legislative commission.
• Ohio lawmakers recently announced that they need to cut $800 million from the state budget over the biennium. Some legislators have pointed to recent tax cuts and tax shifts, that have taken place over the past five years, as key drivers of the state’s budget woes.
• Nebraska legislators debated a property tax and school funding bill Tuesday that would have redirected funding from an existing property tax credit to increase school aid in rural areas. The bill did not appear to have enough support to overcome a filibuster and will likely not advance.
• Alabama‘s effort to update its gas tax was declared officially “dead” for the year after the bill failed to pass a procedural hurdle in the House, but proponents are still working to resuscitate it.

What We’re Reading…  

• A new book that examines Americans’ attitudes on taxes, “Read My Lips: Why I Am Proud to Pay Taxes,” shows that most Americans consider paying taxes a civic duty and are bothered by the idea of others not playing their part.
• Retired Microsoft billionaire executive Steve Ballmer has led a new effort to make public finance data easily available online.
• The Public Assets Institute recently released a report that provides alternative approaches to balancing the state budget while better meeting the needs of Vermonters.
• The New York Times covers an emerging body of work supporting the positive benefits of public investments and supports that, contrary to typical supply-side mythology, encourage work and grow the economy.

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.

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. 

Every year around Tax Day, ITEP updates some of its key reports to help put the nation’s tax system in proper context. This year, as people around the country march to demand President Trump release his tax returns and as policymakers consider overhauling our federal tax system, these reports are especially topical. Read 10 Things You Should Know on Tax Day.

Who Pays Taxes in America Now—Who Will Pay under Possible Tax Reform?

The nation’s combined federal, state and local tax system is slightly progressive and relatively proportional (for now), meaning each income quintile’s total share of taxes is more or less on par with its total share of income.

 But ITEP analysts also examined what the tax system would look like if Speaker Paul Ryan’s so-called Better Way plan were enacted. It found that Ryan’s plan would cut taxes for every group, but would reserve the most lavish tax cuts for the top 1 percent. In fact, under Ryan’s  plan  the tax system  would redistribute income away from the bottom 99 percent and toward the top 1 percent. Read Who Pays Taxes in America in 2017 for a complete overview.

What about State Tax Systems?
The reason the nation’s combined federal, state and local tax system is relatively proportional is because the federal income tax is progressive. Every state and local tax system, however, is regressive, meaning lower-income people pay a higher effective state and local tax rate than the wealthy. Take a look at Fairness Matters: A Chart Book on State and Local Taxes, for an overview of tax systems in all 50 states.

The U.S. is Far Below Average When It Comes to Taxes We Pay Relative to GDP
Tax Day—when many taxpayers who waited until the last minute to file are writing checks to Uncle Sam and also their state governments—perhaps isn’t the best time to present these harsh facts, but compared to other advanced economies:

• The United States is one of the least taxed developed countries.  ‘

And while corporations argue that the U.S. tax system is too onerous and stifles competitiveness (in spite of the fact that profitable corporations are doing quite well), the truth is:

• The United States collects a substantially smaller share of total corporate taxes than average among 34 developed countries.

15 Reasons We Need Corporate Tax Reform—And We Don’t Mean Tax Cuts
Another new ITEP report examined 2016 financial filings to identify profitable companies that paid ZERO in federal taxes. The report highlights 15 U.S. corporations, including some common household names such as GE and Netflix, and identifies the tax breaks they used to zero out their tax obligations. For most of them, last year’s zero-tax liability wasn’t an aberration.

ICYMI:

Fortune 500 Companies Hold a Record $2.6 Trillion Offshore
A March 2017 ITEP corporate report, Fortune 500 Companies Hold a Record $2.6 Trillion Offshore, examines how much cash corporations are stashing offshore and, based on analyses of their financial reports, estimates how much they’re dodging in taxes ($780 billion).

The 35 Percent Corporate Tax Myth
Our wide-ranging, eight-year study of Fortune 500 companies found that the average effective tax rate for profitable corporations is 21.4 percent, barely more than half the statutory rate. Further, a broad swath of profitable companies paid ZERO federal taxes in at least one of the last eight years. Check out the corporate study for more details on how corporations avoid taxes.

Undocumented Immigrants Pay State and Local Taxes
In early March, ITEP updated its distributional analysis of Undocumented Immigrants’ State and Local Tax Contributions. According the report, undocumented immigrants contribute an estimated $11.74 billion in state and local taxes each year. This means that undocumented immigrants contribute 8 percent of their incomes in state and local taxes on average, which is on par with the rate paid by middle-income taxpayers. Read the full report

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

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This week in state tax news we see Louisiana‘s session getting started, budgets passed in New York and West Virginia, Kansas lawmakers taking a rest after defeating a harmful flat tax proposal, and Nebraska legislators preparing for full debate on major tax cuts. Nevada lawmakers may make tax decisions related to tampons, diapers, marijuana, and property before closing their session this week. And gas tax update efforts are gaining steam in Alabama, South Carolina, and Tennessee.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• The Louisiana regular legislative session started on Monday, April 10, with high aspirations but uncertainty about whether the political will exists to tackle substantive tax reform. There is great urgency to act, as lawmakers have had to grapple with closing 15 budget gaps over the past nine years and the temporary sales tax hike enacted last year will expire halfway through 2018, leaving a $1.3 billion shortfall. There is no shortage of ideas. In addition to the Task Force for Structural Changes in Budget & Tax Policy’s recommendations, plans from advocacy organizations, and the governor’s proposal, the legislature has already begun hearings for various legislative proposals. With a high threat of political gridlock, the governor’s opening remarks focused on finding bipartisan solutions.
• Legislators in New York and West Virginia passed budgets last weekend. The budget agreement in New York includes a two-year extension of the state’s surcharge on millionaires. It also includes an overhaul of the state’s workers’ compensation program and a plan to waive state college tuition for many middle-class families. By contrast, the West Virginia legislature passed a budget last weekend that includes heavy spending cuts and no tax increases. The agreement, now under consideration by Gov. Jim Justice, draws $90 million from the state’s rainy day fund and cuts the medical services line item in Medicaid, higher education, regional education service agencies, and WV public broadcasting. It also lacks any teacher pay increases.
• A flat tax proposal that had the support of Gov. Brownback fell flat last week in the Kansas Senate. In addition to eliminating the exemption for business pass-through income and lowering the sales tax on food, the bill would have substituted a single 4.6 percent rate for the current three rate/bracket structure. Lawmakers are on recess until May, when tax reform discussions will pick back up again.
• Although major tax-cut bills in Nebraska have advanced from committee to the full legislature, some lawmakers remain displeased with the effort to slash income taxes to primarily benefit wealthy urban Nebraskans.
• Delaware‘s legislators will return from recess in a couple of weeks to take up Gov. John Carney’s budget balancing plan that includes both funding cuts and income tax increases.
• Tennessee‘s needed gas tax update continues to be the center of controversy, as the bill advanced through a key House panel last week but some lawmakers are still working on finding ways to avoid increasing the gas tax.
• Alabama appears poised to update its gas tax with a 4-cent increase this year, another 2-cent increase in 2019, and an optional increase of 3 cents in 2024. The revenue would be split between state infrastructure bond payments and city and county roads needs. The bill advanced through a House committee this week and has broad support.
• South Carolina‘s gas tax debate is set to recommence in earnest when legislators return from recess next week, though the outcome remains uncertain. Gov. Henry McMaster has vowed to veto any gas tax increase, leading some lawmakers in the Senate to attempt to add an income tax cut to the bill to attain a veto-proof majority, while others are hoping to fill the state’s $1 billion annual transportation funding gap by building and taxing new casinos.
• Nebraska lawmakers have given first-round approval to a bill to collect sales taxes on online purchases, but Gov. Pete Ricketts may veto it.
• Nevada lawmakers have a few issues left to settle before ending their session at the end of this week. They may still pass a fix to the state’s property tax cap that has been causing major revenue problems for local governments, and are still considering bills to exempt tampons and diapers from sales tax. The state is also working out how to tax recently legalized marijuana and where to devote the resulting revenue.
• Idaho Gov. Butch Otter vetoed legislation that would have excluded food from the sales tax base, stating that “the costs of this particular proposal are too high and the potential for imminent financial need too great for the small amount of tax relief it would provide.”
• A tax incidence study published in Minnesota shows the state significantly narrowed gaps in the effective tax rates paid by taxpayers at varying levels of household income between 2009 and 2014, when the state enacted a new top rate of 9.85 percent on incomes greater than $150,000 if single or $250,000 if married filing jointly. Thanks to its progressive graduated rate structure and refundable tax credits, Minnesota has the fifth least unfair state and local tax system in the country.

What We’re Reading…  

• An op-ed penned by New Jersey Policy Perspective makes a good case for a change of approach to New Jersey‘s fiscal issues, arguing that “Instead of the annual ritual of scores of groups with important needs fighting for tiny scraps of an ever-shrinking pie of funding, New Jersey needs to take a serious look at making that pie larger.” The op-ed offers a few excellent suggestions for how to accomplish this goal.
• A new report by the Keystone Research Center (KRC) provides estimates of the impact of property tax elimination proposals. The analysis shows that eliminating Pennsylvania‘s school property taxes would increase taxes on the middle class while hampering the state’s ability to adequately fund public schools.
• The Louisiana Budget Project has just released an analysis of Gov. John Bel Edward’s tax plan—a plan that suggests adopting a Commercial Activities Tax and significant changes to the personal and corporate income taxes that would require both legislative and voter approval. If all components of the tax reform package were to be enacted, collectively these reforms would be a move toward a more adequate tax system for the state.
• The Iowa Fiscal Partnership has released a brief on elements to consider when discussing tax reform and debunking some of the myths currently driving the debate.
• The Georgia Budget and Policy Institute takes a look back at this year’s session, noting the state avoided some harmful regressive tax cuts but also passed a number of smaller changes that add up to a significant reduction in revenue for state services.

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. 

A new bill introduced this week by Rep. Mark Pocan (D-WI), the Tax Fairness and Transparency Act, would rip out the offshore corporate tax avoidance system by its roots. This legislation combines into a single, comprehensive bill elements of three pieces of legislation that Rep. Pocan has proposed in previous years.

While many drivers of offshore corporate tax avoidance exist, the single biggest one is companies’ ability to defer paying taxes on their offshore earnings. According to official estimates, this provision of the tax code, known as deferral, will cost the U.S. Treasury about $1.3 trillion over the next 10 years.

Rep. Pocan’s bill would end deferral, which means companies would be required to pay the full U.S. corporate tax rate each year on their offshore earnings (less foreign taxes already paid), rather than indefinitely putting off paying these taxes. This provision would remove the incentive for companies to hold their earnings in tax havens because they would owe the same amount in taxes regardless of where they report their profits.

Ending deferral is a proposal that has garnered substantial bipartisan support over the years. For example, in the presidential primaries, Sen. Bernie Sanders (I-VT) and then Republican presidential candidate Donald Trump both put out tax reform plans calling for an end to deferral. In addition, Sen. Ron Wyden (D-OR) and former Sen. Dan Coats (R-IN) proposed tax reform legislation that would have ended deferral as well.

Rep. Pocan’s bill also takes aim at a tax avoidance practice known as earnings stripping, wherein companies shift profits by making loans from their subsidiaries in low-tax jurisdictions to their subsidiaries in higher-tax jurisdictions. The bill would crack down on this behavior by limiting the amount of interest that companies can deduct if their U.S. subsidiaries are taking on a disproportionate share of the company’s worldwide debt. Curbing earnings stripping would reinforce the bill’s move to end deferral by limiting the incentive of companies to avoid U.S. taxes by engaging in a corporate inversion and then using earnings stripping to shift U.S. income out of the country tax-free.

A final key provision in Rep. Pocan’s proposed legislation is that it would require all publicly traded companies to disclose key financial data on a country-by-country basis. The financial data would have to be publicly disclosed and would include companies’ income, income taxes paid, revenue, number of employees and capital in each of the countries in which they operate. This provision would add critically needed transparency to our tax system by allowing the public, media and even tax officials to ascertain whether major corporations are paying their fair share in taxes. It would also make the United States a leader, rather than a laggard, in the international effort to end corporate tax avoidance.

Offshore corporate tax avoidance is neither inevitable nor acceptable. Lawmakers could immediately put an end to these offshore tax shenanigans once and for all by passing Rep. Pocan’s Tax Fairness and Transparency Act. 

A new pair of bills introduced by Representative Lloyd Doggett (D-TX) this week would crack down on loopholes that allow corporations and individuals to avoid paying their fair share in taxes.

Rep. Doggett’s Stop Tax Haven Abuse Act, which was sponsored by Senator Sheldon Whitehouse (D-RI) in the Senate, would close a number of the most harmful loopholes in the current international tax code. Taken together, the provisions of the bill would reduce international tax avoidance by $278 billion over 10 years.

Corporations’ use of offshore tax gimmicks have grown so out of control that companies have now accumulated a stunning $2.6 trillion hoard of money offshore for tax avoidance purposes. The bill wouldn’t entirely solve the problem of tax haven abuse, but it could ensure corporations are paying part of the estimated $100 billion they avoid each year in taxes. Some of the key components of the bill include provisions that would:

• Reduce corporate inversions by treating the corporation resulting from the merger of a U.S. and foreign company as a domestic corporation if shareholders of the original U.S. corporation own more than 50 percent (rather than 20 percent under current rules) of the new company, or if the company continues to be managed and controlled in the United States and engaged in significant domestic business activities (meaning it employs more than 25 percent of its workforce in the United States).
• Disallow the interest deduction for U.S. subsidiaries that have been loaded up with a disproportionate amount of the debt of the entire multinational corporation. This provision would curb so-called “earnings stripping,” a practice in which a U.S. subsidiary borrows from and makes large interest payments to a foreign subsidiary of the same corporation to wipe out U.S. income for tax purposes.
• Require multinational corporations to report their employees, sales, finances, tax obligations and tax payments on a country-by-country basis as part of their Securities and Exchange Commission (SEC) filings. Such disclosures would provide crucial insights into how companies are gaming the international tax system and would provide more transparency to investors.
• Repeal the “check-the-box” rule and the “CFC look-through rules” that allow companies to shift profits to tax havens by letting them tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist.

Rep. Doggett’s other new tax-related bill, the Corporate EXIT Fairness Act, takes direct aim at one of the main drivers of corporate inversions. Under the current tax code, companies have a huge incentive to invert or become a foreign corporation (at least on paper) because they can permanently avoid paying taxes on accumulated offshore earnings. Doggett’s legislation would require inverted companies to pay the full amount of taxes they owe on offshore earnings if they become a foreign company, which means that avoiding taxes on unrepatriated earnings will no longer be a factor in making that decision.

The bill also contains the same anti-inversion provisions in the Stop Tax Haven Abuse Act that tighten rules around what constitutes a domestic corporation.

What differentiates Rep. Doggett’s exit tax bill from similar bills is that it would require all expatriating companies to pay what they owe on their offshore earnings, rather than just those companies that are engaging in a transaction that meets the definition of an inversion. This makes the bill even more effective in that it reduces the offshoring tax incentive across the board and allows the bill to work as a complement to other anti-inversion legislation.

Rather than moving to an even more loophole-ridden corporate tax code as the House GOP has proposed, lawmakers should be considering reforms such as those in the Stop Tax Haven Abuse Act and the Corporate EXIT Fairness Act that crack down on offshore tax avoidance.

This week in state tax news we saw a destructive tax cut effort defeated in Georgia, a state shutdown avoided in New York, and lawmakers hone in on major tax debates in Massachusetts, Nebraska, South Carolina, and West Virginia. State efforts to collect taxes owed on online purchases continue to heat up as well.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

• Georgia‘s 2017 session ended last week without legislators passing a major income tax cut that had been working its way through the legislature. The bill could be revived next year, however.
• In their final week of regular session, the West Virginia House throws a new tax reform proposal into the mix. The latest version under consideration would keep the personal income tax as is, broaden the sales tax base (but not include groceries), and lower the sales tax rate to 4.75 percent by 2020.
• In Massachusetts, a measure to decrease the state sales tax rate could join the millionaire’s tax, a 4 percent surcharge on incomes over $1 million, on the ballot. The result would be a proposal close to revenue neutral rather than a way to bolster revenue for education and transportation spending.
• A protracted fight over tax cuts may move from Nebraska‘s Revenue Committee to the full legislature soon. One piece of a compromise, a bill to cancel a $224 million property tax credit and use the money for more targeted school aid has now advanced. If the committee also advances an separate bill that makes further property tax changes as well as massive income tax cuts for high-income Nebraskans, the full legislature will take up the bills. The legislative session is now about two-thirds complete, ending in June.
• South Carolina‘s needed gas tax update faces a difficult road ahead. Senators blocked the bill from being debated last week so they could combine it with income tax cuts that will drain funding from other state priorities like education and health care, and new Gov. McMaster has now vowed to veto any gas tax increase, preferring instead to borrow $1 billion for roads repairs.
• Avoiding a shutdown, New York lawmakers extended the terms of the state’s current budget. The reasoning is due in part to uncertainty at the federal level. Tax policy changes, such as the proposed extension of the state’s millionaires tax, will be debated over the next two months.
• In Oklahoma, a group of oil and gas producers have asked lawmakers to raise the state’s gross production tax. Demonstrating their commitment to helping solve the state’s budget woes, they would like to see the tax return to 7 percent.
• District of Columbia Mayor Bowser and the D.C. Council appear unlikely to roll back scheduled tax cuts despite pressure from the community to devote the revenue to local needs instead.
• Internet sales tax bills are facing various fates in the states this legislative session. Efforts are underway in Colorado to limit the law that many states have modeled their proposals on—taking away the provision that requires businesses to report buyers who owe state taxes that the retailer didn’t collect. A bill to require the collection of sales taxes from online transactions in New Mexico passed both chambers and faces its end if Governor Martinez fails to act in the coming days. Stop and go efforts in Arkansas ended without passage of an online sales tax bill as the legislature recessed until veto session. A Kansas bill patterned off of the Colorado law has received a first round of approval in the House.

 Governors’ State of the State Addresses

• Gov. Kasich of Ohio gave his address on April 4, in which he repeated debunked tax-cut mythology, saying “look at the states across this country that have the fastest economic growth. They either have no income tax or very low income taxes.”

What We’re Reading…  

• The Center on Budget and Policy Priorities (CBPP) released a report last week that presents steps states can take to strengthen their tax systems and reserves in the face of revenue shortfalls.
• Governing unpacks where and why personal income is growing and shrinking in different states.
• In a recent video, Pennsylvania Budget and Policy Center’s Director, Marc Stier, presents the group’s Fair Share Tax Plan.

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.