Author: tarek

In the debate over offshore tax avoidance by multinational corporations, one proposal that should not be controversial is country-by-country reporting. The U.S. government does collect information on what profits corporations claim to earn and what taxes they pay in each country, but this information is not available to lawmakers or the public. Some developing countries that suffer the most from outflows of capital into offshore tax havens do not seem to have country-by-country reporting even for the purposes of tax administration.

And so, the declaration issued by the G-8 governments in Northern Ireland last week included a plea that “Countries should change rules that let companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities what tax they pay where.”

Note that this does not even call for such information to be made public but only available to tax authorities. Given that tax authorities in the U.S. already have this information and corporations like Apple are still able to artificially shift their profits into tax havens, this seems like an awfully small step towards reform. Perhaps if this information was collected and actually made public, then ordinary citizens would find out how many other corporations engage in the same type of offshore tax avoidance and demand reform.

But even a small step in this direction seems to be too much for officials at the U.S. Treasury Department to contemplate, as they rushed this week to assure multinational corporations that their interests would take priority over stopping tax avoidance.

An article appearing Wednesday in Tax Notes Today (subscription required) tells us, “With both the G-8 and the OECD’s base erosion and profit shifting (BEPS) project examining expanded country-by-country reporting by multinationals, Treasury officials say the tax information should not be made available to the public.”

The article quotes Brian Jenn, an attorney-adviser with the Treasury Office of International Tax Counsel, saying “For us it is important that that information be restricted to tax administrations and not be publicly available.”

“Jenn said,” the article informs us, “that in addition to addressing concerns about uncoordinated legislative actions, the BEPS project is meant to ward off aggressive positions by tax administrations that could be ‘disruptive to multinationals.’”

This is an alarming statement because anything that stops offshore corporate tax avoidance would be considered “disruptive” to the companies involved in it. It’s a sure bet that Apple’s CEO Tim Cook would find it “disruptive” if the company had to pay taxes on the profits that it claims are generated by a zero-employee subsidiary that allegedly has no country of residence for tax purposes. This seems to confirm the suspicion that the OECD’s latest talk of working to stop corporate tax avoidance is really an effort to throw a few symbolic bones to the principles of tax fairness in order to prevent any real reform from developing.

Arlene Fitzpatrick, attorney-adviser in the Treasury Office of International Tax Counsel, also commented on the OECD’s BEPS project, saying “We don’t want to have a situation where unilateral action is taken and you wind up with a situation where we have double tax rather than double nontax [profits not taxed in any country].” This statement defies belief, as the problem of double-non-taxation (that is, corporate profits being taxed in no country at all) is the defining feature of the current international corporate system and should be the number one focus of international efforts.

Jenn stressed that any solutions would be tailored as narrowly as possible and that solutions could be found in changing the OECD’s “transfer pricing” guidelines, which some countries have adopted for their rules.

But these “transfer pricing” rules are hopeless. They are an attempt to get different parts of a corporation spanning different countries to treat each other as unrelated parties engaging in transactions when they exchange, say, a patent or charge royalties for the use of a patent.

Tax authorities are supposed to apply an “arm’s length” standard, meaning the subsidiaries of a corporate group (the different parts of a multinational corporation) must charge market prices when they engage in these transfers with each other, otherwise (for example) a subsidiary in the U.S. will tell the IRS that it has no profits because it had to pay enormous royalties to its subsidiary in Bermuda (which is probably just a post office box). But what’s the market price for a patent for a brand new invention? Neither the tax authorities nor anyone else has any idea.

As we’ve argued before, the international tax system needs a more fundamental overhaul. But, sadly, the Obama Treasury Department resists fundamental change and resists even telling the public what corporations are claiming to earn and the taxes they pay in other countries so that we can determine how much profit-shifting is taking place.

The federal government has gone almost two decades without raising its gas tax, but that doesn’t mean the states have to stand idly by and watch their own transportation revenues dwindle.  On Monday July 1, eight states will increase their gasoline tax rates and another eight will raise their diesel taxes.  According to a comprehensive analysis by the Institute on Taxation and Economic Policy (ITEP), ten states will see either their gasoline or diesel tax rise next week.

These increases are split between states that recently voted for a gas tax hike, and states that reformed their gas taxes years or decades ago so that they gradually rise over time—just as the cost of building and maintaining infrastructure inevitably does.

Of the eight states raising their gasoline tax rates on July 1, Wyoming and Maryland passed legislation this year implementing those increases while Connecticut’s increase is due to legislation passed in 2005.  California, Kentucky, Georgia (PDF) and North Carolina, by contrast, are seeing their rates rise to keep pace with growth in gas prices—much like a typical sales tax (PDF).  Nebraska is a more unusual case since its tax rate is rising both due to an increase in gas prices and because the rate is automatically adjusted to cover the amount of transportation spending authorized by the legislature.

On the diesel tax front, Wyoming, Maryland, Virginia (PDF) and Vermont passed legislation this year to raise their diesel taxes while Connecticut, Kentucky and North Carolina are seeing their taxes rise to reflect recent diesel price growth.  Nebraska, again, is the unique state in this group.

There are, however, a few states where fuel tax rates will actually fall next week, with Virginia’s (PDF) ill-advised gasoline tax cut being the most notable example. Vermont (PDF) will see its gasoline tax fall by a fraction of a penny on Monday due to a drop in gas prices, though this follows an almost six cent hike that went into effect in May as a result of new legislation. Georgia (PDF) and California will also see their diesel tax rates fall by a penny or less due to a diesel price drop in Georgia and a reduction in the average state and local sales tax rate in California.

With new reforms enacted in Maryland and Virginia this year, there are now 16 states where gas taxes are designed to rise alongside either increases in the price of gas or the general inflation rate (two more than the 14 states ITEP found in 2011).  Depending on what happens during the ongoing gas tax debates in Massachusetts, Pennsylvania, and the District of Columbia, that number could rise as high as 19 in the very near future.

It seems that more states are finally recognizing that stagnant, fixed-rate gas taxes can’t possibly fund our infrastructure in the long-term and should be abandoned in favor of smarter gas taxes that can keep pace with the cost of transportation.

See ITEP’s infographic of July 1stgasoline tax increases.
See ITEP’s infographic of July 1stdiesel tax increases.

The Commonwealth Institute of Virginia explains the folly of cutting state corporate income taxes – a move endorsed by Virginia gubernatorial candidate Ken Cuccinelli, among others. The Institute points out that corporations are already paying a smaller share of state income taxes than in years past, and have left individual taxpayers to pick up the rest of the tab. Moreover, Virginia analysts say (PDF) that about three-quarters of any corporate income tax cut would actually flow outside of Virginia’s borders, since most of the cut would go to large, multi-state corporations.

The Washington Post reports on the state of America’s bridges, and provides some consumer-focused context for why raising taxes to fund infrastructure repair is so important.  “In many cases … a bridge has weakened to the point where it can no longer handle the heavy loads it once did. When lower weight restrictions are imposed, the big trucks that deliver goods of all sorts have to detour, making their routes longer, and that cost generally trickles down to the price consumers pay for almost everything.”

Illinois lawmakers have been focused on pension reform lately, but this Crain’s Chicago Business piece highlights the need for real tax reform in the state. Notably two aspects of the state’s income tax are flagged for reform (the same ones we’ve been talking about for years) – the state’s exemption for all retirement income and a universal property tax credit that’s not based on need.

Last week, Arizona Governor Jan Brewer signed into law SB 1179, a bill containing a wide assortment of tax breaks. The bill’s initial goal was to create a small tax break for one specific industry, but it ended up being a vehicle for tax breaks that lawmakers couldn’t pass individually. The final bill provided certain exemptions for an energy drink company, a sales tax break for companies that rent ignition devices to people with DUI convictions, and an extended property tax break for biofuel manufacturers. The Associated Press reports it this way: “As lawmakers rushed to adjournment last week, those with bills that had languished looked for places for them to land. House members with tax breaks in mind found SB1179, adding four amendments in the late-night hours of June 13.”

Throughout most of its existence, online retailer Amazon.com aggressively avoided having to collect state sales taxes from its customers.  Its 5 to 10 percent price advantage relative to local retailers who have to collect the tax wasn’t something that Amazon was willing to give up.

More recently, however, Amazon’s business strategy seems to have shifted.  In order to provide faster delivery times to more of its customers, Amazon has opened up warehouses and distribution centers in a growing number of states (Florida being the most recent example), even though doing so means the company will be subject to the same sales tax collection requirements as Wal-Mart, Home Depot, mom-and-pop bookstores and every other brick and mortar retailer.

But recent events in Minnesota confirm that while sales tax dodging is less central to Amazon’s business strategy than in years past, the company still thinks that not collecting the tax is an advantage.  A new law just passed by Minnesota’s legislature redefines what constitutes a “physical presence” in the state, and it means that Amazon has enough affiliates in Minnesota to have to begin collecting the state’s sales tax this month. So in order to save some nickels and dimes, Amazon has decided to cut its ties with businesses based in the Gopher State so it can keep selling to Minnesotans tax-free.

This development points toward a need for Congressional action for lots of reasons, including these two:

First, it reinforces the point that local retailers are being harmed by their online competitors’ ability to dodge sales tax collection requirements. Why would Amazon bother cutting ties with Minnesota businesses if it didn’t think its market share would suffer from having to play by the same rules as companies with actual stores and employees in Minnesota?

Second, it highlights the degree to which online shopping sales tax laws have become an indefensible patchwork. In geographically large and heavily populated states like Florida and Texas, Amazon has little choice but to have a “physical presence” in the state (and collect sales tax) if it wants to offer reasonably fast delivery times. In other states, however, shipping products from outside the state’s borders is much less of a logistical problem.

There’s no question that Amazon is capable of collecting sales taxes in Minnesota, particularly since the state has already taken steps to simplify its sales tax system by adhering to the Streamlined Sales Tax Agreement.  In fact, Amazon said it plans to begin collecting Minnesota sales taxes as soon as the federal Marketplace Fairness Act (which it supports and which has passed the U.S. Senate) is enacted into law.  In the meantime, however, Minnesota is out of options for getting Amazon to play by the same rules as other businesses selling to its residents.  Amazon’s recent actions make clear that just because the company can do what’s right, that doesn’t mean it will do so voluntarily.

Congressman John Delaney, a Democrat from Maryland, has proposed to allow American corporations to bring a limited amount of offshore profits back to the U.S. (to “repatriate” these profits) without paying the U.S. corporate tax that would normally be due. This type of tax amnesty for repatriated offshore profits is euphemistically called a “repatriation holiday” by its supporters.

The Congressional Research Service has found that a similar proposal enacted in 2004 provided no benefit for the economy and that many of the corporations that participated actually reduced employment. Rep. Delaney seems to believe his bill (H.R. 2084) can avoid that unhappy result by allowing corporations to repatriate their offshore funds tax-free only if they also fund a bank that finances public infrastructure projects, which he believes would create jobs in America.

A new CTJ report explains why this is a strange and problematic way to fund infrastructure projects. Delaney’s bill will provide the greatest benefits to corporations that are engaging in accounting schemes to make their U.S. profits appear to be generated in offshore tax havens, further encouraging such tax avoidance and resulting in a revenue loss in the long-run. Incredibly, a super-majority of the infrastructure bank’s board of directors would, under Delaney’s bill, be chosen by the corporations that receive the most tax breaks.

Read the CTJ report on Rep. Delaney’s proposal.

California Shows that Geographically Targeted Tax Incentives Don’t Work

Last week, the New York State Legislature overwhelmingly passed START-UP New York (previously known as Tax-Free NY). The approval came after nearly a month of Governor Cuomo’s state-wide campus PR tour where he touted the plan’s infallible greatness, a claim we have explained is almost completely unjustified.

3,000 miles to the west, in California, fellow Democratic Governor Jerry Brown is telling a different story. He has proposed eliminating the state’s costly Enterprise Zone (EZ) Program, citing its ineffectiveness and huge cost as the rationale for the move.

California’s EZ Program was created in 1986 and has been the state’s primary policy tool in attempting to promote economic development in distressed areas. Like START-UP NY, California’s EZ Program provides geographically targeted tax breaks to 40 “zones” determined by the state. (START-UP NY provides tax breaks to over 70 zones, primarily college campuses.)

According to the Public Policy Institute of California, however, the EZ Program has had “no effect on business creation or job growth.” Furthermore, the California Budget Project has found that EZs “have cost the state a total of $4.8 billion in lost revenue since the program’s inception” while benefiting “less than half of one percent of the state’s corporations.”

Governor Brown’s proposal – initially outlined in his May budget revision (PDF) – signifies an important shift away from using geographically targeted tax breaks as an economic development tool. A growing body of research has shown (and shown again) tax incentives of most kinds to be poor tools for economic development, and California’s three decades of experience with its EZ Program is a case in point.

“California’s thirty-year-old Enterprise Zone program is not enterprising, it’s wasteful. It’s inefficient and not giving taxpayers the biggest bang for their buck,” said the Governor in a meeting with business leaders and labor groups. “There’s a better way and it will help encourage manufacturing in California.”

It must be noted, of course, that Governor Brown’s “better way” is only half better; it throws half of those EZ Program dollars at similarly unproven tax breaks while spending the other half – wisely – on a reduction in the sales tax (PDF) businesses pay.  Still, a governor who is beginning to listen to policy experts over pollsters deserves some credit for moving in the right direction.

If Governor Brown’s proposal is enacted (it may be on the ballot next year), it appears we will have a tale of two states: in California, a state trying to learn from the past; in New York, a state blindly shaping policy based on political interests.

On Tuesday, the non-partisan Congressional Budget Office (CBO) found that the immigration reform bill currently making its way through the US Senate will actually decrease the deficit by $197 billion between 2014-2023. The report’s findings are at odds with claims by the bills opponents that increased immigration would be fiscally harmful to the US. In fact, House Speaker John Boehner said today that if the CBO is right, those revenues could be a “real boon” for the US.

According to the CBO, the bill would generate $459 billion in additional revenue over the next decade. Allowing unauthorized immigrants to seek legal status would increase tax compliance, and also increase the wages and thus the taxes of those same immigrants. In addition, the CBO found that the increase in the immigrant population and the number of individuals working in the US as a result of the bill would also substantially increase revenue.

Conservative critics of the immigration bill have tried to argue that the bill will drain public resources as immigrants obtain government benefits. The reality, according to the CBO, is that the required increase in government outlays (primarily in the form of refundable tax credits, Medicaid, and health insurances subsidies) would amount to only $262 billion over the next decade, meaning that immigrants as a group would end up paying more than they receive. This would be even more true over the bill’s second decade (from 2024-2033), during which the CBO estimates the federal deficit would be decreased by an additional $700 billion.

The bill’s positive fiscal impact could undermine efforts by lawmakers like Senators Marco Rubio, Orrin Hatch, and Jeff Sessions to add amendments to the bill that would create extra obstacles for immigrants in terms of taxes and government benefits.

Last year we wrote about an unwelcome mini-trend in state corporate tax policy: the creation of “neo-vouchers,” tax breaks for businesses that donate money to private-school scholarship funds. At the time, advocates for these neo-vouchers were making the (not very convincing) case that these programs shouldn’t be counted as government spending since the programs were quite specifically designed such that “the money would never go into public accounts, making it less susceptible to court challenges.” (The legal challenges are often based on the argument that most private schools are religious in nature and the First Amendment prohibits public funds from supporting religion.) In other words, the argument went, if a company gets a million dollar tax break for donating money to private school scholarship funds, those million dollars never got collected by the state, so they remain somehow private dollars, outside the grasp of the state government.

At the time, a number of states were contemplating enacting tax breaks of this kind, (available to individuals, corporations or both), and New Hampshire subsequently did enact neo-vouchers in June of 2012, overriding a veto by Governor John Lynch, and took effect in January 2013. The law gives New Hampshire corporations a tax credit equal to 85 percent of any contributions they make to private school foundations. The law’s authors also attempts to codify the “private dollars” argument and inoculate it against constitutional challenges by asserting (PDF), “[c]redits provided under this chapter shall not be deemed taxes paid.” If the money was never handed over to the public treasury, it was never the public’s money, right?

Wrong, at least according to a lower court in the Granite State that just ruled the new tax credit is unconstitutional, explicitly rejecting the “private dollars” charade. The judges wrote:

“The phrases ‘public funds,’ or ‘money raised by taxation,’ focuses the Court’s inquiry not on when the government’s technical ‘ownership’ of funds or monies arises, but on when, or at what point, the public’s interest fairly arises in how funds or monies are spent. The Court concludes that the interest of New Hampshire taxpayers in regard to challenging the legality of legislation such as the program at bar does not arise only after money is deposited in the New Hampshire treasury….”

The Court sensibly notes that if “money that would otherwise be flowing to the government is diverted” for private ends, that is essentially the same as direct government spending. This shouldn’t be news to anyone familiar with the “tax expenditure” concept—the notion that a $1 million tax break for a specific business is not meaningfully different from government writing a $1 million check to the same business.

Of course, it’s not hard to see that the neo-voucher idea is bad policy whether it’s constitutional or not. It erodes corporate tax revenues, takes money away from already-strapped public schools, and (in the case of the New Hampshire laws) sharply limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. But the New Hampshire court’s finding underscores the absurdity of the fiction that neo-vouchers subsidized by corporate tax credits can be thought of as “private dollars” outside the purview of state governments—and offers a helpful precedent for advocates seeking to repeal neo-vouchers in other states.

The tax reform/tax cut debate in the North Carolina capital continues into another dramatic week. Yesterday, Senate President Phil Berger pulled his chamber’s version of reform from the floor calendar, before Senators held their final vote on the plan, amidst speculation that Senate and House leaders were meeting behind closed doors with Governor Pat McCrory to hammer out a compromise before the final vote. 

But today we learned that the plan is going back to the Finance Committee for a complete rewrite. Savvy lawmakers don’t like bringing legislation to a vote that they know won’t pass, and odds are that’s what Senator Berger realized, so all the puzzle pieces are back on the table.

Despite rumors that this sudden change of plans could mean tax reform is in jeopardy, we aren’t holding our breath for a Louisiana or Oklahoma style implosion and collapse in North Carolina.  As all three parties bring their reform priorities to the table, an all-too likely outcome is that we could see the cost of tax reform grow even higher than the annual $1.3 billion loss in the Senate plan.

Why? Each legislative chamber has one or more constituencies lobbying for protection of their special tax code carve outs. The House bill, for example, already preserves the costly mortgage interest deduction because the realtors demanded it.  The Senate version may have to leave Social Security payments alone after hearing from the local AARP chapter, even though taxing them would reduce the bill’s cost (by broadening the base of taxable income thus producing more revenues). Meanwhile, the Governor doesn’t seem to be wielding much clout over the bill’s final form, but having campaigned on revenue neutral tax reform (reform that doesn’t break the bank), his blessing for the final bill will be helpful.

It’s now a wait-and-see moment in the Tarheel State, so it’s a good time to check out more great resources coming from the North Carolina Budget and Tax Center with assistance from ITEP staff which highlight what’s at stake in this ongoing and intriguing debate: Cataloguing the Impact of the Senate Tax Plan and Doubling the Standard Deduction is insufficient to protect low- and moderate income families.

Remember the 2011 Hollywood blockbuster The Descendants, starring George Clooney? Odds are yes, as it was nominated for 5 Academy Awards. Perhaps less memorable were the ending credits and the special thank you to the Hawaii Film Office who administers the state’s film tax credit – which the movie cashed in on.

Why did a movie whose plot depended on an on-location shoot need to be offered a tax incentive to film on-location? The answer is beyond us, but Hawaii Governor Abercrombie seems to think it was necessary as he just signed into law an extension to the credit this week.

Hawaii is not alone in buying into the false promises of film tax credits. In 2011, 37 states had some version of the credit. Advocates claim these credits promote economic growth and attract jobs to the state. However, a growing body of non-partisan research shows just how misleading these claims really are.

Take research done on the fiscal implications such tax credits have on state budgets, for example: 

• A report issued by the Louisiana Legislative Auditor showed that in 2010, almost $200 million in film tax breaks were awarded, but they only generated $27 million in new tax revenue. According a report (PDF) done by the Louisiana Budget Project, this net cost to the state of $170 million came as the state’s investment in education, health care, infrastructure, and many other public services faced significant cuts.

• The Massachusetts Department of Revenue – in its annual Film Industry Tax Incentives Report – found that its film tax credit cost the state $200 million between 2006 and 2011, forcing spending cuts in other public services.

• In 2011, the North Carolina Legislative Services Office found (PDF) that while the state awarded over $30 million in film tax credits, the credits only generated an estimated $9 million in new economic activity (and even less in new revenue for the state).

• The current debate over the incentive in Pennsylvania inspired a couple of economists to pen an op-ed in which they cite the state’s own research: “Put another way, the tax credit sells our tax dollars to the film industry for 14 cents each.”

• A more comprehensive study done by the Center on Budget and Policy Priorities (CBPP) examined the fiscal implications of state film tax credits around the country. This study found that for every dollar of tax credits examined, somewhere between $0.07 and $0.28 cents in new revenue was generated; meaning that states were forced to cut services or raise taxes elsewhere to make up for this loss.
  

Not only do film tax credits cost states more money than they generate, but they also fail to bring stable, long-term jobs to the state.

The Tax Foundation highlights two reasons for this. First, they note that most of the jobs are temporary, “the kinds of jobs that end when shooting wraps and the production company leaves.” This finding is echoed on the ground in Massachusetts, as a report (PDF) issued by their Department of Revenue shows that many jobs created by the state’s film tax credit are “artificial constructs,” with “most employees working from a few days to at most a few months.”

Second, a large portion of the permanent jobs in film and TV are highly-specialized and typically filled by non-residents (often from already-established production centers such as Los Angeles, New York, or Vancouver). In Massachusetts, for example, nearly 70 percent of the film production spending generated by film tax credits has gone to employees and businesses that reside outside of the state. Therefore, while film subsidies might provide the illusion of job-creation, they are actually subsidizing jobs not only located outside the state, but in some cases – outside the country.

While a few states have started to catch on and eliminate or pare back their credits in recent years (most recently Connecticut), others (including Maryland, Nevada, Pennsylvania, and Ohio) have decided to double down. This begs the question: if film tax credits cost the state more than they bring in and fail to attract real jobs, why are lawmakers so determined to expand them?

Perhaps they’re too star struck to see the facts. Or maybe they, too, want a shout out in a credit reel.