Author: tarek

While poll after poll has long confirmed the overwhelming public support for progressive taxation in principle and increased tax revenues for deficit reduction, some polls that pop up every so often seem to contradict these results. Below we deconstruct two common errors seen in recent polls.

Marginal vs. Effective Tax Rates

Some survey questions fail to distinguish between marginal and effective tax rates. A marginal tax rate is the percentage of the last dollar of income received (by a given taxpayer) that will be paid in taxes. An effective rate is the total amount of taxes a person pays as a percentage of his or her entire income.

For example, when we say a person is in the “25 percent income tax bracket” that means that (generally) 25 percent of the last dollar of income received by that person will go towards federal income taxes. This person has a marginal income tax rate of 25 percent. But his effective income rate might only be around 15 percent or less. That’s because some of his income is taxed at lower rates and because some of his income is not included in taxable income at all (because of deductions).

The recent poll from The Hill is a case study in how conflating the marginal and effective tax rate can create bogus poll results. The Hill survey asks what the respondent believes is the most appropriate “top tax rate” for families earning $250,000 or more and corporations, and then lists out percentage options.

The problem is that the survey does not clearly distinguish whether the “top rate” being discussed is the effective or marginal top rate. In their coverage of the poll, The Hill reports that about three-quarters of likely voters support lower taxes on corporations and wealthy individuals, which just doesn’t sync with what the majority of current polling tells us.  The Center for American Progress’s Seth Hanlon explains why.  He points out that if respondents believed that the ‘top rate’ mentioned in the survey was meant to indicate the effective rate, then most respondents actually came out in favor of higher taxes. For example 67 percent of the respondents favored a 25 percent or higher rate on corporations, which, according to one important measure, is more than twice the current effective rate.

Cutting  Government vs. Cutting Specific Programs

Some misleading polls in recent years have concluded that the public prefers spending cuts over tax increases as the best method to decrease the deficit. The most recent example is an AP-GFK poll, which found that 56 percent of people prefer cutting government services, compared to just 31 percent who support tax increases.

As Citizens for Justice explained last year while examining a New York Times-CBS News poll, these questions are misleading because they ask about cutting “government services” more generally, rather than allowing the respondent to consider specific program spending cuts. When faced with a choice between vague service cuts and taxes, it’s not surprising that the public favors cutting spending because it’s not clear how they might lose out. Americans are famously wary of government spending, but ask them if they’re willing to cut, say, Medicare, the answer is a resounding ‘No!’.

When faced with specific choices, tax increases actually become one of the most popular ways to reduce the deficit. For example, a May 2011 Pew Research Poll which gave respondents a list of specific spending cuts and tax increases, found that two-thirds of the public favored raising income taxes on those making over $250,000 and raising the payroll tax cap, whereas nearly 60 percent opposed raising the Social Security retirement age and 73 percent opposed reducing funding to states for roads and education.

Next time you see news about a poll and it doesn’t sound right, it’s worth taking a look at the actual questions. The way they are worded makes the difference between good and bad polling.

• Just last year Sears and other companies threatened to leave Illinois after the state’s corporate income tax rate increased. So two months ago, Illinois lawmakers awarded Sears a targeted tax credit to appease them. The company kept their headquarters in Chicago (not surprisingly), but announced last week they would be laying off 100 employees from their headquarters anyway.  
• The Institute on Taxation and Economic Policy (ITEP) responds to Oklahoma Governor Mary Fallin’s misguided tax plan with an op-ed in The Oklahoman.  The Governor has said that her income tax repeal proposal is “pro-jobs” and a “game-changer,” but ITEP makes clear that Oklahomans should not expect their economy to improve if they join the no-income tax club.
• Virginia just struck a deal with Amazon requiring the company to begin collecting sales taxes by September 1, 2013, but traditional brick and mortar retailers in the state don’t want to wait another eighteen months for a more even playing field.  The North Jersey Record opens its editorial of a potentially similar deal in the Garden State with the right question: “How much help from the state of New Jersey does a business with a 2011 profit of $631 million really need?”
• Some legislators in Minnesota are proposing a hike in regressive cigarette taxes. Governor Mark Dayton’s various proposals to increase taxes on the best off Minnesotans are the better plan. 
• An editorial in the Kansas City Star wisely points out that the “soak-the-poor approach to tax reform of Topeka today is counter-productive to getting people back to work.” The piece calls on lawmakers to “stop [their] mean spirited attack on the poor” and keep the state’s Earned Income Tax Credit. 
• In an interview with CNN last week about his income tax cut plan, New Jersey Governor Chris Christie lashed out at Warren Buffett for his call for higher taxes on the rich saying the billioniare “should just write a check and shut up.”  To which Buffett replied, “It’s sort of a touching response to a $1.2 trillion deficit, isn’t it? That somehow the American people will all send in checks and take care of it?”

Romney: I Have Friends Who Own NASCAR Teams

The 2012 NASCAR season kicked off Monday with the Daytona 500. The much-celebrated start to the racing season is a chance to remind Congress and the administration that it’s time to end track owners’ special tax break.

In 2004, President Bush signed a tax bill chock-full of special interest tax breaks, including one for his NASCAR friends. The legislation allowed track owners to write off the cost of motorsports facilities (track, grandstand, etc.) over seven years for tax purposes. For accounting purposes, these assets are written off over their useful lives, ranging from ten to thirty years. The accelerated write-off allowed by the tax break costs the U.S. Treasury an estimated $40 million per year.

This particular tax break, along with many others known as “the extenders,” expired on December 31 of 2011. With the projected deficits and the clamor for base-broadening corporate tax reform, you’d think this special-interest loophole would be an easy one to keep off the books. Even Oklahoma Republican Senator Coburn has called for its elimination. But Florida Rep. Vern Buchanan is pushing for bringing back the NASCAR tax break, while he’s busy collecting campaign contributions from the industry. And President Obama’s budget proposal also calls for extending it.

An interesting question is whether GOP Presidential hopeful Mitt Romney is a supporter of this tax break, too. As he said in an interview Sunday, “I have friends who own NASCAR teams,” and it turns out some of those friends are also campaign donors.

As governor in Massachusetts, Romney made the decision to close a slew of corporate loopholes that brought in some $370 million to his state’s treasury. Presidential candidate, Romney, however, doesn’t like to talk about that.

So we will see: will we have a presidential race featuring two candidates who try to bolster their blue collar bona fides by supporting the NASCAR track owners’ loophole, or two candidates who mean it when they say they want to simplify the tax code?

Photos of Nascar related materials via Side Hike  and Brian C Creative Commons Attribution License 2.0

For Immediate Release: February 27, 2012 (rev. 4/12)

Contact: Anne Singer, 202-299-1066, ext. 27

General Electric Paid Only Two Percent Federal Income Tax Rate Over the Past Decade, Citizens for Tax Justice Analysis Finds; Actual Payments Were Probably Lower

Washington, DC – General Electric’s (GE) annual SEC 10-K filing for 2011 (filed February 24, 2012) reveals that the company paid at most two percent of its $80.2 billion in U.S. pretax profits in federal income taxes over the last 10 years.

Following revelations in March 2011 that GE paid no federal income taxes in 2010 and in fact enjoyed $3.3 billion in net tax benefits, GE told AFP (3/29/2011), “GE did not pay US federal taxes last year because we did not owe any.” But don’t worry, GE told Dow Jones Newswires (3/28/2011), “our 2011 tax rate is slated to return to more normal levels with GE Capital’s recovery.”

As it turns out, however, in 2011 GE’s effective federal income tax rate was only 11.3 percent, less than a third the official 35 percent corporate tax rate.

“I don’t think most Americans would consider 11.3 percent, not to mention GE’s long-term effective rate of 1.8 percent, to be ‘normal,’ ” said Bob McIntyre, director of Citizens for Tax Justice.  “But for GE, taxes are something to be avoided rather than paid.”

Citizens for Tax Justice’s summary of GE’s federal income taxes over the past decade shows that:

O From 2006 to 2011, GE’s net federal income taxes were negative $3.1 billion, despite $38.2 billion in pretax U.S. profits over the six years.

O Over the past decade, GE’s effective federal income tax rate on its $81.2 billion in pretax U.S. profits has been at most 1.8 percent.

McIntyre noted that GE has yet to pay even that paltry 1.8 percent. In fact, at the end of 2011, GE reports that it has claimed $3.9 billion in cumulative income tax reductions on its tax returns over the years that it has not reported in its shareholder reports — because it expects the IRS will not approve these “uncertain” tax breaks, and GE will have to give the money back.

GE is one of 280 profitable Fortune 500 companies profiled in “Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.”  The report shows GE is one of 30 major U.S. corporations that paid zero – or less – in federal income taxes in the last three years.  The full report, a joint project of Citizens for Tax Justice and the Institute on Taxation and Economic Policy, is at http://ctj.org/corporatetaxdodgers/. Page 24 of the report explains “uncertain” tax breaks.

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Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation (www.ctj.org).

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP’s mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (www.itepnet.org).

Note: GE’s profits and taxes for 2009 and 2010 have been slightly revised from an earlier version of this release. The earlier version inadvertently used GE’s restated 2009 and 2010 figures from GE’s 2011 annual report. Those restated figures excluded the half of NBC that GE sold to Comcast in 2011, and did not reflect GE’s actual results for those two years.

What do Tom Cruise and Florida Senator Bill Nelson have in common? Both have taken advantage of a lax definition of what constitutes farming in order to reap large property tax breaks.

The Miami Herald reports that by allowing a few cows to graze on 55 acres of his land, Senator Nelson reduced his property taxes on the land from over $45,000 to just $3,696 in 2011. The reduction results from the fact that a few cows make Nelson’s property suddenly agricultural land, and as such, its value is a mere $210,000, rather than its full market residential value of $2.7 million.

Using a similar tax break in Colorado, Tom Cruise was able to pay only $400 in property taxes on his $18 million, 248 acre tract of land in Colorado by allowing sheep to graze on it for brief periods each year. The good news for Colorado taxpayers is that the state legislature has since taken a small step toward closing the loophole by valuing residences on ‘agricultural land’ at the same rate as they are on residential property.

Rather than just tightening up eligibility requirements though, lawmakers could instead replace current agricultural land valuation systems with an agricultural circuit breaker that makes property tax relief available only to real family farms. This would not only ensure that Senators and movie stars do not abuse the system, it would also better target those farmers most in need of property tax relief – the farmers for whom the tax loopholes were presumably written in the first place.

Photos of Tom Cruise and Senator Bill Nelson via Nasa HQ and Surrealistic Scenes Creative Commons Attribution License 2.0

• Two of the country’s largest Big Box retailers, Target and Best Buy, are turning up the pressure on their home state of Minnesota’s legislators to pass a law requiring online businesses to collect sales taxes.  Republican lawmakers are divided over the issue because some see the so-called “Amazon” tax as a tax increase which they adamantly oppose.  One Republican House member, however, came up with a compromise: use the revenue gained from taxing internet sales to pay for an “outdoors, guns, and ammo” sales tax holiday. Huh?
• The Idaho Mountain Express editorial board gets it right when it opines  against Governor Otter’s proposal to cut taxes by $45 million, “just when things are looking up, would any sensible family insist that its wage earners take jobs that pay less? That’s absurd and so are the proposed tax cuts.”
• In the refreshing news department, the former CEO of the Georgia Chamber of Commerce comes out against a business tax credit bill saying, “credits like those proposed in House Bill 868 could inadvertently undermine our state’s economy by diverting revenue from equally essential investments.” Here’s another gem, “To thrive, businesses large and small need a well-educated workforce, good transportation systems to facilitate their supply-chain, and stable, safe neighborhoods for employees and customers. They also need customers with sufficient income to buy their goods and services, something that tax credits cannot assist.” We couldn’t have said it better ourselves.
• The Orlando Sentinel wisely editorializes against Florida lawmakers cutting state revenues to cities and counties. “[C]utting taxes is easy; paying for it is hard,” they write. “And lawmakers have been dumping much of that dirty work on local government leaders.” A former mayor now in the state legislature is quoted: “We’re trying to take credit for cutting taxes when we’re, in essence, really just telling somebody else, ‘You need to cut.'” 

Last month, New Jersey Governor Chris Christie made a bold and reckless promise to cut personal income taxes across the board. 

Christie used his annual budget address this week to spout conservative talking points to justify his tax cut plan.  There are two claims in particular we take issue with: the idea that high tax rates harm economic growth; and that high tax rates cause families to flee states.

From Christie’s speech:

“First, any job growth plan for New Jersey has to start with cutting taxes… So, to the naysayers, I say this. We have been down the road of high taxation. It didn’t work. The result was high unemployment, high taxes and low growth. The result was families leaving New Jersey.  The old way was a dead end for New Jersey. High taxes and excessive spending left us stranded in a world of declining growth, declining prospects and a diminished ability to compete as a state.”

Christie’s claim that cutting taxes will lead to job growth is one of the most frequently repeated talking points used by conservative lawmakers seeking to reduce or eliminate state personal income taxes. 

Two new reports from ITEP clearly dispel this conservative tenet. “’High Rate’ Income Tax States Are Outperforming No-Tax States” explains that the nine states with the highest top marginal tax rates (New Jersey included) are outperforming the nine states without income taxes, in terms of both growth in economic output per person and median income levels. 

Between 2001-2010, New Jersey beat six out of nine states with no-personal income tax in terms of lowest unemployment rate.  And over the same time period, New Jersey topped four out of nine no-tax states in terms of economic growth per-capita.

A second report, “Athur Laffer Regression Analysis is Fundamentally Flawed, Offers No Support for Economic Growth Claims” shows that an analysis on which tax-cutters like Christie rely, that predicts huge economic gains as a result of cutting state personal income taxes, is fundamentally flawed. 

The conclusion of both reports: there is simply no evidence that state income tax rates harm state economies (or the national economy, but that’s another matter).

Then Christie invoked the millionaire-migration canard:

“Our tax rates, and our overall tax burden, were also the worst in the region. And the effects were being felt: a study by scholars at Boston College found that $70 billion of wealth had left the state in the prior five years. That exodus hurt jobs, economic growth and yes, even state tax revenues…”

This claim – that high taxes will (and have) force wealthy New Jerseyans to flee the state – is yet another unfounded conservative myth. 

In fact, as ITEP has pointed out in the past, the Boston College study Christie referenced made no mention of taxes at all, let alone in New Jersey families’ migration decisions.  A second study that actually looked at the role of taxes in New Jersey migration decisions (which Christie did not mention), found the impact of the state’s “half-millionaires’ tax” on New Jersey’s high-income earners was “small,” and that the change in the net out-migration rate following the enactment of the tax was “negligible.”  The researchers for this second study also review Census Bureau interviews that show that while people gave a lot of reasons for leaving the state – retirement, new jobs, family needs – none reported they were leaving because of tax rates. 

Photo of Governor Chris Christie via  Bob Jagendorf Creative Commons Attribution License 2.0

Today the Treasury Department released “The President’s Framework for Business Tax Reform” outlining the Obama Administration’s ideas for corporate tax reform. Citizens for Tax Justice has been generating research on corporate taxes for over 30 years, most recently with its November, 2011 report, Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.  In response to the White House and Treasury Department release today, Citizens for Tax Justice Director, Bob McIntyre, issued the following statement:

“The corporate tax reform ‘framework’ released by the Obama administration today fails to raise revenue that could be used to make public investments in America’s economy and America’s future.

“The President has proposed to reduce the statutory corporate tax rate from 35 percent to 28 percent, make certain temporary tax breaks, including the research and experimentation credit, permanent, and add some new business tax breaks.  In total, these tax cuts would cost us about $1.2 trillion over the next 10 years.

“To offset this cost, the President proposed in his fiscal 2013 budget to raise about $0.3 trillion from closing or reducing business tax loopholes.  That leaves almost $1 trillion in further business tax reforms that would be necessary for the tax plan to break even, as the President say he wants to do. His ‘framework,’ however, leaves the sources of this $0.9 trillion in offsetting reforms mostly unspecified.

“We can and should collect more tax revenue from corporations. Right now, America’s biggest and most profitable corporations are paying, on average, a ridiculously low amount in federal income taxes, and many of them are paying nothing at all.

“Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations.

“It’s very disappointing that the President has proposed what is at best ‘revenue-neutral’ corporate tax reform.  In 1986, President Reagan and Congress passed a tax reform act that increased corporate tax payments by more than a third.  In today’s terms, that would be a corporate tax increase of more than a trillion dollars over the next 10 years. The corporate tax reform that we need today should do no less.”

CTJ has published a fact sheet explaining why corporate tax reform should be revenue-positive and a fact sheet explaining how the international corporate tax rules should be reformed.

Photos of President Obama and Secretary Geithner via Downing Street and World Economic Forum Creative Commons Attribution License 2.0

• New Mexico legislators took important steps last week to level the playing field between in-state mom and pop stores and multi-state big box stores when they sent Governor Martinez a bill mandating combined reporting, in other words, closing the loophole that allows national retailers to shelter their profits in no-tax states.  Despite strong support among small business owners for closing corporate loopholes, the governor is likely to veto the legislation.
• Some Minnesota legislators are not backing down from their pledge to cut the business property tax, promising what tax cut advocates always promise: it will be good for the state’s economy.   In effort to paper over the hole the cut blows in the budget, they propose to gut a tax credit for low- and middle income families and seniors who rent – a credit that was already reduced last year.
• The Washington State Senate overwhelmingly passed a bill that would require any new or expanded tax breaks to “sunset” (or expire) after five years.  Washington already has over 250 tax breaks that automatically drain the state’s coffers every year without ever having to be voted on.  Both Citizens for Tax Justice  and The Institute on Taxation and Economic Policy (ITEP) support this kind of accountability, as does the Washington State Budget and Policy Center.

Published in the Sacramento Bee, February 17, 2012

With jobs front and center in most voters’ minds, politicians seeking to cut or repeal personal income taxes are marketing their proposals as tools for boosting the economy. Recently, some have sought to bolster this claim by asserting that states without income taxes are experiencing a real economic boom, and by promising that the boom can be recreated in any state smart enough to join the no-tax club.

My organization was skeptical of these claims, so we decided to take a closer look at one of the most prominent studies, cited by the governors of Kansas and Oklahoma, among others. It turns out that the study was done by a consulting firm headed by economist Arthur Laffer, perhaps best known as a longtime spokesman of a supply-side economic theory that George H.W. Bush once called “voodoo economics” because of its bizarre insistence that tax cuts often lead to higher revenues.

In kicking the tires on the study’s findings, we paid particular attention to the same 18 states it includes: the nine without income taxes, and the nine with the highest top income tax rates.laf But while Laffer chose to focus on clumsy aggregate data (more on that later), we took a look at three of the most important and widely recognized measures of economic success: growth in economic output per person, growth in median income levels, and the unemployment rate. The results we found were very different than Laffer’s.

In terms of the first two measures – economic output per person and median income levels – the nine states without income taxes are actually lagging behind the nine states with the highest top income tax rates, and most no-tax states are actually doing worse than the national average. On the third measure, the unemployment rate, it turns out that no-tax states and “high tax rate” states are essentially neck and neck, which will no doubt shock lawmakers promising that an improved job climate will come hot on the heels of income tax repeal.

We also found that on all three measures, some of the states most frequently disparaged by the tax cut true believers – including Maryland, Hawaii and Vermont – managed to best not only no-tax idol Texas but also most of the other eight states “unburdened” by a personal income tax.

So how was Laffer able to reach the opposite conclusion, and in the process generate a wave of assertions that states without income taxes are booming? It turns out that the aggregate numbers he picked – designed to measure the total size of an economy and its workforce – are heavily influenced by shifts in population. These shifts, in turn, are driven by a slew of factors Laffer fails to control for, like the housing market, population density, birth rates, immigration and even climate. And since most no-tax states happen to be located in the growing south and western regions of the country, they tend to have a lot of these factors working in their favor.

Laffer also makes no effort to account for the tremendous natural resource advantages enjoyed by many no-tax states. The two best performing states, according to Laffer, also happen to be the two states most dependent on mining: Alaska and Wyoming. But one would be hard pressed to find a serious analyst in either state willing to attribute their recent growth to the lack of an income tax.

The bottom line is this: no-tax states aren’t booming, and lawmakers should not expect their states’ economies to improve if they join the no-tax or low-tax club. In fact, in terms of the economic factors that matter most to families – income levels, and whether or not they can find a job – the states with the highest top income tax rates are, in most cases, doing better than the no-tax states. If the economy is really the concern of lawmakers railing against the income tax, it’s time for them to put away Arthur Laffer’s tax cut snake oil.

ABOUT THE WRITER

Carl Davis is a senior analyst at the Institute on Taxation and Economic Policy, 1616 P Street NW, Suite 200, Washington, D.C. 20036; website: www.itepnet.org.

This essay is available to McClatchy-Tribune News Service subscribers. McClatchy-Tribune did not subsidize the writing of this column; the opinions are those of the writer and do not necessarily represent the views of McClatchy-Tribune or its editors.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0