Author: tarek

On the heels of state Earned Income Tax Credit (EITC) expansions in Iowa, Maryland, and Minnesota and heated debates in Illinois and Ohio about their own credit expansions,  the Institute on Taxation and Economic Policy released a new report today, Improving Tax Fairness with a State Earned Income Tax Credit, which shows that expanding or enacting a refundable state EITC is one of the most effective and targeted ways for states to improve tax fairness.

It comes as no surprise to working families that most state’s tax systems are fundamentally unfair.  In fact, most low- and middle-income workers pay more of their income in state and local taxes than the highest income earners. Across the country, the lowest 20 percent of taxpayers pay an average effective state and local tax rate of 11.1 percent, nearly double the 5.6 percent tax rate paid by the top 1 percent of taxpayers.  But taxpayers don’t have to accept this fundamental unfairness and should look to the EITC.

Twenty-five states and the District of Columbia already have some version of a state EITC. Most state EITCs are based on some percentage of the federal EITC. The federal EITC was introduced in 1975 and provides targeted tax reductions to low-income workers to reward work and boost income. By all accounts, the federal EITC has been wildly successful, increasing workforce participation and helping 6.5 million Americans escape poverty in 2012, including 3.3 million children.

As discussed in the ITEP report, state lawmakers can take immediate steps to address the inherent unfairness of their tax code by introducing or expanding a refundable state EITC. For states without an EITC the first step should be to enact this important credit. The report recommends that if states currently have a non-refundable EITC, they should work to pass legislation to make the EITC refundable so that the EITC can work to offset all taxes paid by low income families. Advocates and lawmakers in states with EITCs should look to this report to understand how increasing the current percentage of their credit could help more families.

While it does cost revenue to expand or create a state EITC, such revenue could be raised by repealing tax breaks that benefit the wealthy which in turn would also improve the fairness of state tax systems.

Read the full report

Two years ago as part of the fiscal cliff deal, members of Congress sensibly allowed a subset of the Bush tax cuts for the wealthy to expire, including an increase in taxes on capital gains. Many wealthy investors, who have the benefit of tax advisors, chose to sell stocks in 2012 rather than wait for potentially higher federal income tax rates in 2013. The result was a boost in federal and state income tax collections in fiscal year 2013.

To be clear, the fiscal cliff deal’s anticipated tax hikes on the investor class didn’t increase the amount of revenue from capital gains income—it just shifted that income from fiscal year 2014 to fiscal year 2013. This meant that state lawmakers needed to plan for an extra shot of revenue in 2013, and an equivalent amount of missing revenue in 2014.

Most states planned accordingly. In states such as California, this basic budgeting matter hardly caused a ripple: the Golden State experienced a surge in personal income tax revenues in April 2013 and a large decline this year.  But, they saw the decline coming and when the dust cleared, the state actually brought in more money from personal income taxes than expected in April.

A handful of other states, however, didn’t plan as well and are attempting to blame their failed tax policies on the fiscal cliff deal. Kansas is a prime example.

Two years ago, Kansas Gov. Sam Brownback declared that his plan to repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two successive tax cuts that disproportionately benefited the richest Kansans, assuring the public these cuts would pay for themselves. Now he is facing a barrage of criticism over growing evidence that state tax revenues are declining in the wake of these cuts.

The pressure seems to be getting to the Brownback administration: earlier this month, Brownback’s revenue secretary, faced with a 45 percent decline in April tax revenues relative to the same month in 2013, called the month’s revenue slide “an undeniable result of President Obama’s failed economic policies.”

Kansas experienced the same revenue bubble in 2013, and the same trough in 2014, as did California and many other states. The state Department of Revenue’s April 2014 tax report notes that April 2013 revenues “increased dramatically from the previous year, about 53 percent,” due to accelerated capital gains encouraged by the fiscal cliff deal. In that context, the reported 45 percent decline in April 2014 is not only predictable, it sounds like a pretty good deal.

So why is Gov. Brownback’s administration citing this income-tax timing shift as evidence that President Obama’s policies have caused “lower income tax collections and a depressed business environment?” And why are governors in New Jersey and North Carolina making similar claims? In both Kansas and the Tarheel State, the governor is under pressure to defend the affordability of recently enacted income tax cuts.

Pinning the blame for revenue shortfalls on the fiscal cliff deal deflects scrutiny from state tax cuts costing more than advertised. In New Jersey, as the Tax Foundation has noted, Gov. Christie has been accused of using wildly optimistic revenue forecasts as part of his 2013 reelection campaign, and now he has some explaining to do about why his projections were so wrong. Once again, the Obama Administration serves as a convenient scapegoat for poor fiscal management decisions by state leaders.

But the news is not all bad out of Kansas: in a rhetorical flourish that would make North Korea envious, just one month before the Kansas Department of Revenue blamed President Obama for April’s decline in tax revenues, they explained a March increase in tax revenues as evidence that “ [w]e’re seeing the Kansas economic engine running.”

Kansas is, by all accounts, in a real fiscal jam. The ballooning cost of Brownback’s tax cuts and a recent state Supreme Court mandate that Kansas spend additional money on schools has made the task of a balanced budget very difficult for state lawmakers. But if Kansas lawmakers are in a fiscal hole, they need look no further than the state capitol to determine who is wielding a shovel.

Oklahoma voters have had a rough year.  In the span of less than twelve months, their elected officials passed an income tax rate cut that a majority of Oklahomans opposed, saw that cut thrown out by the state’s supreme court for technical reasons, and then watched their elected officials re-pass the cut even though opposition had increased among Oklahoma voters.

The cut gradually lowers the state’s top personal income tax rate from 5.25 to 4.85 percent, and is likely to take full effect in 2018.  Our colleagues at the Institute on Taxation and Economic Policy (ITEP) analyzed the cut, and found that the top fifth of Oklahoma households will receive a whopping 71 percent of the total benefits.  The bottom 60 percent of Oklahomans, by contrast, will see just 9 percent of the benefits.

After being told about the plan’s lopsided distribution, 61 percent of Oklahoma voters polled said they opposed the cut this year—slightly more than the 60 percent share who opposed it the year before.  And even among Oklahomans who were not told any details about the cut, less than half of all voters polled said they currently support it.

The Tulsa World reacted to the re-passing of this regressive and unpopular tax cut by calling it “a bad choice for a state that is desperately short on money for essential services, including schools, roads and public safety,” and by explaining that those public services are more important to the state’s economy than income tax cuts.

That same editorial also shined a bright light on the absurdity of lawmakers opting to yet again prioritize income tax cuts: “we saw no public groundswell to cut taxes this year. On the contrary, a few weeks ago the largest public political demonstration in state Capitol history brought an estimated 25,000 supporters of public schools to Oklahoma City.”

The lack of adequate funding for roads, bridges, and transit has been a major topic of debate in the United States for years.  Anti-tax groups often claim that the problem could be fixed by redirecting education funds toward roads, or by simply cutting “waste” in the transportation budget.  But those arguments just got a lot harder to make in ten states, where our partners at the Institute on Taxation and Economic Policy (ITEP) have discovered that the gas tax has reached its lowest level ever, after adjusting for inflation.

The ten states where the gas tax rate is at an all-time low are Alabama, Alaska, Delaware, Idaho, Iowa, Nebraska, New Jersey, South Carolina, Utah, and Virginia.  As the report explains, it should come as little surprise that many of these states have debated gas tax increases or reforms in recent months, given just how difficult it is to balance a transportation budget with a gas tax that has “hit rock bottom.” 

Having a safe and efficient transportation network costs money.  Given this fact, levying a gas tax rate that’s so low as to be historically unprecedented is doing more harm than good.

Read: Gas Tax Hits Rock Bottom in Ten States

An anti-tax, Republican super majority in the Missouri Legislature claimed victory yesterday in a year-long battle with Gov. Jay Nixon over taxes by voting to override Nixon’s veto of a $620 million income tax cut. This comes one year after Gov. Nixon’s veto was enough to stop a similar measure from becoming law.

The new law, Senate Bill 509, will gradually drop the top income tax rate from 6 to 5.5 percent and create a new tax break for “pass through” business income. Besides blowing a hole in the state’s budget, the tax cut will also make Missouri’s already-unfair tax system even worse: a Missouri Budget Project report, using data from our partners at the Institute on Taxation and Economic Policy (ITEP), found that 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.

Throughout this bruising battle, Missouri lawmakers made it clear that similar income tax cuts enacted by neighboring Kansas in 2012 and 2013 were a motivating factor in dropping Missouri’s tax rates. Clearly these lawmakers did not read news stories last week when Moody’s lowered Kansas’s bond rating due, in part, to the fiscal crunch created by that state’s income tax cuts.

But it shouldn’t take a bond downgrade to convince lawmakers that unfunded tax cuts can have a devastating effect on a state’s economy. What has just happened in Missouri and recently in Kansas is a symptom of a larger problem. Anti-tax proponents across the country are pushing a message that taxes are inherently bad without regard to what less revenue does to basic public services, from infrastructure to education. This fallacious messaging has allowed a number of states in the last few years to push through tax cuts that disproportionately benefit the wealthy.

For many states, it’s too soon to tell the long-term impact. But it is likely that other states could experience the same negative consequences as Kansas, including cuts in public services and downgraded bond ratings. Just last week, North Carolina lawmakers (who enacted a massive tax cut package last year) got word that revenues are coming in more than $445 million below projection in the current fiscal year and are likely to be down next year as well thanks in large part to under valuing the impact of their regressive tax cuts. 

Fortunately, Missouri tax cuts won’t begin to phase in until 2017, and even then are contingent on future economic growth. But in the long run, Governor Nixon’s bleak assessment of the bill’s impact—that it’s an “unfair, unaffordable and dangerous scheme that would defund our schools, weaken our economy, and destabilize the strong foundation of fiscal discipline that we’ve worked so long and hard to build” may prove prophetic.  

Many companies claim they are forced by shareholders to dodge taxes in order to maximize profits, but what would a company do if its shareholders insist that it actually pay its fair share in taxes?

A group of Google shareholders, headed up by Domini Social Investments, may soon find out. The group has filed a proposal for consideration at the shareholder annual meeting asking the company to adopt a set of principles regarding taxes. The shareholders are recommending that the principles include consideration of any “misalignment between tax strategies and Google’s stated objectives and policies regarding social and environmental sustainability.”

The proposal comes after several widely publicized stories about Google’s aggressive tax planning which moves billions of dollars annually to offshore tax havens. In 2012 alone, Google dodged an estimated $2 billion in income taxes by shifting an estimated $9.5 billion to offshore tax havens.

Last year Google was called before the UK House of Commons Public Accounts Committee to explain its cross-border tax avoidance. The committee chair called the company’s behavior “devious, calculated, and … unethical.” French tax authorities, having raided Google’s offices in Paris in 2012, just delivered the company a $1.4 billion tax bill.

The shareholder group points out that Google’s tax dodging not only gets it in trouble with tax authorities, but damages the company’s brand and reputation that has long been associated with its motto “Don’t Be Evil.” Its tax avoidance has other social and human rights consequences that the shareholders urge the company to consider.

Over the long term, the best way to ensure that all American corporations like Google pay their fair share would be to end offshore tax loopholes like the active financing exception and the CFC look-thru rules or to simply end deferral of U.S. taxes on foreign profits. Unfortunately, Congress seems to be moving in the opposite direction, with the House Ways and Means Committee voting last week to make the active financing exception and the CFC look-thru rules permanent.

If this new shareholder initiative is any indication, many tax dodging multinational corporations may soon find that the pressure to pay their fair share is not only coming from the public, but increasingly from stakeholders within the company as well.

Results from Governor Brownback’s “real live experiment” (the passage of two rounds of extreme tax cuts under the guise of stimulating the economy) are trickling in and they aren’t good.  The Kansas City Star is reporting that the state’s “plummeting revenues” and increased need are some of the reasons why the state’s bond rating is now down from the firm’s second highest rating of Aa1 to Aa2.

Regrettably, Florida lawmakers just approved those “super-sized” sales sales tax holidays we told you about a few weeks ago. Read why sales tax holidays are a bad deal for both consumers and the Sunshine State in the Institute on Taxation and Economic Policy’s (ITEP) policy brief.

We offer our congratulations to former President George H.W. Bush on being awarded the Profile in Courage Award for raising taxes in 1990 despite his “Read my lips: no new taxes” pledge.  John Sununu, the President’s chief of staff, said, “George Bush did the right thing for the country, and it’s nice to see people are beginning to appreciate it.”

Calls for the Texas legislature to remedy a state tax law that has allowed commercial properties to be assessed at an (often large) discount are still being heard, loud and clear. An opinion piece in the Dallas News calls the lower property tax bills that many businesses have been receiving “unfair,” and cites examples of some of the state’s largest commercial buildings being assessed at a 35-40% discount.

After years of being a bad corporate citizen, Pfizer is now seeking to renounce its U.S. citizenship entirely by reincorporating in Britain as part of its hoped-for purchase of British pharmaceutical company AstraZeneca. While the deal would allow Pfizer to claim on paper that it’s a British company, it would not require the company to move its headquarters abroad.  In fact, the main effect would be to allow Pfizer to reduce its taxes to an even lower level than they already are.

While the audacity of this newest maneuver by Pfizer is striking, it’s not shocking. The company has a history of engaging in offshore income-shifting games. Over the past five years for example, the company has reported that it lost about $14.5 billion in the United States, while at the same time it earned about $75.5 billion abroad. Is the United States just a really bad market for Pfizer? It’s unlikely given that Pfizer also reports that around 40 percent of its revenues are generated in the United States. The more realistic explanation is that Pfizer is aggressively using transfer pricing and other tax schemes to shift its profits into offshore tax havens.

Despite its already low U.S. taxes, Pfizer has been aggressive in pushing Congress to preserve and expand loopholes in the corporate tax code. Over the past five years, Pfizer spent more than $72 million lobbying Congress. It reports that “taxes” are second only to “health” among issues it lobbies on. In addition to its own efforts, Pfizer has helped sponsor four different business groups (Alliance for Competitive Taxation, Campaign for Home Court Advantage, LIFT America and the WIN American Campaign) pushing for lower corporate taxes.

Over the years, Pfizer’s aggressive lobbying efforts have taken billions of dollars out of the U.S. Treasury, at the expense of ordinary taxpayers. Its biggest coup was the passage of a repatriation holiday (PDF) in 2004, for which it was the largest single beneficiary and ultimately saved the company a whopping $10 billion. On the state and local level Pfizer has also done very well for itself, receiving over $200 million in subsidies and tax breaks over the past couple decades.

What makes Pfizer’s tax avoidance efforts particularly galling is how it’s also happy to take full advantage of U.S. taxpayer assistance via government spending. From 2010 to 2013 for instance, Pfizer sought and received $4.4 billion in contracts to perform work for the federal government. On top of this, Pfizer has directly benefited from taxpayer funded research to develop drugs like Xelijanz, which was first discovered by government scientists at the National Institutes of Health (NIH). Finally, it’s worth remembering that without Medicaid and Medicare, Pfizer would lose out on billions from customers who would be unable to afford to purchase their drugs.

All this begs the questions of why Pfizer thinks it is worthy of profiting from taxpayer-funded research, corporate tax subsidies, and federal health care spending,  but feels no corporate responsibility to pay its fair share of U.S. income taxes.

Congress, should it decide to do so, can easily put a stop to Pfizer’s offshore shenanigans. To prevent Pfizer, as well as companies like Walgreens, from relocating to another country to avoid taxes, Congress could pass a proposal by the Obama administration that would limit the ability of domestic companies to expatriate. It would nix any repatriation if a company continues to be controlled and managed in the United States or if at least 50 percent of the shareholders stay the same after the merger. To address Pfizer’s broader tax dodging, Congress should also require that companies pay the same tax rate on both their offshore and domestic profits, by ending deferral of taxes on foreign profits.

Photo of Pfizer Pill via Waleed Alzuhair Creative Commons Attribution License 2.0

At a time when many states have toyed with the idea of paring back their progressive income taxes, Illinois policymakers this year showed real interest in a progressive change.

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. A proposal (The Fair Tax) would have authorized lawmakers to devise a progressive, graduated income tax structure with higher rates applied to higher income levels. (Note: this Fair Tax proposal is very different from the so-called “fair tax” proposals in other states designed to dismantle state tax systems by eliminating income taxes and replacing their revenue with increased sales taxes.)

Unfortunately, the Senate adjourned Tuesday without voting on this transformative proposal. Lawmakers had appeared poised to take up legislation that, if passed by a supermajority in both the House and Senate, would have allowed voters to amend the state’s constitution to permit a more progressive tax structure.

This battle led by Sen. Don Harmon was especially timely because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. In fact, Sen. Harmon went one step beyond just urging lawmakers to cast their vote in favor of a graduated income tax and actually developed his own proposal whereby taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxable income over $180,000 would be taxed at 6.9 percent. 94 percent of Illinoisans would not see their taxes go up under his plan, and no Illinoisan with income under $200,000 would see a tax increase.

In the wake of this setback, progressive policymakers and advocates are now setting their sights on 2016 as the next opportunity to put the Fair Tax proposal before voters. The campaign for the Fair Tax was spearheaded by a A Better Illinois Coalition . The Coalition released a statement saying that despite their obvious disappointment, “the fight for a Fair Tax – which enjoys the support of 77% of Illinois voters – is far from over.  Our statewide grassroots campaign, including more than 250,000 petition signatures and the support of more than 750 small businesses, faith leaders, labor and education groups, and civic and community organizations from every corner of the state brought us closer to implementing a Fair Tax in Illinois than ever before.”

Despite this setback there is, in fact, plenty Illinois lawmakers can do right now to raise needed revenues in a fair way. Preserving temporary income tax increases, possibly with low-income offsets, can achieve the same goals as the stalled effort at constitutional reform.

Tax justice advocates should take these words of Abraham Lincoln to heart: “Always bear in mind that your own resolution to succeed, is more important than any other one thing.” The Illinois tax reform debate is hardly over and this week’s activities should only act to encourage and shore up the resolve of advocates in Illinois and elsewhere.

Fresh off a two-week spring recess, House Ways and Means Committee Chairman Dave Camp today shepherded through six bills that would provide corporate tax breaks at a whopping cost of more than $300 billion over the next decade.

The tax breaks are a subset of the temporary business tax breaks or “tax extenders.” Given the nation’s many other pressing priorities, its nothing short of outrageous that the committee, on a party-line vote, approved this package of corporate giveaways.

Rep. Sander Levin, the committee’s ranking Democrat, called this approach “fiscally irresponsible and fundamentally hypocritical” given House leaders’ refusal to extend emergency unemployment assistance or make permanent tax breaks that will help working people with children, including recent EITC and child tax credit expansions.

“To say Republican action today is hypocritical is a serious understatement,” Levin said. He and his Democratic colleagues voted against each of the measures, while Camp’s Republican colleagues voted in favor of each.

The party-line vote was not a certainty given many of the committee’s Democrats are sponsors of the bills. Ultimately, many Ways and Means Democrats said although they support making certain business tax breaks permanent, they oppose doing so in a way that provides hundreds of billions of dollars in deficit-financed tax breaks for businesses while the House refuses to address the needs of the unemployed and working people with children. The unified opposition may mean the full House and Senate may think twice before following Camp’s approach.

Citizens for Tax Justice has explained that the tax breaks made permanent by this legislation demonstrate fealty to corporations over ordinary people and are simply bad policy.

A recent CTJ report describes significant problems in the research credit that should be addressed before it is extended or made permanent. CTJ and other organizations have also called upon Congress to allow the expiration of two breaks that encourage offshore tax avoidance: the so-called “active financing exception” and “look-through rule” for offshore subsidiaries of American corporations.

The Senate Finance Committee has taken a different approach. Instead of choosing certain temporary tax breaks to make permanent, it voted earlier this month to extend the entire package of 50-plus expiring provisions (often called the “tax extenders”) for two years, without offsetting the cost. CTJ has explained that this approach is also deeply problematic.

Some of the tax extenders should be dramatically reformed, and some should be allowed to expire altogether. None should be enacted unless Congress offsets the costs by repealing other tax breaks or loopholes that benefit businesses.