Author: tarek

On June 18, the leaders of the G-8 countries meeting in Northern Ireland released a declaration that included cracking down on the use of shell corporations for tax evasion and principles related to this goal, while the White House released a national action plan to implement these principles.

Shell Corporations Facilitate Tax Evasion, Money Laundering and Terrorism

Certain countries and certain U.S. states (Delaware most of all) allow individuals to form shell companies that carry out no real business but only serve to hide money and the owners of money from our government or a foreign government.

This is a problem for tax enforcement and other types of law enforcement, because the motivation for forming a shell company is often to evade income taxes owed to the U.S. government or a foreign government or to launder money generated by criminal activity or even to funnel money to terrorists. 

If you think that sounds far-fetched, think again. Viktor Bout, an indicted Russian arms dealer who was the inspiration for the book Merchants of Death (and the Nicholas Cage movie), used Florida, Texas and Delaware companies to carry out his activities, including moving millions in dirty money. In 2008 he was indicted for conspiracy to kill United States nationals, the acquisition and use of anti-aircraft missiles, and providing material support to terrorists. As Senator Carl Levin (D-MI) explained in a 2009 hearing:

In July 2009, Romania filed a formal request with the United States for the names of [Bout’s] company’s owners and other information.  But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies. The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.

Of course, it’s much more difficult to convince other governments to cooperate with our efforts to stop tax evasion, money laundering and terrorist funding when we allow their citizens to establish shell companies in the U.S. that are used for these very purposes.

In 2009, Senators Carl Levin (MI-D), Chuck Grassley (R-IA) and Claire McCaskill (D-MO) introduced a bill that would require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed and make that information available when ordered by a court pursuant to a criminal investigation.

Unfortunately, this legislation, the Incorporation Transparency and Law Enforcement Assistance Act, was stymied by Senator Tom Carper of Delaware, who introduced an alternative bill that would defeat the entire purpose of the reform. (Among other problems, Carper’s bill would allow the beneficial owner on record to be a shell company, rather than requiring it to be an actual human being.)

The White House action plan released during this week’s G-8 summit proposes to “advocate for comprehensive legislation” which “could” include several possible provisions, one of which would “define beneficial owner as a natural person…” In English, that means that states would have to record the actual human being who ultimately owns the company being formed. 

The bill previously promoted by Senator Levin and his allies in 2009 would accomplish this, and hopefully they will soon reintroduce their proposal with White House backing to implement the action plan. But, the organization Global Financial Integrity points out that the action plan is “essentially the same action plan the White House has had for two years under the Open Government Partnership, and the administration has yet to really ‘advocate for comprehensive legislation’” like Senator Levin’s proposal.

Some organizations addressing exploitation and impoverishment of developing countries, which suffer disproportionately from illegal outflows of capital into offshore tax havens, praised the move by the G-8 and the member countries that have released action plans.

Global Witness noted that part of the G-8’s success today can be attributed to the government of the United Kingdom, which has historically turned a blind eye to tax evasion in its territories but used its current presidency of the G-8 to push for reform. UK Prime Minister David Cameron has said that he would prefer to go even farther than the reforms being discussed today and make the owners of all incorporated entities known to the public, rather than just to law enforcement officials, an idea supported by Global Financial Integrity.

Addressing Tax Avoidance by Companies Like Apple

The declaration issued from the G-8 meeting in Northern Ireland also addressed other tax issues. While mysterious shell corporations are the tool of individuals seeking to illegally hide their income from governments, well-known, publicly traded corporations are involved in offshore tax practices that are probably not illegal, but ought to be. (Think of Apple’s recently uncovered tax avoidance practices using Ireland as a tax haven.)

The G-8’s declaration addresses this type of corporate tax avoidance, for example by stating, “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.”

Unimpressed, Global Financial Integrity says in its statement, “While we’re happy that the G8 acknowledges aggressive tax avoidance and profit shifting is a problem, they failed to agree to curtail it in any meaningful way. This is one area where coordination of changes to legal systems is essential to combat the problem, and public reporting by companies of revenues, profits, losses, taxes paid and number of employees in each country in which they operate is necessary in order to see whether those measures are having the desired effect.”

Ultimately, the White House must promote concrete legislative proposals rather than just vague principles. As we saw with the Incorporation Transparency and Law Enforcement Assistance Act, even a bill cracking down on money laundering and terrorist funding (the sort of bill the public would likely support) can be defeated by vested interests without advocacy from the President.

In disturbing news that shouldn’t surprise anyone who  looked at the math, Wisconsin’s Legislative Fiscal Bureau is anticipating that the state will experience a $500 million structural shortfall in 2017 if the bill approved by the Joint Finance Committee becomes law in the Badger State.

In Iowa, voters have become increasingly wary of this year’s property tax overhaul– as they see businesses, not individuals, as the plan’s main beneficiaries. A recent poll shows that 64 percent of respondents say businesses that own property would be the winners in reform, and 37 percent of respondents say they would personally lose under the plan. This sentiment seems to be in line with what the Iowa Fiscal Partnership has been saying all along: “property-tax reform will be costly and will challenge cities, counties and schools to deliver what Iowans have come to expect. It offers big breaks to business property owners — while costing significant sums in local services.” Governor Branstad, however, plans to sign the bill this week.

ITEP has long studied state gas taxes and concluded that “state governments are losing out on over $10 billion in transportation revenue every year.” Washington State is on track to curb that trend this year as political leaders of both parties have come to an agreement on a gas tax hike. While it’s promising that legislators are interested in raising the gas tax to fund transportation projects, the kind of increase they’re looking at, a rate increase without any other reforms, is still going to fall far short of restoring the value Washington’s gas tax has lost in recent decades..

With help from ITEP’s number crunchers, the North Carolina Budget and Tax Center is busy setting the record straight about who wins and who loses under a myriad of tax reform proposals moving quickly through North Carolina’s legislature (and causing no small amount of drama!).  On the heels of the House approving its version of tax reform earlier this week, the Senate is expected to pass its plan (check out this great infographic about it! and read full analysis here) early next week (June 17-21).  It met approval on the Senate floor today, but bills require three votes to officially pass. 

What do the House-approved and soon to be Senate-approved plans have in common?  Both are unaffordable tax cuts that will results in massive spending reductions and give significant windfalls to the Tarheel State’s wealthiest residents and to profitable, out-of-state, multinational corporations.  Sound like a good idea? No, we don’t think so either.

During the 2013 legislative session, our state policy team has been observing the tenor of the Kansas tax cut debate with some concern. Too many media accounts have focused primarily on the sales tax and whether the temporary hike to 6.3 percent would be extended. (Ultimately the legislature decided to increase the sales tax rate to 6.15 percent.)

But attention is beginning to turn, albeit too late, to some incredibly important provisions of the legislation that was just signed into law by Governor Brownback. As highlighted in this Kansas City Star editorial and this Associated Press analysis, the tax debate was about a lot more than the sales tax.

The Kansas City Star explains the consequences in a sobering editorial: “The two-year spending plan, which Gov. Sam Brownback is expected to approve, places income tax cuts ahead of schools, universities and public safety. Giving tax breaks to wealthy Kansans matters more to state leaders than investing in the state and its citizens.”

The Associated Press reports: “Important but relatively little-noticed provisions in the tax plan approved by Kansas legislators this year embody conservative Republicans’ vision for long-term constraints on government spending.” Indeed, the bill that passed the legislature includes arbitrary spending controls and could mandate the eventual repeal of the state’s personal income tax.

Of course all of this is what ITEP argued in a paper (one of many) last April: “Lawmakers and the public should be aware of the devastating impact either the House or the Senate bill would have, regardless of the compromise reached about the current sales tax rate, on the state’s ability to balance its budget and on tax fairness.”

For some combination of political and ideological reasons, lawmakers in Kansas, for two years running, have been falling all over themselves to pass tax cuts of disastrous proportions, despite red flags from experts, editorial boards and their colleagues in other states.  When good policy is not even on the priority list, it seems no amount of evidence can stop elected officials from pursuing their short-term political agendas.

On Thursday morning, a hearing was held on “Tax Havens, Base Erosion and Profit-Shifting,” by the House Ways and Means Committee, whose chairman, Dave Camp (R-MI), has proposed several types of “territorial” tax systems that CTJ has long argued would make these problems worse.

One of the witnesses, Paul Oosterhuis of Skadden Arps, explained that adoption of one of Camp’s proposals would move the U.S. towards taxing only those profits that come from sales generated in the U.S., which is essentially what Apple accomplished through the complicated tax planning revealed by the Senate Permanent Subcommittee on Investigations (PSI) last month. Oosterhuis argued that this would be a good result. He said that the taxes it avoided were really taxes on profits from foreign sales, and therefore of no importance to the U.S.

While Chairman Camp seemed to be in full agreement with Oosterhuis, some of the other committee members and another of the witnesses, Ed Kleinbard, pointed out the problems with his approach. Apple’s profits are generated by its research and development, and 95 percent of that activity takes place in the U.S. (Apple outsources the actual manufacture of its products to other companies.) Rep. Danny Davis of Illinois pointed out that this research and development, which seems to be the source of Apple’s profits, would not be possible without the public investments funded by U.S. taxpayers, like our patent protection and other legal protections, our educated workforce and infrastructure.

Kleinbard also pointed out that the U.S. must prevent our corporations from avoiding foreign taxes as well as U.S. taxes. Partly this is because much of the profits that are characterized as “foreign” are really U.S. profits that our corporations have dressed up as “foreign” using the type of practices Apple engages in. Another reason is that lax rules facilitating avoidance of foreign taxes makes foreign investment more attractive than investment here in the U.S.

The PSI hearing on Apple revealed the tricks used by the company to make its profits appear to be generated abroad so that it can take advantage of the rule allowing U.S. corporations to “defer” paying U.S. taxes on their offshore profits. As CTJ has explained before, a territorial system would expand deferral into an exemption for offshore profits, which would increase the incentives to engage in these practices.

While Citizens for Tax Justice has been taking a deep dive into offshore-tax sheltering and why the corporate tax is indispensable, some friends and allies have put out a series of reports over the past week on the economic impact (or not) of corporate taxes, the enduring dominance of corporate lobbyists and the need to revisit our fiscal policy debate in light of new evidence. Below we highlight the most crucial findings of these must-read reports.

Economic Policy Institute: Corporate Tax Rates and Economic Growth Since 1947

The Economic Policy Institute’s (EPI) most recent report on corporate taxes by Thomas Hungerford (author of that high profile Congressional Research Service report showing income tax cuts create more inequality than jobs) debunks the pervasive myth that the US’s corporate tax rate is harmful to the economy. For one, Hungerford notes that although the US has a high on-paper marginal rate compared to other countries, its effective corporate tax rate is just about average compared to other rich, developed countries. In addition, Hungerford notes that despite all the claims about corporate taxes preventing growth, corporate profits in the US are actually at an historic high.

Backing up these points (for our stats-minded readers), Hungerford performed a multivariate analysis comparing GDP growth and corporate tax rates and found that corporate tax rates (including the effective and statutory rate) have no correlation with economic growth. This conclusion even held true when controlling for other economic factors and for a lag effect on growth. In other words, the idea that cutting corporate taxes will increase growth in the US has no basis in the historic evidence.

Public Citizen: Lax Taxes

In it’s report Lax Taxes, Public Citizen makes case studies of the lobbying around three pieces of progressive tax legislation to demonstrate the disproportionate firepower of corporate lobbyists versus public interest groups. Appallingly (though not surprisingly), Public Citizen found that 86 percent of the lobbyists who reported lobbying on the Stop Tax Haven Abuse Act (STHA), the CUT Loopholes Act, and the Wall Street Trading and Speculators Tax Act represented corporate clients. Looking at the STHA specifically, the group found that for every one pro-tax reform lobbyist there were 20 lobbyists representing industry interests.

Perhaps even more disturbing, Public Citizen found that of those lobbyists with previous government experience working on these bills, 96 percent of them represented corporate clients rather than ordinary Americans. This dynamic not only means that industry advocates have deeper connections to Congress, but also that current lawmakers and Congressional staffers have an incentive to appease corporate interests if they themselves want to get a job a lobbying gig after they leave Capitol Hill.

Further, Public Citizen also notes that groups opposing these pieces of legislation donated about four times as much in campaign contributions to lawmakers that those supporting them, which may explain why these common sense reforms have failed to move despite overwhelming public support for closing corporate tax loopholes.

Center for American Progress: It’s Time to Hit the Reset Button on the Fiscal Debate

The prevailing ethos in Washington over the past few years is that budget deficits are out of control and that austerity measures must be taken in order to prevent economic catastrophe. A new report from the Center for American Progress (CAP) shows that this conventional wisdom is all wrong given recent policy actions and mounting evidence.

Most importantly, CAP points out in their report that Congress and the President have already enacted $2.5 trillion worth of deficit reduction (three-quarters of which took the form of spending cuts) since the start of fiscal year 2011. While many lawmakers and pundits are still warning that without additional and immediate deficit reduction the debt will spin out of control, the reality is that the current level of deficit reduction is already enough to stabilize the debt as a percentage of GDP through 2023.

CAP also notes that a research paper often cited by debt alarmists to argue for immediate deficit reduction has been pretty thoroughly debunked. Specifically, the claim by Carmen Reinhart and Kenneth Rogoff that a debt level over 90 percent of GDP jeopardizes economic growth is based on a calculation error (oops!) and does not take into account that causation can work both ways. 

One final important point in CAP’s report is growing evidence from Europe that austerity has actually made the economic situation there worse rather than better. Why? Budget cuts create a downward spiral by increasing unemployment and reducing consumption, which then results in even lower revenues and higher deficits. Some proponents of austerity have tried to counter this evidence by arguing that it’s austerity in the form of tax increases that is driving lower growth, but this logic has also been debunked.

Some observers have asked why we need a corporate income tax in addition to a personal income tax. The argument often made is that corporate profits eventually make their way into the hands of individuals (in the form of stock dividends and capital gains on sales of stock) where they are subject to the personal income tax, so there is no reason to also subject these profits to the corporate income tax. Some even suggest that the $4.8 trillion  that the corporate income tax is projected to raise over the next decade could be replaced by simply raising personal income tax rates or enacting some other tax. This is a deceptively simple argument that ignores the massive windfalls that wealthy individuals would receive if there was no corporate income tax.

A new fact sheet from Citizens for Tax Justice explains three of the biggest problems with repealing the corporate income tax:

First, a business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a fraction are paid to individuals rather than to tax-exempt entities not subject to the personal income tax.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means any attempt to replace it with another tax would likely result in a less progressive tax system.

Read the fact sheet.

Congress hasn’t even granted states the power to collect sales taxes owed on online shopping, but already Tennessee lawmakers are discussing how they might squander the money.  On the heels of inheritance tax, gift tax, sales tax, and interest and dividend tax cuts, Governor Haslam says he’s open to the idea of cutting taxes even further if the state sees a bump in revenue from passage of the Marketplace Fairness Act.  So far the Governor has said he wants to proceed cautiously, but Tennessee lawmakers have guzzled their share of  tax cut snake oil lately.

Uh oh! Watch out for income tax cuts in Iowa in 2014. Already Governor Terry Branstad is looking to next year and potentially reducing income taxes. He recently said, “I think it’s very likely we’ll be looking at reducing the income tax further. When I became governor, the income tax rate in Iowa was 13 percent. We now have it down to 8.98 percent, plus we have full federal deductibility…Remember, the top federal tax is 38.5 percent, so the effective rate in Iowa is only about 5.5 percent. We’d like to see that go lower.”

In refreshing news, late last week Missouri Governor Jay Nixon vetoed a radical tax package passed by the legislature that included: a reduction in the corporate income tax rate, a 50 percent exclusion for pass-through business income, an additional $1,000 personal and spouse income exemption for individuals earning less than $20,000 in Missouri adjusted gross income, and a reduction in the top income tax rate from 6 to 5.5 percent. The Governor called the legislation an “ill-conceived, fiscally irresponsible experiment that would inject far-reaching uncertainty into our economy, undermine our state’s fiscal health and jeopardize basic funding for education and vital public services.” Stay tuned. The legislature is expected to come back in September for a veto session during which it’s likely legislators will try to override the Governor’s veto.  

Last week, the Nevada Legislature passed AB 1 (PDF), a bill that changes how the state will handle tax abatements for new or expanding businesses. Under current law, the state grants partial abatement of property taxes, business taxes, and sales and use taxes to a business that locates or expands in the State and has 75 employees, or invests $1 million in capital into the state (businesses in smaller counties can qualify with 15 employees or a $250,000 investment). The new bill would lower the employee requirements to 50 in larger counties and 10 in smaller counties. The Institute on Taxation and Economic Policy (ITEP) reminds us that these kinds of tax incentives are costly and their real impact hard to measure, to say the least.

The Connecticut House of Representatives passed a bill, HB 6566 (PDF), which would require public disclosure of specific details about state economic assistance and tax credits for businesses. The bill would call for the creation of an online database that lists information such as the name and location of the recipient, the number of jobs created or retained, and the amount and detailed nature of the tax subsidy. This bill came only a few weeks after a report was released by Good Jobs First that documented how costly economic development subsidy programs often lack any kind of public transparency. “Despite its widespread practice, this use of taxpayer funds remains controversial,” the report said, “but the absence of good information makes it impossible for citizens to weigh the costs and benefits to their communities.” The bill now heads to the State Senate for consideration.

Washington State lawmakers are continuing to debate raising the state’s gasoline tax by 10 cents per gallon, as they have for much of this year, but with perhaps a renewed sense of urgency following the collapse of the Skagit River Bridge. But while a 10 cent increase would provide a needed boost in transportation revenues today, such an increase would do little to reform the state’s broken gas tax structure for the long-term.

Washington is like a majority of states in levying its gas tax as a flat number of cents per gallon—37.5 cents, to be specific.  But flat-rate gas taxes inevitably fall short when construction costs rise and gas tax rates don’t.  Because of this, states like Maryland and Virginia both redesigned their gas taxes this year to rise alongside gas prices, and Massachusetts and the District of Columbia are contemplating similar reforms.  Washington State would be wise to follow their lead.

According to a new analysis (see chart below) by the Institute on Taxation and Economic Policy (ITEP), Washington State’s gas tax rate (adjusted for inflation) would remain low relative to prior years even if it were increased by 10 cents per gallon.  More importantly, by retaining the state’s simplistic flat-rate gas tax structure, such a reform would leave the state unprepared to deal with increases in the cost of infrastructure construction in the future. 

By 2023, we project that the state’s inflation-adjusted gas tax rate will slip back down to the same, inadequate level it is today.  This unsatisfactory outcome could be avoided by tying the tax rate to rise with either inflation or gas prices after the 10 cent increase is implemented.

Thirty-five years ago today, California voters passed an initiative that would change the fiscal trajectory of their great state for decades: Proposition 13.

Championed by two citizen-activists with a politically popular message, but ill-conceived vision for California’s fiscal future, Proposition 13 cut and capped the state’s property tax at one percent and allowed for assessed property values to rise by no more than 2 percent per year. Stripping localities of their primary ability to raise revenues, the initiative changed how public services like K-12 education, police and fire protection, road and bridge upkeep, and water and sewers would be paid for.

Many proponents of Proposition 13 were individual homeowners who saw housing prices grow rapidly throughout the 1970s. Because California property taxes were assessed at market value, rapidly growing housing prices were causing property tax liabilities to grow in matching fashion. As Bruce Bartlett recently wrote in the New York Times, “Many Californians were literally being taxed out of their homes.” (Proposition 13 was a poorly targeted response to this problem because research has shown time and again that sensible options exist that wouldn’t involve capping property taxes). Additional supporters included those who believed the initiative would shrink the size of government – a mentality that went on to cause what commonly referred to as the “national tax revolt.”

Thirty-five years later, Proposition 13 is still in full effect. How has the 1978 ballot initiative fared? Well, after years of fiscal crises, several of the country’s largest municipal bankruptcies, deteriorated spending on public education (PDF) at both the state and local level, and increased reliance on the very regressive sales tax, Proposition 13 didn’t have exactly the impact its advocates had hoped for.

Proposition 13’s shortfalls are becoming increasingly clear, particularly in how it has shifted revenue collection (and spending power) from local governments to the state. Take K-12 education, for example. According to the California Budget Project (CBP)  (PDF), “Passage of Proposition 13 in 1978 fundamentally changed how schools receive their dollars,” by significantly shifting their revenue source from the local level to the state level. Alone, this shift shouldn’t have affected schools negatively, but state lawmakers engaged in poor fiscal stewardship throughout the 1990s and 2000s (primarily in the form of tax cuts, spending cuts, and a weak rainy day fund) and generally failed to fund schools as well as local governments previously did. CBP writes, “State cuts to education combined with California schools’ substantial reliance on state dollars explains the widening gap between the resources available to California schools and those of the rest of the US.”

William Fulton and Paul Shigley, experts on Proposition 13 and editors of the California Planning & Development Report, who summarize this dilemma by saying:

“In the old days, property taxes were high, but at least you could have a debate at your local city hall about how much they would be increased and what the money would be used for. No more.”

In addition to this shift in responsibility, Proposition 13 has shifted the property tax burden away from commercial property owners and onto residential homeowners. This shift has taken place due to a loophole which allows companies to avoid reassessments when properties change hands, allowing them to pay taxes on assessed land values from years (and in some cases decades) ago. This practice is termed the “Dell Tax Maneuver,” after Michael Dell, who has avoided paying more than one million dollars a year in property taxes on a piece of commercial property he bought in 2006, but which is still taxed at its 1999 assessed value.

In May, Assemblyman Tom Ammiano (D-San Francisco) introduced AB 188, a bill that would keep residential homeowners under Proposition 13’s umbrella, but would force business owners to pay property tax based on a more realistic assessment of their property’s value. While the bill stalled in committee and most likely won’t be heard again until next year, it is a step in the right direction – and the public seems to agree.

According to a new survey (PDF) conducted by the non-partisan Public Policy Institute of California, a majority of voters – regardless of political affiliation – support splitting the property tax roll.

This movement is significant. It signals that after thirty-five years of wreaking fiscal havoc on the state, both the political climate and public opinion are such that change to Proposition 13 is possible.