Month: May 2017

Nebraska lawmakers had a long and contentious tax-cut debate this session but ultimately chose the wise path and rejected attempts to give a massive tax cut to the wealthy at the expense of the state’s schools, other public services, low- and middle-income families, and property tax payers.

Tax cut efforts in Nebraska last year ended with a promise to find a package over the summer that would resolve the differences between major factions within the state who sought different outcomes. But the death of LB 461 in the state legislature this week showed that no amount of wheeling and dealing, nor any innovative tax-cut gimmickry, can turn costly and regressive income tax cuts into a good idea for Nebraska.

The session began with a multitude of ideas, each of which had one or more fatal flaws in the eyes of some policymakers. Early proposals to pay for income and/or property tax reductions with sales tax expansions were unacceptable to Gov. Pete Ricketts and others who refused to support anything that might be branded as a tax increase. Plans backed by Gov. Ricketts and some of his allies focused on slashing income tax rates for wealthy Nebraskans and pushing the full cost of the tax cuts into future years using arbitrary tax cut “triggers,” but rural representatives wanted property tax reductions, many objected to giving most of the tax cut to the wealthy, and most lawmakers saw the “trigger” proposal for the fiscally irresponsible gimmick that it was. Another attempt to reduce rural property taxes through increased and redirected school aid was unpalatable to urban legislators who wanted their districts’ school aid kept whole. And all this unfolded as the state grappled with a projected shortfall of as much as $1.2 billion and neighboring Kansas’s recent tax-cut disaster continued to play out just to Nebraska’s south.

A compromise finally emerged from committee that included triggered personal and corporate income tax rate cuts and bracket consolidation, a small increase in the state Earned Income Tax Credit (EITC), and a phase-down of the personal exemption credit. But amendments and objections came flooding in immediately, and it became clear during the first round of debate that the bill had not succeeded in pleasing all these diverse factions. The bill had a little something for each faction, but retained the key flaws. ITEP microsimulation model analyses showed that more than half (54 percent) of the tax cut for Nebraska residents would go to highest-income 5 percent of Nebraskans. Additionally, much of the benefit from would have flown out of state, it still relied on “triggers” meant to obscure the true budgetary cost, and it shifted around property taxes without significantly reducing them for very many Nebraskans, all while undermining the revenue sources that could be used to actually reduce property taxes in the future.

The bill was ultimately rejected Tuesday, falling several votes short of the threshold needed to overcome its opponents.

The Apple corporation made waves earlier this week with its disclosure that its worldwide cash now exceeds $250 billion.  Less noticed was a separate disclosure on Wednesday that the company’s offshore cash now exceeds $239 billion, meaning that more than 93 percent of the company’s cash is now held—at least on paper—abroad. This represents an increase of $9.4 billion in the past three months, sending a clear signal that the company continues funneling money offshore to avoid U.S. taxes on a scale unmatched by any other U.S. company.

Taken on its own, holding cash abroad isn’t inherently bad behavior for a U.S. multinational engaged in business worldwide. But virtually everyone except Apple CEO Tim Cook now recognizes that in Apple’s case, the firm’s mountain of offshore cash reflects not the normal workings of a worldwide enterprise but a brazen effort to hide U.S. and European profits from the reach of the tax man. Back in 2013, the U.S. Senate’s Permanent Subcommittee on Investigation (PSI) made a careful and convincing case that Apple had used loopholes in the tax laws to make legal, but ethically reprehensible, “cost-sharing agreements” with its insubstantial Irish subsidiaries that allowed the company to avoid paying tens of billions of dollars in income taxes. Then, last fall, the European Commission (EU) ruled that Apple has used its Irish subsidiary for an elaborate profit shifting scheme that was not only unethical but downright illegal.

But you don’t need a lengthy investigation to know that Apple is dodging taxes offshore: the company’s annual report tells us so. The disclosures in the company’s latest 10-K reveal that Apple has paid a total foreign tax rate of less than 4 percent on its offshore cash. This means its unpaid U.S. tax bill on this cash is a whopping $75 billion.

It’s in this context that policymakers should be evaluating the current plan—supported by Congressional leaders and President Donald Trump—to offer a “tax holiday” for companies holding profits indefinitely offshore. While hundreds of companies hold at least a chunk of the $2.6 trillion plus in U.S. corporate cash that now sits offshore, Apple’s share is by far the biggest, and Apple’s near-zero foreign taxes on these profits mean that Apple would likely be far and away the biggest beneficiary from a low-rate holiday on offshore profits. Which means that the biggest winner from the proposed tax holiday is a company that has been on an illicit tax holiday of its own making for years.

The question isn’t whether Apple has played U.S. policymakers like a piano so far: it has. CEO Tim Cook has used his considerable PR skills to portray Apple as a helpless victim of a rampant corporate tax law, while insisting that the findings of the PSI and the EU are “total political crap.” But he has offered no evidence to counter these tax avoidance claims.

The real question is whether Congress will continue to be duped. Instead of offering a new tax holiday, Congress could easily make Apple pay its taxes. It could require Apple (and other companies shifting their intangible profits from the U.S. to foreign tax havens, for that matter) to pay their fair share by ending deferral of tax on offshore profits. This would give an immediate shot in the arm to U.S. tax collections, and it would help counteract the corrosive public fear that tax rules are written for and by powerful corporate interests.  If, instead, Congress instead follows President Trump’s recommendation and rewards Apple’s bad behavior with billions of dollars in new tax breaks, the public’s trust in our political leaders will be further eroded—and our leaders will deserve it. 

This week, Kansas lawmakers found that they’ll have to roll back Gov. Brownback’s tax cuts and then some to adequately fund state needs. Nebraska legislators took notice of their southern neighbors’ predicament and rejected a major tax cut. Both Hawaii and Montana‘s legislatures sent new state EITCs to their governors, and West Virginia began an uncertain special session as other tax debates also continued around the country.

— Meg Wiehe, ITEP Deputy Director, @megwiehe

• Efforts to slash taxes in Nebraska using a “trigger” mechanism have been defeated for the year after a bill failed to come close to overcoming a filibuster Tuesday. The bill, favored by Gov. Pete Ricketts and Revenue Committee Chair Jim Smith, would have primarily benefited high-income Nebraskans, worsened the state’s projected budget shortfall, and could have triggered tax cuts in economic hard times. Lawmakers turn to the budget today.
• Back from spring recess, Kansas lawmakers are working to find tax reform solutions that raise enough revenue to close budgetary shortfalls and meet constitutional requirements to adequately fund public education, all while receiving the necessary legislative votes to override a gubernatorial veto.
• Big news out of Hawaii this week: both the Senate and House voted to pass HB 209 yesterday. The bill, which would make permanent the top personal income tax brackets and rates on high-income earners and create a 20 percent nonrefundable Earned Income Tax Credit (EITC), now heads to the governor.
• Under a bipartisan effort, lawmakers in Montana have also passed a bill creating a state Earned Income Tax Credit (EITC) that would be 3 percent of the federal credit (and refundable). The governor is expected to sign the bill.
• Tomorrow marks the first day of West Virginia‘s special session. Yet, uncertainty remains regarding how the divided leadership will come to a budget and tax resolution.
• Despite a tight budget this year and ever present concerns about property taxes in the state, the Texas House has voted to phase out its franchise tax, which is currently one of three major revenue sources in the state. The approved House bill now makes its way to the Senate, which passed a similar elimination bill earlier this session.
• In a renewed effort to shore up funds, a hiring freeze on almost all state agencies went into effect this week in Wyoming. Lawmakers’ opposition to tax increases has left them with limited options for dealing with declining oil prices.
• Florida‘s legislative session is nearly complete. Most of Gov. Rick Scott’s proposed tax cuts have been ignored this year, but the latest package in the House still amounted to nearly $300 million in cuts, and the Senate is expected to approve about $142 million. A bill did pass to send an expansion of the state’s homestead exemption to voters in November 2018, which would cut property taxes and would sap an estimated $750 million of funding for local services that rely on property tax revenue and shift taxes onto businesses.
• A Wisconsin lawmaker is expected to release details soon for a plan that likely proposes to garner more funding for infrastructure investments by raising the gas tax and cutting the income tax through switching to a flat tax structure. Gas tax swaps like this have become increasingly popular, but all suffer from the same problem of boosting infrastructure funding at the expense of core public services like education and public health.
• In Oklahoma, a bill to raise the state’s cigarette and fuel taxes moves forward. If advanced, the bill would increase the cigarette tax rate by $1.50 per pack and the gasoline and diesel fuel by $0.06 per gallon. However, the Senate also passed a bill to reduce road funding in hopes that the fuel tax increase will fill the gap.
• The Seattle City Council has passed a resolution expressing intent to pursue a local income tax. Under a coalition’s proposal, adjusted gross income in excess of $250,000 would be taxed at 1.5 percent. In addition to shoring up the finances of Seattle, the income tax would provide a test legal case for the constitutionality of an income tax in the state of Washington.
• A proposal to tax sugary drinks in Santa Fe, New Mexico failed at the ballot yesterday.

What We’re Reading…  

• A new report from the California Budget & Policy Center explains the importance of raising awareness of the state’s Earned Income Tax Credit (EITC). The credit has been available since 2015.
• A new working paper from Columbia University law professor David Schizer explores the benefits of taxing both corporations and their shareholders, though in a coordinated fashion.

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. 

The Foreign Account Tax Compliance Act – or FATCA – is a financial disclosure and transparency law designed to crack down on international tax evasion by U.S. taxpayers who hold financial assets offshore. This law, passed in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, provides the Internal Revenue Service (IRS) with the information necessary to ensure that every U.S. taxpayer is tax compliant.

Despite – or perhaps because of – its important role in combating international income tax evasion, FATCA continues to have outspoken critics. The ongoing effort to repeal FATCA took one step forward this past Wednesday, when the House Oversight Committee’s Subcommittee on Government Operations held a hearing to “Review the Unintended Consequences of the Foreign Account Transparency Act.”

The forum could have been an opportunity to spur reasoned debate to address some of the issues raised by FATCA. Instead, Subcommittee Chair Rep. Mark Meadows (R-NC), who recently introduced a bill to repeal FATCA alongside long-time anti-FATCA champion Sen. Rand Paul (R-KY), used the hearing as an opportunity to cherry-pick extreme examples of FATCA’s (admittedly bumpy) implementation and rail against FATCA’s necessary disclosure of financial information to invalidate the entire law.

Despite what Rep. Meadows and Sen. Paul would like us to believe, FATCA is a critical and effective anti-tax evasion law.  It wasn’t created with the desire to rake through U.S. taxpayers’ financial data. FATCA was passed in the context of overwhelming evidence that certain U.S. taxpayers were taking advantage of the intricacies of the global financial system to hide assets offshore. For example, in 2009, 52,000 American-held accounts totaling over $14.8 billion in previously undisclosed assets were discovered at the Swiss bank UBS. And this is just one example at one bank – it is estimated that the United States loses $40 to $70 billion in revenue annually due to individual income tax evasion.

FATCA helps to close the gap between the revenue the U.S. government should collect and what it actually brings in by aggregating account information from both U.S. accountholders and their foreign financial institutions (FFIs). The IRS can then match what each individual reports against the information supplied by their FFI to identify misreported and unreported income. According to the IRS, sources of income that are not subject to either third-party-reporting or withholding are misreported at a 56% higher rate than sources that are subject to additional reporting and withholding. Matching statements of income provided by taxpayers against third-party sources is a common U.S. practice; it’s how the IRS identifies misreported information from wage (through your W-2) and investment income (through the 1099 series) each year.

When the HIRE act was first proposed, the Joint Committee on Taxation estimated that FATCA would raise approximately $8.7 billion over the next decade. While it’s difficult to measure how much FATCA has raised to date, the IRS recently reported that over 100,000 individuals have voluntarily come back into tax compliance through its voluntary disclosure program, resulting in approximately $10 billion in recouped taxes, interest, and penalties. Many have attributed this influx of voluntary compliance to taxpayers’ realization that FATCA increases their likelihood of detection if they misreport their worldwide income.

FATCA is designed to ensure that every American taxpayer is paying the correct amount of tax. Repealing FATCA would be a serious step in the wrong direction. Without a new law to take its place – which no one advocating for repeal has proposed – repeal would return us to the pre-FATCA status quo of having no meaningful way to crack down on international income tax evasion. This isn’t fair to law-abiding citizens who eventually end up picking up the tab when revenue is hidden overseas.

We should instead focus our energy on thoroughly vetting and advancing reform proposals – such as Sen. Sheldon Whitehouse & Rep. Lloyd Doggett’s “Stop Tax Haven Abuse Act” – that serve to improve and strengthen FATCA, rather than simply striking this important disclosure law from our books.

For more information on FATCA and how the law works to crack down on international tax evasion, ITEP has published a FATCA policy brief Foreign Account Tax Compliance Act (FATCA): A Critical Anti-Tax Evasion Tool and a one page FATCA fact sheet.

Three of the biggest needs facing state policymakers right now are new revenues to fund their priorities in the face of budget shortfalls and federal funding cuts, ways to insulate those revenue streams from unpredictable tax changes at the federal level, and approaches to meet these needs without leaning even more heavily on low- and middle-income families for revenue than they already do. As our newly updated brief shows, the six states that still allow an income tax deduction for federal income taxes paid can advance all three of these important goals. Lawmakers in Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon should strongly consider repealing this costly, regressive, and volatile tax break.

As our brief outlines, these six states collectively will lose about $3.8 billion in revenue in 2017 due to this deduction. In three of the states—Alabama, Iowa, and Louisiana—the deduction is unlimited, allowing every dollar paid in federal income taxes to be deducted from income for state tax purposes. In the other three states, caps or phase-downs limit how much any one taxpayer can take advantage of the tax break. Not surprisingly, the three states without any limits on the deduction lose the most revenue ($2.7 billion combined). Those three states also give more of the break to their highest-income taxpayers than the states that limit it, with around 80 percent of the benefit going to the highest-income 20 percent of residents, though high-income families receive an outsized share of the benefit in every state that allows the deduction.

Some of these states are wisely taking notice and working to address these issues. In Louisiana, Gov. John Bel Edwards, a legislative tax study task force, and the state’s leading tax policy experts have all called for eliminating the deduction. In Iowa, although no major tax changes were ultimately approved this year, the deduction was targeted there as well. And repealing the deduction has also been considered in Alabama as a way of offsetting the revenue loss that would occur if the state repeals its tax on groceries.

With federal tax and budget debates heating up and rampant uncertainty about where those debates may lead, these six states have a clear opportunity to bring in needed revenue, protect that revenue from the whims of Congress, and advance tax fairness at the same time.