Author: tarek

While Congress’s attention has been riveted on the saga of a handful of corporations making high-profile attempts to invert to foreign countries, Microsoft’s recent announcement that it’s holding a staggering $92.9 billion offshore is a stark reminder of the far more consequential tax avoidance practiced by Fortune 500 companies that remain based in the United States.

Microsoft admits in its annual financial report that it would owe $29.6 billion if it paid taxes on the cash it’s stashing offshore. In the past year, Microsoft moved $16 billion offshore, which is more than the total amount the much-maligned inverter Medtronic currently holds abroad. Only General Electric and Apple disclose having more offshore cash than Microsoft.

Even more important, the company’s annual report essentially admits that the vast majority of its offshore profits are being held (at least on paper) in jurisdictions with tax rates very close to zero. Microsoft estimates that if these profits were brought back to the United States, it would pay an effective tax rate of just under 32 percent. Since the U.S. tax on repatriated profits is 35 percent minus any taxes previously paid to foreign jurisdictions, this suggests that the company has paid an overall tax rate of about 3 percent on these profits to date.  

While the company is required to disclose all its “significant” foreign subsidiaries, none of the 12 subsidiaries the company now discloses are in places with 3 percent tax rates. As the Wall Street Journal reported last year, Microsoft used to disclose “more than 100” subsidiaries. Academic research suggests that in at least some cases, large multinationals that disclose fewer subsidiaries are doing so not because the subsidiaries no longer exist, but because they don’t want to disclose them.

As we have recently noted, companies know they can get away with this because of a loose accounting rule that only requires they disclose “significant” subsidiaries. It’s within the power of Congress and federal regulators to require big multinationals to disclose all of their foreign subsidiaries—including the beach tax haven subsidiaries that tech companies have found so helpful in shifting their U.S. profits abroad.

The wall-to-wall media coverage that has been lavished on corporate tax inversions has shed welcome light on the topic of offshore income shifting, and Walgreen’s recent decision to at least postpone its inversion suggests that this attention has had a positive effect. But for every company currently contemplating an inversion, there are 10 major multinationals that continue shifting their profits offshore the old-fashioned way. Congress shouldn’t lose sight of this broader, worrisome trend.

Yesterday voters in Missouri soundly defeated Amendment 7, a ballot measure that would have raised the sales tax by three-fourths of a cent to fund transportation needs.

Sales taxes are largely regressive, capturing a larger share of income from the poor than from more affluent people. The move to temporarily raise the state sales tax to pay for roads and bridges comes just months after the state legislature overrode Gov. Jay Nixon’s veto and passed income tax cuts that overwhelmingly benefit high-income taxpayers.

The vote defeating the sales tax increase sends a message to lawmakers to go back to the drawing board in terms of finding ways to pay for needed infrastructure. Lawmakers projected the new sales tax to generate $5.4 billion over ten years for transportation projects across the state. Now that the sales tax hike has been defeated critical work won’t begin on the more than 800 projects the Missouri Department of Transportation identified as “critical safety improvements.”

In what has been called “a study in bad behavior” the fact that lawmakers put a tax hike before the voters after just passing income tax cuts boggles the mind. Lawmakers in Jefferson City recently approved mammoth income tax cuts that overwhelmingly benefit high income taxpayers, yet seemed to have few qualms about asking voters to support a regressive sales tax hike that would have actually raised taxes on low income families. The income tax cuts that were contentiously passed this year included a drop in the top income tax rate and a new deduction for business income. ITEP found that under this legislation the poorest 20 percent of Missourians will see a tax cut averaging just $6, while the top one percent of families will enjoy an average tax cut of $7,792 once the cuts are fully phased in.

Lawmakers clearly see the need for increased transportation funding–why put a sales tax on the ballot if that isn’t so–but they arguably wouldn’t need to raise $500 million in new sales tax revenue if they hadn’t just cut an even larger amount of income tax revenue.

Lawmakers’ procrastination on this issue is the root cause of Missouri’s transportation funding shortfall. The state’s has raised it current 17-cent gas tax in 18 years, and it isn’t generating the revenue necessary to keep up with demands on Missouri’s infrastructure. If lawmakers don’t act, ITEP estimates that Missouri’s gas tax rate will reach an all-time inflation-adjusted low by 2020. In 2011, ITEP found the state’s gas tax rate would need to be increased by 9.6 cents just to return its purchasing power to the level it had when it was last raised back in 1996. Right now, Missouri’s gas tax is lower than the tax in all of its neighboring state except Oklahoma. Increasing and indexing the gas tax is a better solution for Missouri’s transportation woes because fuel taxes are a very good proxy for the wear and tear vehicles put on the road. However, the gas tax would also have a worrying impact on tax fairness that can be overcome by introducing a targeted low-income tax credit.

Given the defeat of Amendment 7 what’s to happen to Missouri’s crumbling infrastructure? Transportation commissioners are set to meet to discuss next steps. Let’s hope Missouri lawmakers also regroup and look toward other funding alternatives. Surely it’s not too much to ask that Missourians have safe bridges and quality roads that are paid for in fair and sustainable ways.

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Illinois.

The outcome of the Governor’s race in Illinois will have major  and immediate implications on the state’s ability to provide adequate funding for education, health care, transportation and other important services.  The context for this heated race is especially important. The state currently has one of the nation’s most regressive tax systems, applying the same income tax rate to minimum wage workers and millionaires. To make matters even worse, the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in January leaving the state with a $2 billion budget gap.

This year Illinois lawmakers adjourned without making the temporary income tax rate hike permanent.  The legislature also failed to enact legislation that would have allowed Illinois voters to weigh in on a ballot question in November that would amend the state’s constitution to allow a graduated income tax.  Yet, the budget passed assumes the higher 5 percent rate is allowed to continue and leads Illinois down the path of deeper program cuts if lawmakers cannot agree  to increase the rate by the end of the year.  It’s largely agreed that the budget Governor Pat Quinn signed into law was the equivalent of “kicking the can down the road” and that election year politics got in the way, with lawmakers not wanting to cast tough votes in favor of maintaining current tax rates ahead of November.   According to the Fiscal Policy Center at Voices for Illinois Children, the budget was also balanced “by borrowing and by underfunding existing obligations, which will further add to the state’s backlog of unpaid bills.”

Given this backdrop the choice between Governor Quinn and businessman Bruce Rauner couldn’t be more stark. Quinn has said that he supports making the temporary 5 percent income tax rate hike permanent. In his 2014 budget address he stressed the harm that will come if the income tax rate is allowed to expire and new revenue isn’t raised, “mass teacher layoffs, larger class sizes and higher property taxes.” Quinn has gone beyond saying that the income tax rate should be 5 percent-  he’s also been a long-time supporter of a graduated income tax.

Rauner initially proposed allowing the temporary income tax hike to immediately expire, but he changed his position once the reality set in that as governor he would need to fill the $2 billion hole created in the budget once the rate hike expired. More recently Rauner has said that he will allow the temporary tax increase to expire over four years and will keep property taxes at their current level. Rauner would make up $600 million of lost income tax revenue by broadening the sales tax base to include many business services like advertising, printing and attorney fees. Sales tax base broadening makes good sense in terms of modernizing a state’s tax structure and making it more sustainable over the long term. But Rauner’s plan is regressive and taxing business to business services is problematic. For more on applying the sales tax to services, read this ITEP brief. Stay tuned. This gubernatorial race is one to watch.

Some will rob you with a six-gun,
And some with a fountain pen.
Woody Guthrie, “Pretty Boy Floyd” (1939)

Short of cash, you decide to rob a bank at gunpoint. But on your way out the door, the cops arrest you. You say, “Sorry about all this. I’d sure appreciate it though if you let me keep the money.” Fat chance.

But for big multinational corporations that are caught stealing from the U.S. Treasury, letting them keep the money seems to be exactly what Republicans in Congress favor.

Case in point involves the recent wave of American corporations renouncing their U.S. citizenship, on paper, to avoid billions of dollars in taxes. Almost everybody says they agree that this sleight of hand has to be stopped. But Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, says he’ll support closing this huge new corporate loophole only if the result is “revenue-neutral.” In other words, only if the big corporations get to keep the money.

Hatch is not an outlier. In fact, his screwball position reflects the general view of his party in Congress. Republicans in both the House and Senate are blocking legislative action to stop corporate foreign “inversions” unless the needed reforms are accompanied by a reduction in the statutory corporate tax rate.

“As through this world I’ve wandered,” sang Woody Guthrie, “I’ve seen lots of funny men.” Unfortunately, too many Washington politicians don’t want to make the corporate “funny men” play by the same rules as real people.

In another defection from the corporate income tax base, last Tuesday Windstream Holdings, Inc. announced that it will be spinning off part of its telecommunications assets into a Real Estate Investment Trust (REIT) after it recently received a Private Letter Ruling (PLR) from the IRS approving the transaction. The company, whose 5-year effective federal income tax rate for 2008-2012 was already a paltry 11 percent, will be able to lower its tax rate even more through use of the REIT.

A REIT is to real estate what a mutual fund is to stock and bonds: a way for smaller investors to diversify their holdings by owning a share of a large pool of assets rather than owning individual stocks or properties directly. A REIT, just like a mutual fund, doesn’t pay an entity-level tax. Instead it distributes its income to the REIT shareholders who pay tax on their respective shares.

REIT rules were added to the tax code in 1960 so small investors could invest in pools of real estate (or mortgages on real estate). To qualify as a REIT, the trust must have at least 100 shareholders. Seventy-five percent or more of the REIT’s assets must be related to real estate: real property or mortgages on real property. Traditional REITs hold property such as office buildings, warehouses, and shopping centers. Another requirement for REIT tax status is that at least 75 percent of the REIT’s income must be from real estate (such as rents or interest on mortgages).

Windstream Holdings is a Fortune 500 company that, according to its website, “is a leading provider of advanced network communications, including cloud computing and managed services, to businesses,” and offers “broadband, phone and digital TV services to consumers.”

It shouldn’t qualify as a REIT. As Windstream itself said, the company is putting its copper and fiber networks into the REIT along with “other” real estate. The Internal Revenue Service opened this can of worms with PLRs allowing wireless communications companies, billboard owners, data centers, and prisons to elect REIT status. Casinos, too. Prison operators argued they were receiving rent for holding prisoners.

Is Windstream in the business of providing communications services or owning and managing real estate? Is Corrections Corporation in the business of operating prisons or holding real property? Are casino operators in the business of real estate or emptying your wallet? The answers seems pretty clear to me.

We don’t need these companies to spin off their “real estate” assets so small investors can own a piece. These companies are already publicly traded and investors can buy stock or mutual funds that hold the stock.

Many states are losing tax revenue. First, unlike corporate dividends, there’s no corporate income tax paid first. Then, after the REIT pays dividends to its shareholders, they pay tax to their resident state, say, New York, rather than in the state where the properties are located, say, prisons in Mississippi. Companies are also using REIT subsidiaries to dodge state-level income taxes. Mega-retailer Wal-Mart was assessed $33 million in 2005 by North Carolina related to its use of a 99-percent owned “captive” REIT (executives owned the other 1 percent to reach 100 shareholders); its REIT strategy cut its state income taxes by 20 percent during a four-year period.

The initial motivation behind enacting special tax treatment for REITs might have made sense. But give someone a tax break and other folks, for whom it was not intended, will try to figure out how to use it. This is why we continually argue in favor of a simple, broad-based tax system that has few exceptions. Limit the exemptions, credits, and other special rules and you limit the opportunities for taxpayers to game the system. Until we have a tax system that works like that, Congress should close as many of the loopholes as it can. This is one of them.

The Windstream ruling opens the floodgates for REIT spin-offs for all kinds of companies, from Amazon to Zynga, with AT&T, Comcast, and Verizon in between.  Congress should enact rules to prohibit REIT spin-offs from publicly-traded companies and limit the favorable REIT treatment to the types of activities it was originally intended to benefit.

Following is a statement by Robert McIntyre, director of Citizens for Tax Justice, regarding emerging reports that Walgreen Co. will announce Wednesday that, although it still plans to buy Switzerland-based Alliance Boots, it will not use legal maneuvers to reincorporate as a Swiss company to avoid U.S. taxes.

“Reports are stating that Walgreen Co. has decided to set aside — for now — plans to avoid U.S. taxes by reincorporating as a foreign company. Only the proverbial fly on the boardroom wall truly knows what led the company to reach this decision. But a single company backing off plans to exploit loopholes in our tax code to dodge U.S. taxes does not fix the fundamental problem.

“Congress and the Obama Administration still need to act quickly because many other American corporations such as Medtronic, AbbVie and Mylan are still pursuing corporate inversions, while other major companies such as Pfizer have indicated that they may pursue inversion in the near future.

“Walgreens is a quintessentially American company and an easy scapegoat. But the company’s initial plans to dodge U.S. taxes were merely a symptom of a larger problem. The loopholes in our tax code are so gaping that corporations can simply fill out some papers and declare themselves foreign companies that are mostly not subject to U.S. taxes.

“Congress needs to, at very least, enact the legislation proposed by Sen. Carl Levin and Rep. Sander Levin that would disregard, for tax purposes, attempts by American corporations to claim a foreign status that only exists on paper.

“Refusing to address inversions except as part of comprehensive tax reform would be like refusing to put out a house fire until there is a detailed blueprint for rebuilding the house. Quick action is needed while there is still something to save.”  

Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Michigan.

The gubernatorial race in Michigan pits incumbent Rick Snyder (R), a businessman who won election four years ago as a technocratic outsider, against challenger Mark Schauer (D), a former congressman from Battle Creek. Taxes are a contentious campaign issue – the governor and Republican legislature passed a tax package in 2011 that decreased business taxes and increased taxes on seniors and working families, and Schauer has vowed to repeal the increases. Since enacting his tax plan, Gov. Snyder has sought to move to the middle, alienating some of his more conservative supporters in the process.

The race is a dead-heat. A recent poll for NBC News found registered voters backing Snyder 46 percent to Schauer’s 44 percent, with 9 percent undecided. While the incumbent is still favored to win and will likely outspend his challenger, Gov. Snyder is in a tough spot; no poll shows him with the support of 50 or more percent of voters, and Schauer continues to gain on Snyder despite the governor’s improved job performance ratings.

Gov. Snyder’s 2011 tax-cut bill was the largest Michigan had seen in 17 years. The package eliminated the Michigan Business Tax, enacted in 2008, and replaced it with a 6 percent corporate income tax. The tax cut, estimated at $1.65 billion, benefited 100,000 Michigan businesses. To help pay for the cut, Snyder and Republican legislators increased taxes on pensioners (by eliminating the pension tax exemption for those born after 1952), middle-income families (by eliminating the Homestead Property Tax Credit for those making over $50,000 and the $600-per-child tax credit), and working families (by reducing Michigan’s Earned Income Tax Credit from 20 percent to 6 percent of the federal credit.) The net result left a $220 million hole in state revenues.

Gov. Snyder remains a traditional business-establishment Republican, but he angered state Republicans by embracing the ACA’s Medicaid expansion and Common Core, and has attempted to triangulate to shore up his reelection prospects. His proposed 2014 budget retroactively restored the Homestead Property Tax Credit for those in the $50,000 to $60,000 income range, increased education funding for K-12 and higher education, and increased state aid to local governments. Critics derided the budget as an election-year stunt that didn’t reverse the damage of his earlier tax cut, or offer relief to pensioners burdened with higher taxes.

Schauer, a former one-term congressman from Battle Creek, has forged a progressive campaign built on repealing Snyder’s 2011 tax package – nixing the tax increases on pensions, restoring the cuts to the Earned Income Tax Credit and Homestead Property Tax Credit, and bringing back the child tax credit. He also pledged to increase education and road funding and enact other measures designed to support women and working families, such as paid sick leave and increased unemployment benefits. However, he has offered few ways to pay for these proposals other than ending tax breaks for companies that outsource Michigan jobs and eliminating “wasteful spending.” He also does not want to increase the corporate income tax. The coming months will determine if he can convert his recent momentum into a lasting advantage, as no poll has shown him leading the governor.

One issue that has put Snyder and Schauer on unlikely sides of the usual partisan divide is transportation funding. Gov. Snyder has been a high-profile proponent of raising the gas tax and increasing automobile fees to fund roads and transit projects, though his proposals have not gained much traction. Schauer has flatly said he doesn’t support a hike in the gas tax, saying that he instead would insist on getting Michigan’s fair share of federal gas tax revenues and impose a higher fee on heavy commercial trucks. 

Everyone loves a bargain, so it’s no surprise that sales tax holidays are hugely popular in the 17 states hold them.

Over the past few weekends, 13 states temporarily suspended their sales tax, and four more will do so in the coming weeks.  Most state sales tax holidays will coincide with back to school season, but a subset of these 16 states also hold separate sales tax holidays to help consumers save on purchases tied to hurricane and hunting season. State lawmakers reap public relations benefits from these “holidays”, and media tend to cover them favorably.

But taxpayers should look beyond political talking points, long lines and bargains. The truth about sales tax holidays is that they are a costly gimmick. While they may provide taxpayers some savings on necessary purchases, they are a distraction from the bigger picture problem with regressive state tax systems.

Virtually every state’s tax system takes a much greater share of income from middle- and low-income families than from wealthy families. Nationwide, the poorest 20 percent of households pay more than 11 percent of their income in state and local taxes on average, compared to just 5.6 percent for the top 1 percent. States’ heavy reliance on sales taxes exacerbates this problem.

In theory, sales tax holidays should help mitigate this problem. But temporary reprieves from taxes on back to school items aren’t well targeted. In fact, temporarily suspending sales taxes often benefits wealthy families more than low- to moderate-income families.  Better-off families are positioned to time their big purchases to occur during sales tax holidays–a luxury that often isn’t available to folks living paycheck to paycheck. One recent study found that households earning more than $30,000 per year are more likely to shift the timing of their clothing purchases to coincide with sales tax holidays than lower-income households. Further, low-income seniors and families without children who have no need to purchase “back to school” items get nothing from sales tax holidays.

Another problem is sales tax holidays often apply to an arbitrary assortment of items that may have more to do with lobbying power than consumer needs.  Maryland, for example, continues to tax wedding veils, but it exempts bridal gowns and tuxedos during its sales tax holiday.  Diapers are also exempt, but don’t expect to buy any diaper bags or receiving blankets tax-free. In New Mexico, ice skates are taxed, but not ski boots; chalkboards are taxed, but not chalk or erasers.  In Texas, golf cleats and football pads are taxed but not swim suits or tennis shoes.

Sales tax holidays will collectively cost states more than $300 million this year. This is money states can ill afford to lose. The revenue lost through sales tax holidays will ultimately have to be made up somewhere else, either through spending cuts or increasing other taxes.

Instead of expending resources planning, promoting and implementing sales tax holidays, policymakers would do better to focus on long-term solutions with real benefits for working families.  They could implement policies such as sales tax credits for low-income taxpayers, expand or implement a state earned income tax credit, or permanently reduce sales taxes rates and shift toward a progressive personal income tax.

If lawmakers really want to help families’ bottom lines, they should look to these more thoughtful and permanent reforms.

The current wave of inversions may be motivated by tax avoidance, but the real driver behind the deals is Wall Street. Advisers of every sort—investment bankers, attorneys, accountants, private equity and hedge fund managers—are pushing companies to do a corporate inversion before Congress shuts down this loophole. It’s the latest mania from the folks who gave us the dot-com bubble and toxic sub-prime mortgages. 

What’s in it for them? Well, the advisers who facilitate the deals are raking in hundreds of millions of dollars in fees. In all, investment bankers have earned about $1 billion over the last three years on inversion transactions. Goldman Sachs, which is part of a shareholder group including private equity and hedge funds that is pressuring Walgreens to invert, has earned an estimated $203 million advising on inversion deals since 2011.

Major shareholders, too, like inversions for the prospect of increased long-term profits from avoiding tax, but that comes with a cost. The inversion transaction is treated as a taxable sale of the stock, resulting in capital gains taxes of 20 percent. Tax applies to executive stock options, too, through a 20 percent excise tax imposed on insiders that was enacted with the other anti-inversion rules in 2004. In most cases, though, the company executives are being reimbursed for the tax hit, so they feel no pain. It’s the small investors and the mutual funds that will be stuck with a tax bill and no cash to pay it.

So the Masters of the Universe make out again, like the bandits they are, while the rest of American taxpayers make up the loss to the U.S. Treasury through higher taxes, reduced public goods and services, or increased government debt.

To stop inversions Congress will have to stand up to both the multinational corporations that are pursuing these deals and the Wall Street firms that are advising them. What are the odds?

The idea that tax cuts pay for themselves repeatedly has proven to be nonsense, perhaps most spectacularly when President George W. Bush’s own Treasury Department concluded that his enormous tax cuts did not produce anywhere near enough economic growth to recoup their costs. Yet this repeatedly disproven supply-side economics theory pushed by fringe economist Arthur Laffer and others is alive and well and was most recently promoted at a Ways and Means subcommittee hearing on July 30.

Supply-side economics suggests that by allowing people to keep more of their income, tax cuts encourage people to supply more capital and labor. This supposedly generates such increases in income and profits that the resulting boost in tax revenue will partly cancel out or even exceed revenue loss from the tax cut.

Proponents of tax cuts and supply-side economics have for years called on the Joint Committee on Taxation (JCT), the official revenue-estimators for Congress, to use a method called dynamic scoring to take into account these supply-side effects that allegedly reduce the cost of tax cuts or even result in a revenue increase.

But given the utter uncertainty about these macroeconomic impacts, it is entirely reasonable that they are left out of official revenue scores that Congress and the public must rely on to understand the effects of tax legislation.

Nonetheless, supply-siders and their elected allies twisted JCT’s arm into providing dynamic scoring for the tax reform plan introduced in February by House Ways and Means Chairman David Camp, and this analysis was the focus of last week’s hearing.

JCT found that the macroeconomic growth effects of Camp’s plan would increase revenue “by $50 to $700 billion, depending on which modeling assumptions are used,” over a decade. (CTJ found that while the Camp plan would be revenue-neutral in the first decade, it would lose $1.7 trillion in the following decade, a hole that no dynamic analysis can fix.)

Scott Hodge of the Tax Foundation, a hearing witness, argued that the macroeconomic benefits would have been greater if the Camp plan included more tax breaks. For example, he argued that revenue would actually be higher under the Camp plan if it made permanent the recently expired 50 percent expensing for investment (often called bonus depreciation), as the House of Representatives voted to do with a stand-alone bill in July. CTJ has explained why this tax break, which was projected by JCT to cost $276 billion over a decade, is unlikely to have any economic benefit at all.

The Problem with Dynamic Scoring

Supply-side economists sometimes claim that JCT provides only “static” analysis that ignores behavioral effects entirely, which is not actually true. For example, when JCT estimates the effects of a higher income tax rate on capital gains (profits from selling assets for more than they cost to purchase), it does account for behavioral effects by assuming that some people will want to avoid this tax increase by selling fewer assets. This will reduce the revenue increase that would otherwise result. (A CTJ report goes into great detail about the debate over these assumptions.)

What JCT usually does not take into account are impacts that tax legislation might have on the whole economy (macroeconomic impacts) because these are usually small and always impossible to predict. In fact, economists can’t even agree on the direction of such impacts. For example, a lower tax rate could in theory encourage people to work more because they’re able to keep more of what they earn, but it could also encourage people to work less because they don’t have to work as much to reach whatever earnings goals they’ve set for themselves. In other words, a tax cut could cause the economy to expand or contract.

Yet another problem with dynamic scoring is that its proponents never want to apply the same logic to spending. If tax cuts boost the economy enough to offset part of their costs, then surely the same could be true for public investments such as education and infrastructure, which everyone agrees boost the economy. But don’t expect Arthur Laffer or Dave Camp to be making that argument any time soon.