Author: tarek

Late last week, Kentucky’s Blue Ribbon Commission on Tax Reform released their tax reform recommendations. Many of the Commission’s recommendations are bold and forward-looking, like their proposal to expand the sales tax base to services  (PDF) and simultaneously institute an earned income tax credit (PDF). Not only does the Commission deserve kudos for trying to shore up tax revenues over the long term while keeping an eye on tax fairness, the Commission also clearly understood the need to raise more revenue. As one Herald-Leader columnist said,  “task force members had the courage to recommend a plan that would add $690 million in revenue during the first year.”  But the Commission’s recommendations aren’t without their flaws, such as $100 million in cuts to the corporate income tax. Jason Bailey from the Kentucky Center for Economic Policy reminds us, “Business tax cuts are really a race to the bottom between states.”

Nebraska think tank Open-Sky Policy Institute released, “Feeling the Squeeze- The Negative Effects of Eliminating Nebraska’s Inheritance Tax” detailing the impact of eliminating the state’s inheritance tax. The tax generates about $43 million annually for counties. These revenues are an important part of county budgets, and its counties assist with natural disasters, keeping roads safe and administering elections, among other things. Tax cuts don’t happen in a vacuum and that revenue will need to be made up with new revenue or reductions in services. Open Sky found that if “counties replaced all of the lost inheritance tax revenue with an increase in property taxes, the average overall county tax rate would have to increase by 7 percent.”

The majority of Hoosiers are telling Indiana Governor-elect Mike Pence “not so fast” on his tax cutting plan.  A new poll shows that taxpayers would rather see their tax dollars spent on investment priorities rather than tax cuts. Just 31 percent of those surveyed supported Pence’s proposal of slashing taxes by 10 percent across the board versus 64 percent of voters who would rather see tax revenue spent on education and workforce development.

Read this fantastic op-ed from Remy Trupin, executive director of the Washington State Budget & Policy Center, which makes the case for fundamental tax reform. “Washington needs a revenue mix built for the 21st century. That means eliminating wasteful tax breaks, modernizing our state sales tax to include more consumer services and taxing gains on the sale of stocks, bonds and other high-end financial assets held by the wealthiest two percent of Washingtonians.”

A story in this week’s New York Times uses CTJ numbers to demonstrate what CTJ has said many times: President Obama’s proposal is not the confiscatory tax plan opponents would have you believe.

We have pointed out that taxpayers earning just over $250,000 really don’t have to worry because the President’s plan would barely affect them.  “A married couple whose income is exactly $250,000 would see no change in their income taxes under Obama’s plan,” we explained.

As the New York Times puts it,  “A close look at the president’s plan shows that a large majority of families making up to $300,000 — as well as hundreds of thousands of families with even larger incomes — would not pay taxes at a higher marginal rate…. [T]hey are the beneficiaries of choices the administration has made to ensure that families earning less than $250,000 do not pay higher rates.”

According to the Times, in crafting the plan, Obama’s team assumed high-income families take $20,000 in deductions, even though most families in this income range take a much larger amount, further driving down their taxable income. The Obama team also indexes the $250,000 and $200,000 thresholds for inflation from 2009, when the proposal was first formally put forward. This means families in 2013 could have considerably more than $250,000 in income without losing any part of the Bush income tax cuts under Obama’s approach.

“They wanted to be able to say that ‘Absolutely nobody making less than $250,000 could possibly pay higher taxes under our plan,’” said Robert S. McIntyre, the director of Citizens for Tax Justice, a liberal advocacy group. “So they had to assume the most ridiculous assumptions, that even if you’re a childless couple with no itemized deductions making $250,001, your taxes still won’t go up. They figured that if this couple existed and their taxes went up, somebody would find them and jump on ’em.”

You can view the graphics here.

In the end, the Times reports that if the President’s plan to allow the Bush tax cuts to expire on the top two percent is implemented, only about 32 percent of families with income from $250,000 to $300,000 would lose part of their income tax cuts. About 77 percent of families with income of $300,000 to $350,000 would lose tax cuts, and almost 99 percent of families with incomes above one million would lose some of theirs.

A related story in the Boston Globe uses other new CTJ numbers to show that, by contrast, one of the Republican plans to cap deductions without raising rates would have the inverse effect; it would “exact a bigger toll on upper- to high-income earners in the professional classes,” as opposed to the Mitt Romneys and Warren Buffetts.

While the headlines on the fiscal cliff negotiations are about wrangling over the top individual tax rates, multinational corporations are quietly lobbying for an agreement to move the U.S. international tax rules to a territorial system.

Members of the so-called Fix the Debt Campaign have called for massive cuts to social programs while seeking additional tax breaks for their own companies. A move to a territorial system could give the 63 publicly-held companies in the Fix the Debt campaign an immediate windfall of up to $134 billion and would massively increase their incentives to move even more profits offshore, where they would then be permanently exempted from U.S. taxes. Terrible-torial.

Meanwhile, defense contractors that exhort Congress to find a “reasonable approach” are also lobbying for permanent tax breaks on their offshore earnings. And major corporations complain (perennially) about having to pay U.S. taxes on any foreign cash they decide to bring home.

Moving to a territorial tax system would be a disaster for the U.S. Treasury and an open invitation for multinational companies to intensify their offshore shenanigans. Our fact sheet explains why. For an illustration of why it’s such a bad idea, you only need to look at headlines from the U.K.  Because of their territorial tax system, they are unable to collect corporate income tax from U.S. corporate giants Starbucks, Amazon, and Google who are profiting wildly from sales and business in the U.K.  Recently, these multinational giants were hauled before Parliament to explain their “immoral” tax-dodging behavior.

The U.S. already collects only a fraction of the taxes corporations owe on their profits; why would we move to a system that makes the problem even worse?

A Los Angeles Times report out of Hawaii illustrates why all tax breaks need to be subjected to more scrutiny.  The state’s well-intentioned and wildly popular tax “incentive” for solar energy has gotten more than a little out of control, skyrocketing in cost from $34.7 million in 2010 to $173.8 million in revenues this year, and even jeopardizing the reliability of the state’s power grid. Tax authorities have responded by slicing the credit in half for now.  Had Hawaii implemented some of the tax break accountability reforms we’ve recommended before, (first among them establishing measurable outcomes!), they could have prevented some of this chaos.

South Dakota Governor Dennis Daugaard is encouraging Congress to take action on a national Amazon tax policy because he worries about the impact that exempting online sales from his state’s tax base has on tax fairness and revenues. In the wake of a record settling Cyber Monday he points out that the “gift-buying binge also likely broke another record: most purchases made in South Dakota without paying sales tax.” For more on taxing Internet sales see this Institute on Taxation and Economic Policy (ITEP) brief (PDF).

The Illinois Senate deserves kudos for passing legislation that would require publicly traded corporations to disclose their Illinois income tax bill.  Currently about two-thirds of the companies doing business in Illinois aren’t paying state income taxes. If the bill passes the House and is signed into law by Governor Quinn, important, never-before-known information will be available about corporate taxpayers.  House Majority Leader Barbara Flynn Currie said, “Public policymakers can’t make good public policy if they don’t know what’s going on. We don’t know whether those 66 percent of corporations that pay no income tax in fact don’t have any profits.”

In case you missed it — Good Jobs First and the Iowa Policy Project recently collaborated to release this must read report, Selling Snake Oil to the States, which debunks the tax and regulatory recommendations made by the American Legislative Exchange Council (ALEC) for building economic growth in the states. Here’s a sneak peak of the study’s findings: “the states ALEC rates best turn out to have actually done the worst.”

Michigan House members will likely approve a proposal in the next week to repeal the tax businesses pay on industrial and commercial personal property (equipment, furniture and other items used for business purposes). Idaho lawmakers are considering a similar proposal.  An editorial in the Battle Creek (MI) Enquirer, however, urges lawmakers to put the plan on hold until there is a “better understanding of the impact on local units of government, along with a plan to mitigate that impact.”  Indeed, the overwhelming majority of revenue generated by this tax helps to fund  local governments, and it would be difficult for localities to absorb a cut that severe. 

While most of the IRS’s various statistical reports tend to inspire little excitement in the public and media, the agency’s latest report,“Individual Income Tax Returns, 2010” is something of a barnburner, in part because it confirms several troubling trends in the federal income tax.  A few stand outs:

1. Our Income Tax Code Stops Being Progressive at $2 Million of Income

According to the new IRS data, the average effective income tax rate actually drops from 25.3 percent for people making (a mere) $1.5 – 2 million to 20.7 percent for taxpayers making $10 million or more in income. (Those are 2010 figures.) In other words, as a taxpayer’s income surpasses $2 million, their effective income tax rate actually goes down, which is the opposite of what should happen under a progressive tax system.

2. Average Effective Income Tax Rates on Taxpayers Making Over $500,000 Dropped In 2010

While taxpayers making between $30,000 and $499,000 saw their average effective income tax rates go up slightly between 2009 and 2010, taxpayers making $500,000 or more actually saw their average effective tax rates go down. In fact, taxpayers making $10 million or more saw their effective tax rate drop almost eight percent from 2009 to 2010. Looking over a decade (2001 to 2010), the picture is even more dramatic: taxpayers making $10 million or more saw their average effective tax rate drop by almost 21 percent.

3. The Special Low Rate on Capital Income is Driving Effective Income Tax Rates Lower for the Wealthiest of the Wealthy

What explains the drop in the average effective tax rate for people making $10 million or more between 2009 and 2010? The IRS data reveals that these taxpayers saw their reported income from capital gains and dividend income increase to 48.5 percent of their total income in 2010, compared to 35.8 percent in 2009.  That change was driven largely by the economic recovery and rebounding stock market. Because income from investments is subject to a lower preferential rate than wages or salary, the more income taxpayers earn from these sources the lower the effective tax rate they will ultimately pay. As Citizens for Tax Justice has explained, ending the tax preference on capital gains and dividends is critical to ensuring that the wealthiest Americans pay their fair share.

Recent reports and opinion pieces in two states caution lawmakers about the affordability and fairness implications of excessive tax cuts.

In Indiana the Associated Press is reporting on “apprehension about [Governor Elect] Pence’s call for a 10 percent cut in the personal income tax … among top Republican lawmakers.”  Recent corporate income tax cuts, the elimination of the state inheritance tax, and declining gambling revenues have created a thick “fiscal fog,” as Republican House Speaker Brian Bosma describes it, which keeps him from committing to an income tax cut, at least for now.  To see how Pence’s plan would affect Indiana residents of different means, read the Institute on Taxation and Economic Policy’s report: Most of Indiana Tax Rate Cut Would Flow to Upper-Income Taxpayers (PDF).

Wisconsin Governor Scott Walker is making tax cutting a major priority in 2013. During a major policy speech at the Ronald Reagan Presidential Library he said, “We are working on massive tax reform…. We are going to continue to lower our property taxes.  We are going to put in place an aggressive income tax reduction reform in the state of Wisconsin.” This analysis from the Capital Times reminds us that the Governor really can’t do that much more for small businesses because the tax package he signed into law in his first budget actually eliminated taxes on many businesses altogether. The article also points out that tax cuts cost money — money the state can ill afford to spend — and the state’s “economy is sputtering.” If Governor Walker succeeds in making his tax cut proposals a reality, it warns, “something will have to give.”

A cynic might think it’s a little bit of theater we’re witnessing, political pantomime deliberately staged to make Republicans look like they’ve gone all reasonable and are willing to raise taxes.  Others see this week’s headlines as the meticulously orchestrated end game in a 30-year strategy laid out by Grover Norquist and his Americans for Tax Reform.  More likely it’s just a rush among journalists to tell a big story: Republicans are renouncing their fealty to Grover’s no-tax pledge and are ready to support tax hikes.

The media loves a good story, and this one is the stuff of drama. An awkward little man who rose to power as leader of an anti-government movement faces sudden mutiny, with his followers peeling off and his authority in question. In this story, Grover Norquist is part spurned lover and part emperor with no clothes.

We’re not buying it. Much as we love the idea of Grover losing his clout and credibility, there’s no evidence his followers (mostly Republicans, a few Democrats) have changed their minds about taxes. Even when they make noises about abandoning the pledge and embracing new revenues, they are nonetheless hewing to Norquist’s two-part pledge. Just listen to a few who’ve been making news with their allegedly new-found freedom:

Senator Bob Corker: “I’m not obligated on the pledge.  I made Tennesseans aware, I was just elected, the only thing I’m honoring is the oath I take when I serve, when I’m sworn in this January.” But, “[my] proposal includes pro-growth federal tax reform, which generates more static revenue… by capping federal deductions at $50,000 without raising tax rates.”

Senator Lindsey Graham: “I agree with Grover — we shouldn’t raise rates — but I think Grover is wrong when it comes to we can’t cap deductions and buy down debt…. I will violate the pledge, long story short, for the good of the country, only if Democrats will do entitlement reform.”

Senator Saxby Chambliss: “Times have changed significantly, and I care more about my country than I do about a 20-year-old pledge…. If we do it (Norquist’s) way, then we’ll continue in debt.” But (he tweeted), “I’m not in favor of tax increases. I’m in favor of significant tax reform 2 lower tax rates & generate additional revenue through job growth.”

Rep. John Boehner: “….[R]aising taxes on the so-called top two percent – half of those people are small-business owners that pay their taxes through their personal income tax filing every year. The goal here is to grow the economy and to cut spending.  We’re not going to grow the economy if we raise tax rates on the top two rates.” And, “[w]e’re willing to put revenue on the table as long as we’re not raising rates.”

Rep. Tom Cole:  “I think we ought to take the 98 percent deal right now. It doesn’t mean I agree with raising the top two. I don’t.” And, “I signed that pledge; I’m honored to do it. I don’t think in this case we would be breaking it by making what are temporary tax cuts permanent….I want to make all of them permanent, quite frankly. “

None of these Republicans characterized as leading the mutiny against Grover’s no-tax pledge is getting anywhere near raising taxes, in both senses that the pledge mandates.  It is often forgotten that support for making all the Bush tax cuts permanent amounts to another rate cut because by law, those rates are scheduled to all go up on January 1, 2013.  They may cap a deduction here or there, but that will be outweighed by the generous Bush era rate cuts they (and to a large extent, the President) promise for 2013.  And that’s exactly what the pledge they’ve all signed spells out:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and
TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Increasingly, too, the Republican House leadership is demanding revenue cuts. Where are the President’s cuts? What are the Democrats’ plans for entitlement reform? This is what Speaker Boehner is tweeting several times a day. And his lieutenant, Eric Cantor, remains clear his party is opposed to tax rate increases.

An organization like Americans for Tax Reform doesn’t spend  upwards of $24 million in one election cycle if it’s not serious about getting its way, and Grover Norquist is a serious man.  As he told Politico just this week:

“I want pro-taxpayer candidates to survive and thrive….. My goal is to have the Democrats also all take the pledge…. I’m not planning on losing the tax debate we’re having right now, but the tax issue will be more powerful in 2014 and ’16 than today.  It gets more powerful.”

Let’s don’t kid ourselves or help the deep pocketed anti-tax lobbying machine peddle more myths.  It’s a testament to Norquist’s thirty-year effort that four years into an historic economic crisis, a couple of closed loopholes looks like a win for the good guys.  It’s not a win. Let’s view it instead as a chink in the armor, though – and redouble our own efforts.

Image of Norquist courtesy Liberaland.

An Oklahoma Congressman who chaired the National Republican Congressional Committee is the first person in Washington to speak clearly about the debate over the looming expiration of tax cuts first enacted under President George W. Bush.

Politico reports that Rep. Tom Cole of Oklahoma has argued to fellow Congressional Republicans that voting for President Obama’s proposal to extend the Bush income tax cuts for income up to $250,000 (up to $200,000 for unmarried taxpayers) is clearly a vote for cutting taxes, not raising them, and therefore does not violate a no-tax-increase pledge promoted by Grover Norquist’s organization and signed by most Republican lawmakers.

In other words, the President’s approach is a tax cut, just not quite as big of a tax cut (particularly for the rich) as the Republican Congressional leadership has advocated so far. This is illustrated in the graph below, which is from CTJ’s recent reports on the competing approaches to these expiring tax cuts.

This issue has been muddled by both Republicans and Democrats in Congress and in the White House. For example, President Obama often refers to his proposal to extend the tax cuts for income up to $250,000 or $200,000 as a way to “raise revenue.”

But Rep. Cole is correct because the Bush tax cuts are temporary tax cuts that are specifically written to expire at a certain date. Any extension of part of those tax cuts is a new tax cut that reduces revenue, and is “scored” by the Joint Committee on Taxation and the Congressional Budget Office as a revenue loss.

President Obama’s approach would extend the Bush income tax cuts entirely for 98 percent of Americans and partially for the richest two percent of Americans. Rep. Cole is reported to argue that Congressional Republicans should settle right now for Obama’s proposal to extend the tax cuts entirely for 98 percent of Americans, before they expire, and debate the tax cuts for the richest two percent at a later date.

CTJ has long argued that President Obama’s proposal would extend far too many of the unaffordable Bush tax cuts, but Congress should enact his proposal for the short-term if it is the least irresponsible option being debated today. On the other hand, if anti-tax lawmakers in Congress refuse to follow Cole’s lead and instead block any tax bill that does not include an extension of all the tax cuts, then President Obama should simply allow all of the tax cuts to expire.

The logic used by most Congressional Republicans (not including Rep. Cole) is that allowing the expiration of a tax cut is the same thing as enacting a tax increase. But this logic is not applied consistently. While the Republican tax bills in the House and Senate would extend all the tax cuts first enacted under President Bush, they would allow the expiration of some expansions of the of the EITC and the Child Tax Credit that were first enacted under President Obama in 2009. That’s why the graph above shows that low- and middle-income groups would get slightly smaller average tax cuts under the approach of GOP Congressional leaders than they would get under Obama’s approach. (The difference is much more dramatic for the particular families affected.)

Somehow, followers of Grover Norquist don’t seem to consider the expiration of a tax cut to be a “tax increase” when only low- and middle-income people are affected. 

Kansas First Lady Mary Brownback has been appointed an unofficial advisor to a task force addressing childhood poverty in the state. The Hays Daily News predicts that this could lead to some uncomfortable conversations between Governor Sam Brownback and his wife, especially regarding the tax package he recently signed into law that raised taxes on low-income families. The editors suggest, “[m]aybe the first lady can ask why the governor and state legislature agreed to an unprecedented reduction in income tax rates while at the same time eliminating various tax credits, such as the food sales tax rebate and breaks for child care and renters.”

Monday was the biggest day ever for online shopping. “Cyber Monday” shoppers spent 30 percent more this year than last. The Illinois Retail Merchants Association and other brick-and-mortar business groups used Monday’s online shopping surge to remind shoppers and policymakers alike that sales taxes should be collected on Internet purchases just as on items purchased in traditional stores: “The tax is supposed to be paid. If someone orders something from an online retailer or a catalog retailer that doesn’t collect the tax, the customer owes the money to the state.”

It appears that the gap between Wisconsin’s rich and poor continues to widen. The bottom two fifths of the state’s residents actually saw their incomes decline while the top fifth – and especially the top one percent – saw theirs climb over the last 25 years. One solution to this problem, identified by the Center on Wisconsin Strategy and the Wisconsin Budget Project, is to reform the state’s regressive tax structure because currently, “state and local taxes in Wisconsin increase income inequality rather than reduce it.”

A recent policy brief from the Washington State Budget and Policy Center identifies eight strategies to rebuilding the state’s economy. One of the goals identified is implementing a “Productive, Equitable Revenue System” through modernizing the tax structure and making it more fair. Washington has the most regressive state tax structure in the country; low income people pay far more of their income in taxes compared to wealthy Washingtonians. If state policymakers want to rebuild their economy, improving their tax structure is a good place to start.

The collective investments the taxes we all pay allow us to make in our communities, our states and country.  Whether it’s providing public education, clean air and water, well-connected road and public transit systems, safe streets, affordable health care, or income supports for working families, taxes make a difference in all of our lives every day.  Our society is the product of generations of public investments that serve the common good.

That voters in so many states acted with an eye toward the future this November.  Michiganders rejected a constitutional amendment that would have made tax reform all but impossible.  Floridians opted not to strangle further revenue growth with a “TABOR” amendment.  New Hampshirites left the door open to a fairer tax system by not prohibiting any future tax on earned income. Oregonians decided to retain their estate tax and end the practice of giving corporations their taxes back when revenue growth is unexpectedly strong.  And Californians made an investment in their future by enacting a progressive revenue-raising package. And that nationally, we saw something of a watershed when Americans decided that after decades of tax cuts, it’s time to start restoring some revenues.

That the earned income tax credit (EITC) is offered on the federal level, and that many states have followed in the federal government’s footsteps and adopted their own credit. Offering the EITC is an indication that policymakers of all political persuasions realize that Americans who work and pay taxes but still live at or near the poverty level are deserving of tax relief.

And of course, for our supporters and friends across the country – and around the globe – who make our work possible. We wish all of you, our readers, donors, friends and Tweeps, a very happy Thanksgiving!