Author: tarek

A new CTJ report shows how taxpayers in each state would be affected by the tax plans proposed by the Republican presidential candidates. The report finds that the cost of the tax plans would range from $6.6 trillion to $18 trillion over a decade. The share of tax cuts going to the richest one percent of Americans under these plans would range from over a third to almost half. The average tax cuts received by the richest one percent would be up to 270 times as large as the average tax cut received by middle-income Americans.

Read the report.

Lately, one of the biggest priorities of both conservative state lawmakers and Republican presidential candidates has been the reduction or elimination of the income tax.  But a new analysis of one such plan receiving consideration in Oklahoma should give pause to backers of this “reform.”

According to ITEP, over half of Oklahoma households would actually see their tax bills rise under a plan put forth by The Oklahoma Task Force on Comprehensive Tax Reform (heavily stacked with business interests), and low-income families would face the largest tax increases relative to their income.  Upper-income families, by contrast, would enjoy a bonanza, with the richest one percent taking home over $2,800 in tax breaks per year.

These are the predictable results of a plan that cuts Oklahoma’s top income tax rate and pays for it by eliminating some of the state’s most important and progressive tax credits and exemptions.

We’re usually big supporters of wiping out special tax breaks, but only when it’s done fairly.  And as the numbers above make clear, the Task Force’s plan is far from fair.  It does away with proven low-income provisions like the Earned Income Tax Credit (EITC) and the sales tax relief credit, and it scraps important and very popular breaks like the child tax credit and even the personal exemption.  Meanwhile, itemized deductions, which disproportionately benefit the richest families in Oklahoma – or any state, – are left largely untouched (except for the long-overdue elimination of the ridiculous and rare state income tax deduction for state taxes paid).

The Oklahoma plan is just the latest manifestation of a broader conservative tax platform that thinks the working poor are getting off too easy, and the rich deserve to see their tax rates slashed.  ITEP’s analysis makes a case study of Oklahoma under this disastrous plan; are other legislators listening?

Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country. This week, we’re taking a closer look at proposals which would lessen a state’s reliance on progressive income taxes, often by shifting to a heavier reliance on regressive sales taxes. 

Georgia – A legislative proposal gaining traction in Atlanta would undercut the state’s reliance on the personal income tax – its only major progressive revenue source.  It would make up those revenues by raising the sales tax – every state’s most regressive source of revenue.  The plan also includes two other components that hit the poorest Georgians the hardest: taxing groceries and adding a dollar to the cigarette tax.  A sensible, comprehensive proposal from the Georgia Budget and Policy Institute is the template lawmakers should be following. It starts with fairness, ends with increased revenues and is all about modernization and reform. 

Kansas – If the expectations about Governor Sam Brownback’s proposed income tax changes are right, Kansas could have a hard time balancing its books. Tonight, the Governor, (who has received technical assistance from supply side guru Arthur Laffer), is expected to propose drastic reductions to state income tax rates.  Details on how the governor plans to make up the lost revenue haven’t been revealed, but his sidekick Laffer was recently quoted as saying, “It’s a revolution in a cornfield. Brownback and his whole group there, it’s an amazing thing they’re doing. Truly revolutionary.”

Kentucky –  Fresh off his reelection to the Governor’s office, Steve Beshear is expected to propose his own tax reform plan, but Representative Bill Farmer, who’s been itching to change Kentucky’s tax code for years, has already pre-filed his own tax overhaul bill, which would slash the state income tax, expand the sales tax base to include more services and lower the sales tax rate.  ITEP conducted an in depth analysis of an earlier Farmer proposal and found that his proposal would cost the state hundreds of millions of dollars and raise taxes on the poorest 20 percent of Kentuckians by an average of $138. We expect that his current proposal won’t do much to fix the state’s regressive tax structure either.

Missouri – Perhaps the most destructive proposal of this type gaining traction is Missouri’s mega-tax proposal, so called because it amounts to a massive consumption tax hike for ordinary Missourians. Proponents of the related ballot initiative that would eliminate the state’s personal income tax and replace that revenue by adding goods and services to the sales tax base are currently collecting signatures in an attempt to place the initiative on the ballot this November. Show-Me-Staters would be unwise to provide their signatures for this kind of campaign, however, because its passage would result in higher overall taxes for working families. Click here to see ITEP testimony on a similar proposal.

Oklahoma – Two seriously bad proposals that would increase the unfairness of Oklahoma’s tax system are currently under consideration. Working with (the aforementioned supply side guru) Arthur Laffer, the free-market Oklahoma Council of Public Affairs is proposing to eliminate the state income tax altogether. An ITEP analysis found that the bottom one-fifth of Oklahoma taxpayers — those earning less than $16,600 per year — would be paying on average $250 a year more in taxes, or about 2.5 percent more of their income. Similarly, the Tax Force on Comprehensive Tax Reform (dominated by business interests) suggests lowering the state’s top income tax rate and eliminating a variety of tax credits, many of which are designed to help low and middle income families. David Blatt, director of the non partisan Oklahoma Policy Institute recently said of the proposal, “This would hit hardest the poor and middle class families who are struggling most to make ends meet in a tough economy.”

Photo of Governor Steve Beshear via Gage Skidmore and photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0

A new report from the IRS estimates that individuals and businesses failed to pay $385 billion of the taxes they owed in a single year — a figure that many experts believe is an understatement. This comes just months after Congress cut funding for IRS enforcement activities that could recoup those dollars.

The IRS report estimates that taxpayers paid $450 billion less than was owed in 2006 and that the IRS eventually recovered $65 billion of that, leaving a net “tax gap” of $385 billion — which is roughly 14.5 percent of all taxes due.

As CTJ director Bob McIntyre explained in his testimony before the Senate Budget Committee a few years ago, he and other tax experts have long thought that the tax gap is actually larger than what the IRS estimates, particularly the portion that results from income hidden in offshore tax havens.

The IRS is less able to counter this type of tax evasion than it was in the past. Congress drastically slashed the IRS budget in the 1990s with the rationale that the agency was a bother to taxpayers. But another report released today by the National Taxpayer Advocate (a Bush appointee) concludes that the paltry budget for the IRS is itself the source of irritation for taxpayers who are affected by the various short-cuts the IRS must take in administering the tax system with fewer staff.

The more fundamental problem with the tax gap is that it means the vast majority of Americans, who pay the taxes they owe, are effectively subsidizing those who do not.

Most middle-income working people don’t have many opportunities to evade taxes because their employers report their wages to the IRS and withhold a portion of them for taxes. On the other hand, corporations and business owners are responsible for a majority of the tax gap.

For example, underreporting of business income, corporate income, and compensation by self-employed individuals together make up a majority of the tax gap, according to the IRS report.

Congress’s cuts to IRS funding are bizarre because this is one type of government spending that pays for itself several times over. In some cases a dollar of additional IRS funding can generate $200 of revenue. In other words, lawmakers have forced cuts to the IRS budget knowing full well that this is one type of spending cut that actually increases the budget deficit.

In addition to restoring IRS funding, there are other measures that Congress can take to increase income reporting and crack down on institutions that facilitate offshore tax evasion, as McIntyre called for in his testimony. Most of those proposals have still not been enacted, partly because they’re opposed by the Tax Cheaters Lobby.

Photo of Tax Preparation via Money Blog Creative Commons Attribution License 2.0

It seems impossible, but on the eve of the Iowa Caucus the once unstoppable ethanol tax credit expired. After three long decades and over $20 billion dollars spent, the relatively quiet expiration of this once sacred tax credit is surprising considering the pitched battles that took place earlier this year between Grover Norquist and Oklahoma Senator Tom Coburn over its repeal.

The fact that the credit expired on the eve of the Iowa Caucus, long considered the political bulwark against repeal, demonstrates just how far politically the credit has fallen. In fact, a survey found that even among Iowa Republican caucus goers, 57% of them favored Republican candidates calling for outright repeal of the credit.

Although the ethanol tax credit was ostensibly created to promote ethanol as a greener form of fuel, the credit has long been criticized by a wide variety of groups as a wasteful special interest tax break. As Citizens for Tax Justice Director Bob McIntyre once explained, the critical problem with subsidizing ethanol is the product itself takes “more energy to make than it saves” and that even with an exorbitant subsidy of $0.50 for every $1 gallon it was still not very competitive.

For their part, ethanol industry representatives admitted defeat, explaining that the ethanol industry had “evolved” and that now was the “right time for the incentive to expire.”

It is also the right time for scores of other tax credits to expire permanently. The ethanol tax credit is 1 of the 53 such provisions – called “extenders” because Congress quietly extends them every couple of years or so for their favored constituencies – which expired at the end of 2011, most of which are handouts to business interests. In a word, they are pork.

Let’s hope the ethanol subsidy’s death is permanent, and a sign that tax sanity is making a comeback in Congress.

Photo of Ethanol Production via Bread for the World Creative Commons Attribution License 2.0

Just as President Obama caved at the end of last year to demands that he extend the Bush tax cuts for even the richest Americans, it looked like he was ready to end this year by caving on the debate over payroll tax cuts. Then, strangely, House Republicans refused to accept the surrender.

President Obama and Democratic leaders in Congress made a huge compromise before they even began negotiating with Republicans. Economists agree that the government measures most likely to boost job creation are spending measures (including things like food stamps, infrastructure, hiring teachers) but President Obama decided to focus on a tax cut in order to appeal to Republicans.

And he did not choose the tax cut most likely to boost consumer spending by putting money in the hands of low- and middle-income people. That would be the Making Work Pay Credit, which was allowed to expire at the end of 2010. Instead, he proposed extending and expanding the payroll tax cut that was enacted for 2010, and which was originally proposed by Republicans.

So President Obama and Democratic leaders in Congress proposed that this year’s payroll tax cut be extended into next year and expanded. They insisted that Congress not attach controversial policies like hurrying approval of the Keystone XL Pipeline extension, and they proposed that the cost be offset by taxing millionaires. The President and Democratic leaders eventually surrendered on all of this.

Citizens for Tax Justice estimated that the millionaire surcharge would only affect one-fifth of one percent of taxpayers and that those affected would see their overall taxes go up by an average 2.1 percent. But Congressional Republicans objected that this would burden “job creators,” so the Democrats agreed to drop the millionaire surcharge.

But Republicans in the Senate were still not happy. Senate GOP leader Mitch McConnell introduced a bill to extend the existing payroll tax cut and offset the costs with the types of cuts in public services that Republicans usually support. Strangely, a majority of Republicans voted against this bill, too.

Even the number two Republican in the Senate, Jon Kyl, opposed McConnell’s bill and said he would support extending the payroll tax cut only if it was paired with another extension of the Bush tax cuts. Our figures comparing different types of tax cuts illustrated how this was essentially a demand that the payroll tax cut can only be enacted along with much, much larger tax cuts for the rich (like the Bush tax cuts).

Senate Majority Leader Harry Reid said the Senate would not approve must-pass spending measures before the end of the year without extending the payroll tax cut through 2012. But Senator Reid backed down and made a deal with Senator McConnell. The payroll tax cut would be extended for just the first two months of next year, and it would not be expanded. It would be attached to a provision requiring a quicker approval of the controversial oil pipeline project. And, of course, there would be no tax on millionaires. This bill passed the Senate with 89 of the chamber’s 100 members voting in favor.

President Obama endorsed the deal. It would at least get Congress and the country through the holidays, after which lawmakers could take up this debate again and hash out whether the payroll tax cut should be extended for the rest of the year.

Then something strange happened. Republicans in House refused to approve the Senate bill. They voted along party lines to appoint a conference committee iron out differences between the Senate-passed bill and a bill passed earlier by the House. But the Senate had already left town.

The bill passed by the Republican majority in the House (H.R. 3630) would extend the existing payroll tax cut for a year, but because House Republicans consider this an enormous concession, the bill includes many policy provisions championed by conservatives. It would offset the cost of the payroll tax cut with cuts in public services, which is the opposite of what the economy needs right now. It includes cuts and restrictions on unemployment insurance, delays on environmental rules and, of course, a faster approval for the oil pipeline project.

It’s awfully tempting to tune out of national politics entirely right now and enjoy some eggnog, except for one thing: Millions of Americans are struggling to find decent work and the House of Representatives has done everything imaginable to block anything that might change that. If lumps of coal were environmentally friendly, we’d encourage everyone to send them by the truckload to the House members blocking progress.

As the presidential campaigns rev up, taxes are emerging as the defining issue of the election. Unfortunately, a lot of misinformation and myths about taxes are spreading as candidates and commentators look to push their different economic agendas.

To start the election season off, here is a breakdown of the five biggest tax whoppers being told by the candidates and commentators alike.

1) Myth: 47 Percent of Americans Do Not Pay Taxes

Fact: All Americans Pay Taxes

Pundits and politicians will continue to rile up audiences this election season by claiming that half of Americans in the U.S. do not pay any taxes. This talking point is used to deflect questions about why the rich should pay their fair share.

The basis of this claim is data showing that 47 percent of Americans did not owe federal income taxes in 2009, which the recession was at it’s peak. The claim ignores the much more regressive federal payroll taxes or state and local sales, income, and property taxes that all Americans pay. The reality is that three-quarters of American households actually pay more in payroll taxes than federal income taxes.

Adding to this, the very reason many low income Americans do not pay federal income taxes is because they benefit from highly effective tax credits like the earned income tax credit (EITC), which incentivize work while providing much needed support to working low and middle class family budgets.

2) Myth: The American People and Corporations Pay High Taxes

Fact: The US Has the Third Lowest Taxes of Any Developed Country in the World

Total US taxes are actually at the lowest level they’ve been since 1958. The US has the third lowest level of total taxes of the Organisation for Economic Co-operation and Development (OECD) countries, with the exception of only Chile and Mexico. President Obama, who is often falsely accused of raising taxes, actually cut taxes for 98 percent of the country on top of temporarily extending the entirety of the Bush tax cuts.

A related claim is that the US has the second highest corporate tax rate in the world. This is misleading because it’s based on the on-paper (statutory) corporate rate rather than the actual (effective) rate that corporations pay. Because of the plethora of corporate tax breaks and loopholes, the US actually has the second lowest coporate taxes as a share of GDP in the OECD. In fact, 30 major corporations, including Verizon, Boeing and General Electric, paid nothing in corporate taxes over the last 3 years.  Rather than cutting corporate taxes, the sensible solution is to pass revenue-positive corporate tax reform.

3) Myth: Cutting Taxes Creates Jobs and Raises Revenue

Fact: Tax Cuts Reduce Revenue And Are Not Associated with Economic Growth

Since the rise of supply-side economics, tax cuts for the rich have been regarded as a magic elixir that could unleash economic growth, while simultaneously increasing government revenue.

The reality is that the tax cuts that have been tried for over 30 years have proven to be a stunning failure in all regards. In fact, history has shown that the tax rate on the wealthy simply has nothing to do with economic growth. Just consider the strong growth that occurred after President Clinton increased taxes versus the dismal growth following the Bush tax cuts.

Not surprisingly, tax cuts have been definitely proven to reduce revenue. Even President Bush’s own Treasury Department concluded that tax cuts do not create enough economic growth to to come close to offsetting their costs or raising revenue. The Bush tax cuts cost $2.5 trillion in their first decade and the Reagan tax cuts cost $582 billion.

4) Myth: The US tax system is very progressive because wealthy individuals already pay a disproportionate amount of taxes.

Fact: At a Time of Growing Income Inequality, the US Tax System is Basically Flat.

Conservative commentators and politicians claim that it would be unfair to raise taxes on wealthy individuals because they already pay a disproportionate amount of taxes, usually citing the fact that the top one percent of income earners pay 38 percent of federal income taxes. Once again, such claims ignore the fact that the federal income tax is just one of many taxes that individuals pay.

When you take into account all of the taxes that individuals pay, the truth is that our tax system is relatively flat. The top one percent of income earners receives 20.3 percent of total income while paying 21.5 percent of total taxes and the lowest 20 percent of income earners receive 3.5 percent of total income while still paying out two percent of total taxes.

In other words, wealthy individuals pay a high percentage of taxes because they earn a highly disproportionate amount of income. This is, of course, a consequence of growing income inequality in the United States, which is at a level not seen since before the Great Depression. 

Whether it’s Steve Forbes promoting his flat tax proposal in 1996 and 2000 or Rick Perry and Newt Gingrich in the 2012 presidential race today, the idea to sweep away our current tax system and replace it with a single rate, flat income or national sales tax (called the “Fair Tax”) has become a perennial campaign issue for Republican presidential candidates.

The simplicity of these proposals has much appeal for many Americans, who believe they would make filing taxes less complex and, at the same time, stop wealthy individuals from being able to game the tax system.

A deeper look, however, reveals that both the “fair” and flat tax are very regressive compared to our current system. One recent analysis of a typical flat tax proposal from last year shows that it would result in an average tax increase of $2,887 for the bottom 95 percent of Americans, while those in the top one percent would receive an average tax cut of over $209,562. Furthermore, the Institute on Taxation and Economic Policy’s analysis of the Fair Tax points out the under this system, the sales tax rate would have to be set at a politically and administratively unfeasible rate of at least 45 percent, and, the result would be the bottom 80 percent of American’s paying an average of 51 percent more in taxes compared to our current system.

It’s also important to note that “complexity in the tax code,” which a flat tax system purports to fix, is not caused by our progressive rate structure; rather, it’s the multitude of loopholes and tax breaks, all of which could easily be eliminated while keeping a progressive tax rate structure in place. 

Naughty

Michigan’s legislature and Governor Snyder top the naughty list by giving away more than $1.6 billion in tax cuts for business and paying for it with tax increases on low-and middle-income working and retired families.

Florida continued to dole out more corporate pork this year, including a property tax break that happens to benefit huge commercial land owners, like Disney World and Florida Power and Light, and other corporations (that also happen to be major donors to the state’s Republican governor and legislative majority party).

Minnesota’s legislature missed an opportunity to do the right thing when it rejected a tax increase on the state’s wealthiest residents. The plan was proposed by Governor Dayton and supported by 63 percent of Minnesotans over the alternative, which was cuts to spending on education, health care and other vital public services.

Anti-tax activists in Missouri were hard at work again. This year they were collecting signatures for a ballot initiative that would eliminate the state’s personal income tax and replace it with a broadened and increased sales tax.

Nice

Connecticut’s Governor Malloy and the legislature adopted a $1.4 billion tax increase that improved tax fairness in the state and protected public investments like education and health care.  Most notably, the state added an Earned Income Tax Credit, a significant tax break for low-income working families.

District of Columbia lawmakers greatly reduced the ability of corporations to dodge their fair share of taxes by adopting combined reporting (which makes it harder to hide profits in other states) and a higher corporate minimum tax. The Council also temporarily increased taxes for individuals making more than $350,000 a year and limited itemized deductions, which are most often taken by high income filers.

Hawaii lawmakers also limited upside-down tax giveaways (itemized deductions) for their state’s richest residents and passed other tax changes to raise much needed revenue.

A Little Bit Naughty and Nice

New York’s Governor Andrew Cuomo reversed his campaign vow not to raise taxes and supported a tax increase on residents earning more than $2 million a year.   The plan, passed by the legislature, also included a tax break for those with income under $300,000.

However, New York lawmakers passed the governor’s cap on property taxes this summer, which is predictably creating crises and forcing dramatic cuts in local education, medical, and public safety services.

Illinois raised significant revenue earlier in the year through temporary personal and corporate income tax rate increases, all designed to stave off harsh spending cuts, but then turned right around and gave away hundreds of millions of dollars to Sears and CME, allegedly to keep them in the state.

Our roads, bridges, and transit systems are in decline, and unless lawmakers are cured of their anti-tax phobia, the “fix” could come from education cuts in some states and even more deficit spending at the federal level.

It’s against this backdrop that our friends at ITEP released a first of its kind report on gas taxes last week, titled “Building a Better Gas Tax.”  In the report, ITEP shows that state governments are losing $10 billion every year because of their failure to plan for predictable increases in transportation construction costs. Meantime, much of the federal government’s contribution to states’ transport budgets is being paid for with borrowed money because our national gas tax is also stagnant, costing us $23 billion annually. 

Fortunately, there are glimmers of hope that this problem might be addressed responsibly, at least in some states.  Most notable are Maryland, Michigan, and Pennsylvania, where influential lawmakers are planning to push for long overdue gas tax increases when legislative sessions start next month.

By contrast, Oklahoma and Virginia are each led by governors who have announced their intention to cut education funding in order to pay for road and bridge repairs.

ITEP’s report recommends that lawmakers follow the path being considered in Maryland and other states: an immediate gas tax increase, coupled with reform to ensure that the tax can hold up over time alongside rising asphalt and construction costs.  ITEP’s report also urges that states enact low-income relief to offset gas tax payments made by those least able to afford the tax.

The report has already been greeted warmly by the transportation policy community, and has received significant press coverage (and praise from editorial boards) in a number of states where gas taxes are sure to be most relevant in the months ahead, including Maryland, Michigan, and Virginia.

We’ll keep you updated on all of these debates as they develop, but in the meantime we encourage you to check out the report at www.itepnet.org/bettergastax and see how your state compares.

Photo of Gas Station via Future Atlas Creative Commons Attribution License 2.0

UPDATE: Candidate Mitt Romney told MSNBC on December 22 that he does not intend to release his tax returns, even if he becomes his party’s nominee. Watch CTJ’s Rebecca Wilkins explain to ABC News Brian Ross what Romney’s tax returns would show about his offshore investments and “carried interest” income. ABC video at this link.

End the Loophole Allowing Romney and other Fund Managers to have “Carried Interest” Taxed as “Capital Gains”

GOP presidential hopeful Mitt Romney’s personal wealth, estimated at $190 to $250 million, has been in the news a lot lately, including the sweet retirement deal he negotiated with Bain Capital, the private equity firm he used to head. The stories confirm CTJ director Bob McIntyre’s comments to Time Magazine that Romney’s multi-million dollar income is likely taxed at the special low 15 percent rate imposed on dividends and long-term capital gains.

This makes Romney a good poster child for the “Buffett Rule,” the principle that millionaires should not pay lower effective tax rates than middle-income people. One step towards implementing the Buffet Rule is to close the loophole that allows “carried interest” (the fund managers’ share of the deal they get as compensation) to be taxed at the 15 percent rate even though it is not truly capital gain.

Much of Romney’s income that is taxed at that super-low rate is actually compensation in the form of a “carried interest” in the private equity deals of Bain Capital. While CEO’s, actors, and athletes with multi-million dollar salaries, bonuses, or stock options pay income tax rates of 35 percent (and payroll taxes) on their compensation, managers of private equity firms, hedge funds, and other investment funds pay only 15 percent income tax (and no payroll tax) on their share of the funds’ profits that they get in exchange for their management services. Even some managers who benefit from the low rate admit it’s not justified.

Since this loophole benefits those who make millions, hundreds of millions and sometimes over a billion dollars in a single year, it is truly a case of the richest one percent being subsidized by the other 99 percent who pay higher taxes or get less in services to pay for this tax break.

Various proposals have been offered to close this loophole and, in the last Congress, one of those measures passed the House (three times!) but didn’t make it through the Senate. Republicans and many Democrats in the Senate claimed that the loophole somehow helps encourage investment in poor neighborhoods, helps minorities, small businesses and even cancer patients.

The truth is that it does not encourage any type of investment in any part of the country because it does not benefit the people putting up money for investment. It merely allows those who manage this money to pretend that they have invested their own cash and thus receive the capital gains tax break that is ostensibly in place to encourage investment.

Now that this loophole has the face of a very wealthy presidential candidate on it, perhaps the American public will start to notice and demand that it be eliminated. If you believe the tax code shouldn’t favor the richest 1 percent over the 99 percent, here’s a place to start: Close the Romney Loophole.