To make watching the debates just a little more fun, we created a Bingo card with all the tax and budget related terms we expect the two candidates to trot out time and again over the coming debates. (If you want to make the debates even more fun you could have a drink everytime they use one of these words as well, but you didn’t hear this from us.)
| Bingo Card #1 | Bingo Card #2 | Bingo Card #3 |
Missouri might just be the poster child for why it’s so important to ramp up the amount of scrutiny given to special tax breaks. From 2005 to 2009, the state accidentally spent over $1.1 billion more on tax credits than lawmakers expected. More recently, despite its budget being squeezed by a poor economy, Missouri’s tax credit spending continued on auto-pilot, actually rising by some 15 percent, while education and health spending fell well short of Missourians’ needs (PDF). Making matters worse, the only tax credit “reform” to come close to passage in recent years was an unsuccessful effort to scrounge up some tax credit savings and blow them on a massive giveaway designed to turn the St. Louis airport into a futuristic hub for freight between China and the Midwest.
What Missouri and other states need is a way to carefully evaluate all of their tax breaks on an ongoing basis, and an incentive to get lawmakers to act when a tax break is proven to not be worth the cost. To that end, the Institute on Taxation and Economic Policy (ITEP) just published a new resource outlining five steps that states can take to make this basic standard of good governance a reality, and showing that over a dozen states have already taken at least one of these steps.
In brief, those steps are:
Every state has significant room for improvement when it comes to the level of scrutiny it applies to special tax breaks. To learn more, read ITEP’s report: Five Steps Toward a Better Tax Expenditure Debate.
CTJ Analysis Shows That Millionaires Would Get Average Tax Cut of $250,000 Even If Deductions and Exclusions Are Limited to Zero
Today, presidential candidate and former Massachusetts Governor Mitt Romney suggested that one way to offset the cost of his proposed tax cuts would be to limit deductions to $17,000.
“As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction, or others – your healthcare deduction. And you can fill that bucket, if you will, that $17,000 bucket that way,” he said on a local Denver news show. “And higher income people might have a lower number.”
In September, Romney argued that he would eliminate enough deductions, exclusions and other special breaks to offset the costs of the new tax cuts he proposes, and that the net result would not be a tax increase for the middle-class or a tax cut for the rich.
But an August analysis from Citizens for Tax Justice demonstrated that even if itemized deductions and exclusions were eliminated entirely, people who make over $1 million would still see an average net tax break of $250,000 in 2013 under Romney’s plan.
That’s partly because the new tax breaks that Romney proposes are so generous to the rich that they would outweigh the loss of any deductions or exclusions. In addition to making permanent all the Bush tax cuts, Romney would reduce income tax rates by a fifth and eliminate the AMT and the estate tax.
Another reason is that Romney pledges to keep the special breaks that benefit the wealthy most of all — breaks for investment and savings like the special low rate for capital gains.
As a result, there is simply no way to Romney could fill in the details of his tax plan in a way that will not result in huge tax cuts for the very rich.
For low- and middle-income people, the loss of tax expenditures (tax deductions, exclusions, credits and other breaks) under Romney’s plan could outweigh any gains from the tax rate reductions and other new tax cuts, resulting in a net tax increase. In fact, this result is inevitable if Romney is to accomplish his goal of not further increasing the deficit while at the same time cutting taxes for millionaires by at least $250,000 on average.
Let’s start with the good news. There’s a growing recognition among even the most virulently anti-tax lawmakers that one core area of government is actually underfunded and needs revenues: transportation maintenance and construction.
Unfortunately, there’s some bad news, too. Rather than fixing the gas tax shortcomings that have led to transportation coffers (quite predictably) running dry, many of those same lawmakers want to divert money away from education, health care, and other services, and spend it on roads and bridges instead.
One lawmaker touting this approach is Iowa Governor Terry Branstad. While Branstad should be praised for realizing that the gas tax should be raised next year, his broader plan to couple that increase with big cuts in income taxes and local property taxes completely misses the mark. If enacted, everything from schools to police departments will have to be scaled back just so that Branstad can avoid the “tax raiser” label some political operatives might pin on him for favoring a long-overdue and much-needed gas tax hike.
Governor Branstad’s approach echoes one outlined earlier this year by his counterpart in Virginia, Governor Bob McDonnell. During a conversation with the Associated Press (AP), McDonnell hinted that he might reverse his opposition to raising the gas tax if it’s done as part of a broader, revenue-neutral tax “reform” package. As we explained then, however:
“Even if McDonnell believed the state’s gas tax needs to be raised and indexed, his opposition to raising any new revenue overall is almost guaranteed make his reform agenda bad for the state. That’s because every dollar in new revenue McDonnell might generate for transportation would have to be offset with a dollar in tax cuts elsewhere in the budget—presumably from a tax that funds education, human services, public safety, and other core government functions.”
These proposals to actually increase the gas tax might seem remarkable at first, coming from governors who are as opposed to taxes as Branstad and McDonnell. But when you peel away the layers, the logic behind the proposals is nothing new. In the face of lagging gas tax revenues, politicians have frequently raided other revenue streams in order to avoid raising taxes but still keep their transportation systems afloat. Nebraska, Utah, and Wisconsin did it in 2011, and Michigan, Oklahoma and the federal government did it in 2012. At their core, Branstad and McDonnell’s approaches are just accomplishing the same outcome but in a more roundabout way: shifting money around in a way that benefits roads at the expense of everything else.
For a smarter approach, see the recommendations made in Building a Better Gas Tax, from the Institute on Taxation and Economic Policy (ITEP).
The Committee for a Responsible Federal 
Budget, an organization “committed to educating the public about issues that have significant fiscal policy impact” and running several programs to address the budget deficit, issued a working paper last week calling for corporate tax reform that has no impact on the budget deficit.
The paper actually does a good job of laying out the issues and the options, explaining that a corporate tax rate reduction could be enacted without increasing the budget deficit so long as lawmakers choose to reduce or eliminate tax expenditures (tax loopholes and tax preferences) to offset the costs of lowering the rate.
But why would a deficit-hawk group not call for a more ambitious goal than simply avoiding an increase in the deficit? Doesn’t everyone agree that we should (eventually anyway) reduce the budget deficit?
Part of the problem may be that there is a lot of misinformation about the corporate income tax. Citizens for Tax Justice has as fact sheet and a report explaining why Congress should enact a corporate tax reform that is revenue-positive (that raises tax dollars). They address some of the common fallacies about corporate taxes.
For example, corporate leaders and their lobbyists sometimes claim that the corporate tax is ultimately borne by American workers, who pay the price when the tax pushes corporations offshore. This can be disproven by the research that finds the vast majority of the corporate tax to be borne by the owners of corporate stocks and business assets and by the common sense observation that corporations would not bother lobbying Congress to lower their taxes if they did not believe their shareholders were the people ultimately paying them.
CTJ is not alone in believing corporations should contribute more. Last year, a letter we circulated calling for revenue-positive corporate tax reform was signed by 250 organizations, including national groups and state-based groups in every state, before being sent to every member of Congress. The letter explains,
Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.
This year, Americans for Tax Fairness, the campaign formed by several national organizations (including CTJ) to raise awareness about revenue issues, decided that one of its basic principles is that “any corporate tax reform should require the corporate sector to contribute more in federal income-tax revenue than it does now, not less.”
Former Virginia Governor and current Senate
candidate Tim Kaine found himself in hot water after a Senatorial debate last week in which he expressed a willingness to consider “a proposal that would have some minimum tax level for everyone.” Perhaps even worse, Kaine has also proposed a so-called “Middle-Ground” approach to the Bush tax cuts, which he says in his TV ad is fiscally responsible. His middle ground position – putting him between a tax-averse Democratic president and a tax-loathing Republican rival – would extend the Bush tax cuts for the first $500,000 that a taxpayer makes in a year.
His fiscally irresponsible ideas about the expiring Bush tax cuts merit their own outrage. Kaine’s proposal to raise the income threshold above which the Bush tax cuts expire to $500,000 would save 22 percent less revenue than Obama’s $250,000 threshold, and 73 percent of the lost revenue would be paying for tax cuts for people making over $500,000. A full 30 percent of the cost of Kaine’s extra tax cuts would go to people making over $1 million!
It’s not surprising that his statements regarding a minimum tax have caused an uproar considering that such proposals are usually the province of radical conservatives like Minnesota Republican Michelle Bachman, rather than that of moderate Democrats. Ironically, Kaine himself made a strong case against such a proposal in the debate when he noted that “everyone pays taxes,” a point Citizens for Tax Justice repeatedly makes.
What’s so disturbing about Kaine’s Bush tax cut proposal, as opposed to his openness to a minimum tax (which he’s already walked back), is that it isn’t out of the realm of possibility. Last May, Democratic House Minority Leader Nancy Pelosi proposed to raise the income threshold over which the Bush tax cuts should expire even higher, from $250,000 to $1 million. Kaine and like-minded Democrats need to reconsider their position because allowing even more of the Bush tax cuts to stay in place makes about zero fiscal sense.
Front Page Photo of Tim Kaine via Third Way Creative Commons Attribution License 2.0
Looks like the “spin room” in Topeka has been busy lately. Read how Kansas Governor Brownback and his staff “fashion[ed] a new budget narrative” in reaction to criticism over massive budget cuts he signed (PDF) earlier this year and possible further reductions. Insisting that revenue lost to his pet tax cuts (which take effect next year) won’t be responsible for budget shortfalls, the governor is saying that somehow the European debt crisis and other things beyond the state’s control are forcing spending cuts.
It’s been a while since we’ve heard much about “marriage penalties” imposed by state tax structures (a so-called marriage penalty is imposed when single filers pay more tax as married couples than if they filed as two single filers). But the issue is rearing its head in Wisconsin and this thoughtful blog post from the Wisconsin Budget Projects helps to put the concept in context.
In order to debunk the absurdity of Mitt Romney’s 47 percent claim, an opinion piece in the Las Vegas Sun reminds Nevadans — by pointing to research from the Institute on Taxation and Economic Policy — that low income people are paying more than their fair overall share because of state and local taxes.
Here the Charlotte Observer editorial board decries both gubernatorial candidates’ calls for politically popular rate reductions and their failure to commit to genuine, comprehensive reform for North Carolina. “Today’s tax code is riddled with exemptions, loopholes and preferential treatment that sap the state of needed revenue… [and] it’s time for tax code reform to take a prominent place on the agenda of the state’s chief executive. The public – the voting public – should insist on it.”
Kentucky’s tax structure is broken – so broken that policymakers have convened 12 commissions since 1982 to study the state’s revenue stream. And yet the Institute on Taxation and Economic Policy (ITEP) found that still the state continues to tax low and middle-income people at a higher rate than the wealthy. This year the Governor Beshear formed the Blue Ribbon Commission on Tax Reform, and the consulting economists assisting the Commission have released their report (PDF) which offers a variety of recommendations that are worth legislative consideration. The full commission, consisting of stakeholders and leaders from organizations across the state, will release its recommendations in November.
The Commission was tasked with analyzing the tax structure with these five goals in mind: fairness, competitiveness, simplicity and compliance, elasticity, and adequacy. The economic consultants found (and most analysts agree) that “a broader tax base is needed so that revenue can keep pace with future economic growth.” The report predicts a dire future for the state’s finances unless the tax structure is improved, “Without fundamental reforms Kentucky could face a $1 billion shortfall by 2020, and could find itself at a competitive disadvantage to neighboring states for business growth, retention, and recruitment.”
The experts’ comprehensive report included some common sense, positive proposals like eliminating itemized deductions, instituting an Earned Income Tax Credit, and broadening the sales tax base to more personal services. The Louisville Courier Journal, in the culmination of three months of quality, in-depth reporting on the issue notes that, “many lawmakers and others expect the governor’s effort will fall far short of any significant reform — just as reform attempts by most of Beshear’s immediate predecessors failed.” The reason? Getting legislators to agree to any tax increase (even if other taxes are lowered) may be a political bridge too far.
The Governor, however, has said that he is not abandoning the idea of a special session focused solely on tax reform. He admits, “It’s always difficult to address the issue of taxes. But I think it is do-able if we all will work together.” The full tax commission is expected to come out with its recommendations by November 15. The question remains whether Kentucky can not only study its tax system, but also reform it.
A hearing on offshore profit shifting last week exposed aggressive tax planning strategies employed by Microsoft and Hewlett-Packard (HP) and illustrated the critical need for more disclosure.
On September 20, the Senate Permanent Subcommittee on Investigations held a hearing on “Offshore Profit Shifting and the U.S. Tax Code.” Witnesses from academia, the Internal Revenue Service, U.S. multinational corporations, international tax and accounting firms and the nonprofit Financial Accounting Standards Board (FASB) answered questions from the Senators about how tax and accounting rules allow U.S. multinationals to shift profits offshore using dubious transactions and complicated corporate structures.
The committee looked at two case studies investigated by the committee staff. In the Microsoft case, the committee investigation found that 55 percent of the company’s profits were “booked” (claimed for accounting purposes) in three offshore tax haven subsidiaries whose employees account for only two percent of its global workforce. Microsoft did that by selling intellectual property rights in products developed in the U.S. (and subsidized by the research tax credit) to offshore tax haven subsidiaries, then creating transactions to shift related profits there.
Hewlett-Packard used a loophole in the regulations to use offshore cash to pay for its U.S. operations without paying any U.S. tax on the repatriated income. Rather than having offshore subsidiaries pay taxable dividends to the U.S. parent company, HP had two subsidiaries alternately loan funds to the parent in back-to-back-to-back-to-back 45-day loans. In the first three quarters of 2010, there was never a day that HP did not have an outstanding loan of $6 to $9 billion from one of its foreign subsidiaries.
In the tax footnote to their public financial statements, companies disclose the amount of their foreign subsidiaries’ earnings which are “indefinitely reinvested.” They do not record U.S. tax expense on these profits, ostensibly because they don’t plan to bring them back to the U.S. anytime soon. But they must disclose the total amount of their unrepatriated profits and estimate the U.S. tax that would be due if the earnings were repatriated.
The FASB representative, in a conversation with CTJ Senior Counsel Rebecca Wilkins after the hearing, noted that the accounting standards require disclosure. If companies do have a reasonable estimate and are not disclosing the amounts, that would be an “audit failure” by the accounting firm auditing the financial statements and subject to possible disciplinary action by the Public Company Accounting Oversight Board (established by Congress in 2002).
Most companies have not disclosed the potential U.S. taxes they would owe, but they must know it’s enough that they don’t want to repatriate the earnings and pay it. Chances are, they know those amounts down to the dollar.
It’s outrageous that many of the companies who are lobbying hardest for a repatriation holiday won’t tell Congress whether these foreign earnings are sitting in a tax haven right now or how much U.S. tax they would owe on them. Lawmakers should demand to know.
Last year, when billionaire investor Warren Buffett created a storm by arguing that Congress should reform the tax system that allows him to pay a lower effective rate than his secretary, Senate Republican Leader Mitch McConnell quipped, “if he’s feeling guilty about it, I think he should send in a check.”
This is the common refrain from anti-tax lawmakers and pundits: rich people like Buffett who believe they pay too little in taxes should just make a voluntary contribution to the IRS and stop pestering Congress to raise taxes. Republicans in both chambers of Congress introduced bills to encourage such voluntary contributions, and one was approved by the House of Representatives last week.
Last week, we also learned that presidential candidate Mitt Romney, did, in effect, make a voluntary contribution to the IRS when he decided to forego almost half of the $4 million in charitable deductions that he was allowed under the law for 2011.
Clearly, we can’t expect this sort of voluntary contribution to occur very often. Romney initially resisted the idea strongly, going so far as to state, in January, “I pay all the taxes that are legally required and not a dollar more. I don’t think you want someone as the candidate for president who pays more taxes than he owes.”
But this recent disclosure from Romney’s trustee says that Romney decided to forgo the charitable deductions so that his effective tax rate would “conform” with his earlier statements that he always paid at least 13 percent of his income in federal income taxes. CTJ senior counsel Rebecca Wilkins calculated that his effective tax rate would have been around 10.5 percent if he took all the charitable deductions he was allowed for 2011.
So aside from the occasional multi-millionaire who runs for president and wants to avoid answering difficult questions about the policies that allow him to pay so little, can we expect many wealthy Americans to voluntarily pay for public services and public investments?
No. We cannot pay for roads, schools, aircraft carriers and many, many other public goods with voluntary contributions. Even conservative writers for the Economist have skewered the idea, explaining that
A rationally self-interested individual will not voluntarily pay for public goods if she believes others will pay and she can get a free ride. But if we’re all rationally self-interested, and we know we’re all rationally self-interested, we know everyone else will also try to get a free ride, in which case it is doubly irrational to voluntarily pitch in. Even if you’re not inclined to ride for free, why throw good money at an enterprise bound to fail?
In other words, “game theory” suggests that we would not bother to make a voluntary contribution to, say, build a highway, because we know the task will require contributions from many people who are unlikely to make them. As a result, we end up without the new highway, even if the majority of us want it to be built.
That highway can’t be built with the contributions of the occasional public figure who’s embarrassed about his tax loopholes. Not even one with Mitt Romney’s wealth.
