Author: tarek

In recent months, Google, Inc. has come under fire by Britain’s parliament for its alleged use of “immoral” offshore tax dodges as well as by French authorities (Google’s history of shifting income to offshore jurisdictions, aka tax havens, is well documented). But none of this criticism seems to have changed the minds of Google’s executives: the company’s 2012 annual financial reports were released last week, and in them, the company admits to having shifted $9.5 billion in profits overseas in just the past year.

To put this in context, a recent CTJ report identified all 290 of the Fortune 500 corporations that have admitted holding cash indefinitely overseas; this report ranked Google as having the 15th largest offshore cash hoard, with $24.8 billion of offshore cash in 2011. CTJ’s report also showed that the offshore cash holdings of big corporations are highly concentrated in the hands of just a few companies, and the biggest 20 among these 290 corporations represented a little over half of the $1.6 trillion in offshore income we documented.  And while we can’t precisely predict the revenue loss this represents, we did calculate that it could be as much as $433 billion in unpaid taxes.

So this fierce debate over whether to offer US multinationals a “tax holiday” for bringing their overseas stash back to the US, or to give them a permanent exemption by adopting a “territorial” tax system, is largely about whether a small number of large companies, including Google, should be rewarded for shipping their cash to low-tax jurisdictions. Given that most of us pay taxes on the money we earn in this country, only seems reasonable that colossally profitable corporations should do the same.

Wisconsin Governor Scott Walker’s Secretary of Administration, Mike Huebsch, caused a kerfuffle recently when he said that the Governor “is considering” eliminating the state’s income tax and replacing the revenue with a larger sales tax. This is not a new concept, but to say it’s a flawed approach to tax reform is an understatement.  “For the first time in, I would say the last 20 years,” said Huebsch, “this is getting much more discussion across the nation. And I think it’s being led by governors like Bobby Jindal in Louisiana who are trying to figure out ways that they can eliminate their income tax. That’s really the motivation here. They want to eliminate the income tax.”  

Emulating Governor Jindal would be misguided. An Institute on Taxation and Economic Policy (ITEP) analysis found that Jindal’s proposal to eliminate income taxes and replace the revenue with higher sales taxes would actually increase taxes on the bottom 80 percent of Louisianans. Specifically, the poorest 20 percent of taxpayers, those with an average income of $12,000, would see an average tax increase of $395, or 3.4 percent of their income. The largest beneficiaries of his tax proposal would be the top one percent, with an average income of well over $1 million, who’d see an average tax cut of $25,423.

Since Secretary Huebsch’s comments, the Governor’s office has responded saying that Walker will propose a “middle class tax cut,” but not the complete elimination of the state’s income tax. For now, anyway.

The Governor’s spokesman did open the door to future, potentially more radical tax proposals when he said, “Governor Walker will propose a middle class income tax cut in the 2013-15 state budget. He considers this to be a down payment on continuing to drop the overall tax burden in Wisconsin in future years. He will review the impact of tax policy on job growth in other states as he considers future reforms.”

Wisconsinites should know that a middle class tax cut is, like a Unicorn, commonly mentioned but rarely seen. While there are tax credits (like the making work pay credit and property tax circuit breakers(PDF)) that are genuinely targeted towards middle income families, a tax rate cut for middle income groups is almost always also a tax cut – and a bigger one, at that – for high income groups. That’s just how marginal tax rates work (and the reason across-the-board income tax cuts are such budget busters).

Income tax cuts and even elimination are practically epidemic this year. We’ll be watching to see if Governor Walker catches the bug, too. Meantime, he can already “review the impact of tax policy on job growth in other states” right here, and see that cuts do not, in fact, lead to growth.

A bill introduced in Congress today called the Corporate Tax Dodging Prevention Act would end “deferral,” the most problematic break in the U.S corporate income tax.

The bill would repeal the rule allowing U.S. corporations to “defer” (delay indefinitely) paying U.S. corporate income taxes on their offshore profits until those profits are “repatriated” (brought to the U.S.).

At an event announcing the proposal this morning, CTJ director Bob McIntyre spoke in favor of the legislation. McIntyre explained:

Because of “deferral,” companies like Apple, Microsoft, Dell and Eli Lilly can shift their U.S. profits, on paper, to foreign tax havens and avoid billions of dollars in taxes that they should be paying. At the end of 2010, just 10 companies, including those just mentioned, report that they had stashed $210 billion offshore, almost all of it in tax havens, and thereby avoided $69 billion in U.S. income taxes.

A recent CRS report found that in 2008, American multinational companies reported earning 43 percent of their $940 billion in  overseas profits in five little tax-haven countries, even though only 4 percent of their foreign workforce and 7 percent of their foreign investments were in these countries.

In total, the JCT [Joint Committee on Taxation] estimates that repealing deferral would add $600 billion to federal revenues over the next decade.

The bill was introduced today in the Senate by Bernie Sanders of Vermont and in the House by Jan Schakowsky of Illinois.

CTJ’s recent working paper on tax reform options explains in detail how ending deferral would improve the corporate income tax. It also explains that President Obama has offered several proposals that would address some of the worst abuses of deferral, but would not be as effective or straightforward as simply repealing deferral.

CTJ has published previous reports and fact sheets explaining why Congress should repeal deferral and should also reject proposals to adopt a “territorial” tax system, which would make matters worse.

Senator Carl Levin of Michigan has introduced bills to limit some of the worst abuses of deferral, and has been discussing similar proposals with other Senators as a way to raise revenue to replace or delay the automatic spending sequestration that is scheduled to go into effect in March.

The bills introduced by Senator Levin also include provisions targeting offshore tax evasion by individuals, in addition to the offshore tax avoidance by corporations. Offshore tax evasion involves hiding income from the IRS in offshore tax havens in ways that are criminal offenses, whereas the offshore tax avoidance by corporations generally involve practices that are not illegal — but that ought to be.

(Senator Levin’s legislation would also address other tax issues, like the “Facebook” loophole for stock options and the “carried interest” loophole.)

Ending deferral has become increasingly important as corporations hold more profits than ever offshore. A recent CTJ report finds that public information from 290 of the Fortunate 500 companies indicate that they hold $1.6 trillion in profits offshore. For many of these corporations, the majority of their “offshore” profits are actually U.S. profits that have been artificially shifted to offshore tax havens and then reported as “foreign” profits.  

Citizens for Tax Justice has a new online calculator that will tell you what you’d pay in federal taxes in 2013 under three different hypothetical scenarios:

1) Congress did nothing during the New Year and allowed the “fiscal cliff” to take effect.

2) Congress extended all tax cuts in effect in 2012 and delayed all tax increases that were scheduled to go into effect.

3) Congress enacted the American Taxpayer Relief Act, which extended most, but not all tax cuts. This is what actually happened.

Use CTJ’s online tax calculator.

The calculator illustrates the impact of the changes in personal income taxes (the expiration of some of the Bush tax cuts for the very rich and the extension of some 2009 provisions expanding the EITC and Child Tax Credit) as well as the health reform-related change to the Medicare tax and the expiration of the Social Security tax holiday.

The calculator demonstrates to the vast majority Americans that their personal income taxes are no different than they would be if all the Bush tax cuts were extended. (A CTJ fact sheet explains that less than one percent of Americans lost any part of the Bush tax cuts under the fiscal cliff deal that was enacted.)

But the calculator also demonstrates that the expiration of the payroll tax holiday — which lawmakers of both parties barely bothered to debate at all — affects middle-income people.

For more information, see CTJ’s fact sheet detailing the provisions in the fiscal cliff deal, as well as CTJ’s reports on the distributional effects and revenue impacts of the deal.

Photo of Calculators via Dave Dugdale (of Learning DSLR Video) and 401 K 2013 Creative Commons Attribution License 2.0

Note to Readers: This is the third of a six part series on tax reform in the states. Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” proposals.  This post focuses on personal income tax cuts under consideration in the states.

While not as dramatic as wholesale repeal of the income tax, five states this year are likely to consider regressive income tax cuts that will compromise their ability to adequately fund public services now and in the future.

In Indiana, Governor Pence campaigned last fall on cutting the state’s already low, flat personal income tax rate from 3.4 to 3.06 percent, and has shoehorned that idea into a budget proposal that also fails to help schools that are “still reeling from the cuts” enacted during the recent recession. The Institute on Taxation and Economic Policy (ITEP) found that Pence’s tax plan would primarily benefit the state’s most affluent residents: 56 percent of the benefits would go to the best-off 20 percent of Indiana residents, while one in three of the state’s poorest residents would see no tax cut at all.  The South Bend Tribune, among others, has urged lawmakers to “pass on this tax cut” because of its high revenue cost and the way in which it would add to the unfairness (PDF) already present in Indiana’s tax code.

In Oklahoma, Governor Fallin has significantly scaled back her tax cut ambitions from last year.  Rather than aiming for a fundamental restructuring of the income tax, the Governor has proposed simply repealing the state’s top personal income tax bracket, thereby cutting the state’s top rate from 5.25 to 5.0 percent.  The Oklahoma Policy Institute explains that this proposal “would take $106 million from Oklahoma schools, public safety, and other core state services without offering any way to pay for it.”  And ITEP’s new Who Pays? report shows that last time Oklahoma cut its top income tax rate, in 2012, the vast majority of the benefits (PDF) went to the highest-income taxpayers in the state.  Meanwhile, State Senator Anderson has once again proposed a dramatic flattening of the income tax that would actually raise taxes on most of the state’s lower- and moderate income residents.

In Montana, two different proposals for cutting personal income tax rates have been floated in recent weeks.  A House proposal to cut the bottom income tax bracket has already been defeated, with Democrats opposing it because of its revenue cost and some Republicans opposing the idea of tax relief for the poor, despite the disproportionate impact (PDF) the state’s tax system currently has on low-income families.  Meanwhile, a Senate bill to repeal the top personal income tax bracket and cut the next tax rate is still alive.  A small portion of the bill would be paid for through scaling back the state’s regressive preference for capital gains income and hiking the state’s corporate income tax rate.  Overall, however, the bill would reduce both the fairness of Montana’s tax system and the revenue it generates.

In Arkansas, the debate over the income tax has yet to heat up, but the House Revenue and Taxation Committee Chairman says he’s “very bullish” about the possibility of enacting a large tax cut, and other Republicans in the legislature are reportedly discussing options for cutting the income tax. 

Finally, in Wisconsin, rumors briefly swirled that there may be a push to eliminate the state’s income tax and replace it with a much larger sales tax, akin to what’s been proposed in Louisiana, Nebraska, and North Carolina.  Governor Walker, however, responded by saying that he will wait and see how those debates play out in other states before deciding whether to advocate for such a change in 2015.  In the meantime, the Governor says he will propose what he claims will be a “middle-class” tax cut of about $340 million.  Assembly Speaker Robin Vos is hoping for a proposal of at least that size.  The Governor’s budget proposal is due out on February 20, and by then we should have a better idea of whether the plan will actually be aimed at middle-income Wisconsinites, as well as its true price tag.

Last month, Kansas Governor Sam Brownback proposed, for the second straight year, major tax changes during his State of the State speech. These new changes include lowering the state’s two tax bracket rates to 1.9 and 3.5 percent, eliminating itemized deductions for mortgage interest and property taxes paid, and raising the sales tax. The Institute on Taxation and Economic Policy (ITEP) analyzed the impact of the Governor’s proposal on Kansans and found that his plan is quite costly and raises taxes on the poorest Kansans. Read the full analysis here.

The ITEP analysis found that if fully implemented in 2012, Brownback’s latest proposal would have reduced state revenues by close to $340 million and the poorest 20 percent of Kansas taxpayers would pay 0.2 percent more of their income in taxes each year, or an average increase of $22. However, upper-income families would reap the greatest benefit from his plan, with the richest one percent, those with an average income of over a million dollars, saving an average of $6,528 a year, which is about 0.6 percent of their income. Taxpayers in the middle income groups would see a more modest tax cut, up to $200 on average, amounting to roughly 0.3 percent of their income. When combined with the cuts from last year, wealthy Kansans benefit overwhelmingly – to the tune of an average tax cut of nearly $28,000. And the only group who’d pay higher taxes are the lowest earners.

In his Kansas City Star op-ed, ITEP’s director notes that the first rule of tax reform ought to be to first do no harm, but it seems pretty clear Governor Brownback’s plan would harm low-income Kansans. At the same time, it’s a second round of cuts for Kansans who don’t need them, and when the state can’t afford them.

Earlier this week, a district court in Texas ruled for a second time that the state’s system of paying for schools is unconstitutional, both because it fails to provide enough revenue to deliver an adequate education for Texas children and because it creates huge inequities in the quality of education enjoyed by richer versus poorer districts. The lawsuit prompting this decision was brought by hundreds of school districts in the wake of a 2011 decision by the state legislature to dramatically cut state aid to local schools. The state of Texas is expected to appeal, in which case it goes to the Texas Supreme Court.

As the Texas Center for Public Policy Priorities (CPPP) notes (PDF), the 2011 spending cuts came after a misguided decision by the 2006 legislature to replace local property tax revenue with revenues from cigarette taxes (of all things) and a new, untested approach to taxing business income. CPPP finds that the tax hikes in that 2006 “tax swap” have paid for only about a third of the lost property tax revenue, leaving a gaping $10 billion hole in the state’s 2011 budget. This probably also helps account for what the 600 school districts in the lawsuit say is a $43,000 gap between rich and poor classrooms, too.

The choice to pay for the growing cost of education using a flat-lining tax such as the cigarette tax (whose returns are famously diminishing, PDF) reflects the limited options available in a state that refuses to levy a tax on personal income.

Texas is one of only a handful of states with no income tax, and its current Governor has made a big show of his intention to keep it that way. At a time when a number of states’ elected officials are expressing a desire to restructure their tax systems to more closely resemble the Texas tax system (usually by simply repealing their personal income tax), this week’s court decision is a harsh reminder that the short term politics of tax cuts has long term consequences for citizens. Texas, for example, has abysmal numbers on education and its poverty rate continues to rise.

So when someone like Kansas Governor Sam Brownback crows “Look out Texas. Here comes Kansas!” it might be he didn’t read the brochure before planning this particular trip. It’s not the first time he – like other political leaders – has talked up the Texas tax structure.  But given the Lone Star State’s track record, and the budget havoc tax cuts are causing in Kansas, all lawmakers should think twice before embarking on the no-income-tax path.

Photo courtesy Texas Tribune.

A new short report from Citizens for Tax Justice explains that House Ways and Means Committee Chairman Dave Camp has put forward an intriguing proposal to reform the tax treatment of derivatives — the complex financial instruments that played a starring role in the financial collapse. As the report explains, Camp unfortunately proposes to use any revenue saved from his reforms to pay for reductions in tax rates.

Derivatives can create huge opportunities for tax avoidance. To take just one example explained in the report, Ronald S. Lauder, heir to the Estée Lauder fortune, used a derivative called a “variable prepaid forward contract” to sell stock without paying taxes on the capital gains for a long time. Lauder entered into a contract to lend $72 million worth of stock to an investment bank and promised to sell the stock to the bank at a future date at a discounted price, in return for an immediate payment of cash. The contract also hedged against any loss in the value of the stock.

The contract put Lauder in a position that is economically the same as having sold the stock — he received cash for the stock and did not bear the risk of the stock losing value — and yet he does not have to pay tax on the capital gains until several years later, when the sale of the stock technically occurs under the contact.

The most significant of Chairman Camp’s proposals would subject most derivatives to what is called “mark-to-market” taxation. At the end of each year, gains and losses from derivatives would be included in income, even if the derivatives were not sold.

Assuming the mark-to-market system is implemented properly without loopholes or special exemptions for those with lobbying clout, the result would be that the types of tax dodges described above would no longer provide any benefit. The taxpayers would not bother to enter into those contracts because they would be taxed at the end of the year on the value of the contracts (meaning they are unable to defer taxes on capital gains) and the gains would be taxed at ordinary income tax rates.

The reform could be key to blocking the sort of tax dodges available only to the very rich.

Over the weekend, President Obama and Senate Majority Leader Harry Reid both stated that closing tax loopholes is part of the solution to replacing the coming sequestration of federal spending.

CTJ’s recently updated working paper on tax reform options identifies three categories of reforms that would accomplish this. They include ending tax breaks and loopholes that allow wealthy individuals to shelter their investment income from taxation, ending breaks and loopholes that allow large, profitable corporations to shift their profits offshore to avoid U.S. taxes, and limiting the ability of wealthy individuals to use itemized deductions and exclusions to lower their taxes.

Sequestration: Spending Cuts No One Seems to Want

In 2011, President Obama and Congress agreed to across-the-board sequestration (automatic spending cuts) that they hoped to replace with more targeted, thought-out deficit-reduction measures.

Under the law they enacted, the Budget Control Act of 2011 (the BCA), the sequester was supposed to take effect in the beginning of this year. But the recent deal addressing the “fiscal cliff” replaced the first two months of sequester savings with some arcane accounting gimmicks, so now the sequester begins March 1 if Congress does not act. Between then and the end of the year, it would cut spending by $85 billion. Over a decade, the sequester will cut spending by $1.2 trillion.   

Those cuts are spread evenly across defense and non-defense spending, affecting the programs favored by politicians of every ideological stripe. Lawmakers agree that they do not like the scheduled sequester. Congressional Republican leaders argue that it should be replaced entirely with spending cuts while Democratic leaders in Congress and President Obama insist that revenue increases must be involved.

Revenue Is the Answer

The Center on Budget and Policy Priorities points out that if the sequester is averted with spending cuts and no revenue increases, that will mean that the combination of all the deficit-reduction measures, which began in 2011, would include five times as much in spending cuts as revenue increases. The President is calling for any deficit reduction from this point on to include an equal share of spending cuts and revenue increases. But even this would mean that the combination of all these deficit-reduction measures would include twice as much in spending cuts as revenue increases.

A fair approach would be for Congress to replace the sequester entirely with new revenue. There are several reform options described in CTJ’s working paper that would raise hundreds of billions of dollars over the coming decade.

Some of these reform options could be enacted on their own, like President Obama’s proposal to limit the tax savings of each dollar of deductions and exclusions to 28 cents. Others are more likely to be part of a larger tax reform, like ending the rule allowing corporations to “defer” (not pay) U.S. taxes on their offshore profits or ending the provision in the personal income tax exempting capital gains at death. All of these reforms would end or cut back tax breaks that are hugely beneficial to extremely wealthy families and large corporations but not to low- and middle-income families.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP) is continuing to generate a lot of publicity in the states for its recent Who Pays? report examining the fairness (or lack thereof) of every state’s tax system.  The Tennessean explains, for example, that: “Tennessee is often championed as a low-tax state. But for struggling families, it might not be among the fairest.”

In Pennsylvania, meanwhile, Sharon Ward of the Pennsylvania Budget and Policy Center explained ITEP’s report to CBS Philly by saying that: “We are in a club we don’t want to be in — one of the ‘Terrible Ten States’ that has the most regressive tax systems. And really, we got here for a very important reason: we have a flat income tax that fails to offset the more regressive taxes: sales and property taxes.”

And in Wyoming, the Equality State Policy Center (ESPC) is using ITEP’s new Who Pays? data to make the case for enacting a state Earned Income Tax Credit (EITC).  ESPC explains that the credit could make a long-overdue increase in the state’s gasoline tax much fairer by mitigating its impact on low-income families.

We recently profiled the four states looking most seriously at “tax swaps” that would offset big income tax cuts with a regressive sales tax hike — Kansas, Louisiana, Nebraska, and North Carolina.  New Mexico can now be added to that list.  Two lawmakers there say they would like to expand the sales tax to apply to “virtually everything that happens” in the state and then repeal the personal and corporate income taxes.  But economists in New Mexico say that the plan is “pretty much guaranteed to be regressive and shift the tax burden.”

Bipartisan legislation in Texas would remedy the state’s “astounding deficit of knowledge when it comes to tax expenditures” — or special tax breaks (PDF). The report proposes a number of smart reforms recommended by ITEP.  Those reforms include rigorous reviews aimed at determining whether tax breaks have fulfilled their goals, and “sunset provisions” designed to force a vote on special tax breaks that would otherwise continue on autopilot for years or decades on end.