Author: tarek

Washington State has the most regressive tax structure in the country. No other state asks more of its poorest taxpayers and simultaneously asks so little of its wealthiest taxpayers.  The major reasons for its distorted tax structure are the state’s excessive reliance on sales taxes (along with property taxes) and the absence of any type of tax on income.

Later this month, legislators will be meeting in a special session to try to close the state’s $2 billion shortfall. Governor Gregoire has taken the uninspired and unimaginative approach of proposing only spending cuts to fill the gap. Her proposed plan will simultaneously harm working families and ensure that Washington State’s tax structure remains the nation’s most unfair.

Governor Gregoire and legislators need to think outside the box, and specifically consider  the Washington State Budget and Policy Center’s (WBPC) proposal to tax capital gains income.

 The Institute on Taxation and Economic Policy (ITEP) found that a modest tax on capital gains income could raise as much as a $1 billion annually, and a full 97 percent of Washingtonians wouldn’t be impacted. To read more about WBPC’s proposal and ITEP’s analysis read A Capital Reform.  

Elected officials must move beyond the cuts-only rhetoric and look to budget solutions, like taxing capital gains, that help to create long term fiscal solvency and create a tax structure that works for everyone.

Photo of Governor Chris Gregoire via WS DOT Creative Commons Attribution License 2.0

Kentucky GOP gubernatorial candidate, longtime Senate President and American Legislative Exchange Council (ALEC) “Legislator of the Year” awardee, David Williams, was rebuked by Blue Grass State voters last week.

Williams staunchly advocated for eliminating the state’s personal and corporate income taxes during his campaign, that is, eliminating the most progressive and fair taxes levied in Kentucky and creating a colossal hole in the state’s budget at the same time.

Governor Steve Beshear, who defeated Williams and won a second term on November 8, estimated the budget hole from eliminating these two vital sources of revenue would equal 43 percent of the state’s general fund.  Beshear also suggested it would have to be made up with a sales tax hike – which is always hardest on the poorest families.

Kentucky voters had their say and voted down Williams’ radical agenda 36  to 56 percent (an independent candidate garnered 9 percent of the vote).

This isn’t the last we’ll hear of ALEC and its state-by-state plan to advance its corporate-authored agenda . But it’s encouraging that the good people of Kentucky didn’t fall for it.

Photo of Governor Steve Beshear via Gage Skidmore Creative Commons Attribution License 2.0

A slew of tax credit programs in Iowa that have failed to live up to their job-creation promises is further evidence that while companies will happily take taxpayer money when it’s offered, no amount of corporate pork can make a company hire people when there’s no demand for its products.

An excellent piece of journalism from The Des Moines Register reveals that 15 companies enjoying tax credit dollars given to them by the state have defaulted on the job-creation requirements tied to those credits.  All together, those companies created one-third fewer jobs than they promised when they took the money.  (This story echoes a recent report from Texas showing that just 26 percent of projects receiving funding from the Texas Enterprise Fund (TEF) fully complied with their 2010 job creation requirements.)

The reasons for these failures should be obvious.  When the economy is weak, businesses generally can’t sell as much of their product as they used to.  You can throw money at them and ask them to hire more people, but ultimately it doesn’t make sense for a company to bring on more employees unless there’s some new, unmet demand that needs to be filled.  In good economic times, companies simply rake in tax credit dollars and create jobs they would have created anyway. But in bad economic times, companies rake in tax credit dollars, the façade collapses, and you end up with exactly the situation we see in Iowa.

Iowa State University economist David Swenson provided some valuable insight to The Des Moines Register on this issue: “Tax credits in Iowa are used very injudiciously.  Everybody qualifies for something. It makes no sense from a business or government point of view. … But government officials can’t take credit for job creation if they don’t hand out some sort of subsidy.”

He goes on to provide an important recommendation to legislators currently reviewing 35 of Iowa’s tax credits: “Everybody is living with a lot less,” due to the down economy. “That really does mean businesses should be living with a lot less public subsidy.”

Photo of Iowa State Capito via  Jimmy Wayne Creative Commons Attribution License 2.0

Coburn Report on Hand-Outs for Millionaires Misses the Worst of All

Republican Senator Tom Coburn of Oklahoma, who made news earlier this year when he broke with right-wing ideologues by suggesting that Congress could raise some amount of revenue greater than zero dollars, has issued a report this week claiming to lay bare the various spending subsidies and tax subsidies benefiting millionaires. There are many problems with this report but the most enormous is that it ignores the biggest and most unfair tax subsidy for the rich — the lower tax rates that apply to investment income like capital gains and stock dividends.

Remember, the entire reason why Warren Buffett complains that he pays a lower effective federal tax rate than his secretary, and the inspiration for President Obama’s Buffett Rule, is this tax subsidy for investment income.

It is quite a feat to write a 37-page report about various government hand-outs for millionaires and yet fail to mention the one that the Buffett Rule is designed to address. But Senator Coburn’s staff has done exactly that.

Investment income is taxed less than other types of income in two ways. First, the personal income tax has special, low rates for two key types of investment income (long-term capital gains and qualified stock dividends), including a top rate of 15 percent. The majority of this income goes to the richest one percent of taxpayers. Second, the payroll taxes that apply to wages do not apply to investment income.

A previous report from CTJ explained how these tax breaks for investment income allow millionaires in some situations to pay lower effective federal tax rates than many middle-income people. Another CTJ report compared taxpayers making between $60,000 and $65,000 with taxpayers who make over ten million annually. In the first group, only about 2 percent receive most of their income from investments, while in the second group, about a third receive most of their income from investments and consequently have a lower average effective federal tax rate than most of the $60,000-$65,000 taxpayers.

This is an outrageous situation and the Buffett Rule is the principle that tax reform should reduce or eliminate this unfairness. Any plan to end hand-outs for millionaires that fails to implement the Buffett Rule is not worth the paper it’s written on.

A report from Macroeconomic Advisers, one of the most respected economic forecasting firms, concludes that unemployment would rise from 9 percent to 18 percent in 2012 if Congress had to cut spending to comply with the type of constitutional balanced budget requirement that Republicans and some Democrats tried but failed to pass today.

Most mainstream economists agree that the last thing the federal government should do during a recession is cut spending. Reducing government jobs, or cutting government programs that maintain consumer spending in a way that indirectly creates jobs, is the last thing we need when the economy is already contracting. But that’s exactly what would happen under a balanced budget requirement.

Recessions often cause budget crunches because they reduce revenues (because fewer people and businesses are generating income and paying taxes) and increase government spending (because more people receive unemployment insurance and other benefits). These automatic reductions in taxes and increases in spending can stabilize the economy to an extent. But a balanced budget requirement would make it far more likely that Congress would respond to a recession-induced budget crunch by slashing unemployment insurance and other programs that help offset the economic contraction.

That’s why Macroeconomic Advisers found that if Congress had to cut spending to balance the budget in 2012, another 15 million people would become unemployed and economic growth would drop from an expected 2 percent to negative 17 percent.

Such a proposal would seem too outrageous to even be discussed seriously —  except that a majority of the House of Representatives just voted for it. (The measure thankfully did not receive the two-thirds vote requires for approval of a constitutional amendment.)

The version considered today would not take effect for five years, but it’s important to remember that even the most conservative deficit-reduction plans discussed today would not result in a balanced budget for decades. And America will undoubtedly face recessions in the future when the balanced budget requirement would be in effect.

Citizens for Tax Justice has joined 275 other national organizations on a letter to members of Congress blasting the proposed balanced budget amendment as, to borrow the term used by Macroeconomic Advisers, “catastrophic.”

And just in case you were wondering, the balanced budget amendment considered today was the less extreme of the two versions that have been discussed lately. The version supported by anti-tax activist Grover Norquist would require approval by two-thirds of both chambers of Congress to pass any revenue increase, ensuring that efforts to balance the budget during recessions would definitely be done entirely through spending cuts and have the effects described above. Of course, the fact that a proposal is slightly less extreme than the one preferred by Grover Norquist is no indication that it’s a great idea.

Many lawmakers have apparently decided that they would address difficult fiscal problems with what seems like a simple answer. A rule making Congress balance the federal budget every year probably sounds reasonable to many people until they learn of the horrific consequences. Lawmakers have no such excuse, because they and their staffs are quite aware of mainstream economic research, which this recent report only reaffirms.

Make no mistake; those lawmakers who voted today for the balanced budget amendment have voted to destroy millions of jobs during a recession.

While all of the 2012 GOP presidential candidates have had their fair share of tax policy blunders, Minnesota Republican Representative Michele Bachmann has stood out among the field for her outrageous and often factually incorrect statements about our tax system.

During the recent CNBC GOP Debate, Bachmann mentioned “47 percent of Americans who pay no federal income tax” and then took this point a step further saying that “even if it means paying the price of two Happy Meals a year, like $10, everyone can afford at least that.”

Bachmann’s statement is intentionally misleading. While many Americans do not pay federal income taxes, all Americans pay other taxes such as payroll, property, sales taxes (often on the Happy Meals they buy), and other largely regressive taxes.

Some taxpayers don’t pay federal income taxes because they are working poor families who receive the refundable parts of the Earned Income Tax Credit and the Child Tax Credit (which are available only if an adult in the family is working). Other taxpayers don’t pay federal income taxes because they are recipients of Social Security benefits, most of which are not taxed.

One recent report from CTJ found that if we set aside Social Security recipients and combine just two taxes, federal income taxes and payroll taxes, the number of Americans “not paying” drops to 15 percent, and these are concentrated among the poor.

Michelle Bachmann said other wildly inaccurate things about taxes during the same debate. For example, she claimed that the United States has an “effective” corporate tax rate of about 40 percent. She apparently was referring to the federal statutory corporate tax rate of 35 percent, which, combined with the average state statutory corporate tax rate would be around 40 percent. Of course, this is entirely different from the effective corporate tax rate, which is the percentage of profits that corporations actually pay in taxes after accounting for the wide range of tax breaks and loopholes.

The recent CTJ-ITEP report “Corporate Taxpayers & Tax Dodgers,” examines most of the Fortune 500 companies that were profitable over the last three years and finds that their effective corporate income tax rate was just 18.5 percent on average. Many major corporations like General Electric or Verizon paid nothing at all.

These corporate tax breaks and loopholes have spun so out of control in the US that despite having the second highest statutory corporate tax rate in the developed world, the US actually has the second lowest rate of corporate tax collected as a percentage of GDP.

Although Bachmann was especially brazen in the most recent debate, she has a history of outrageous tax policy statements. For example, she has advocated for the elimination of all taxes, rewritten fiscal history by claiming that the Bush tax cuts aren’t the main driver of the deficit, and promoted a job killing corporate tax amnesty program.

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The release of the corporate tax avoidance study by CTJ and ITEP last week marked a turning point in the debate over the budget deficit and tax reform. Until now, members of Congress and the Obama administration could ignore the 67-73 percent of Americans who think that large corporations pay too little in taxes.

But now, with hundreds of news stories about our findings, there is no denying the public appetite for corporate tax reform that asks profitable companies to pay their fair share.

Among other things, our report, Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010 showed that thirty large, profitable companies paid nothing in federal taxes over the last three years, and that seventy-eight had tax rates below zero in at least one of the last three years. We showed that the financial industry is making off with the biggest share of all tax subsidies, that defense contractors pay some of the lowest rates and that these major American companies end up paying about half the official tax rate because of all the loopholes in the tax code.

Indifferent to public opinion and the facts, however, too many lawmakers are caving into corporate lobbyists’ demands to actually cut corporate taxes. President Barack Obama and members of Congress in both parties are considering “revenue-neutral” reform of the corporate income tax.  This would close corporate tax loopholes, but it would put the revenue back in corporations’ pockets by reducing the statutory tax rate.

CTJ has responded with a campaign to educate lawmakers about how they can raise revenue from corporations and reject so-called “reforms” that make it easier for corporations to shift investments offshore and avoid taxes. In May, we led 250 organizations in demanding “revenue-positive” corporate tax reform. Large labor unions, including AFL-CIO affiliates and the SEIU, joined public interest organizations in opposing a “territorial” tax system, a “repatriation” amnesty as well as any corporate tax reform that fails to raise significant revenue.

The CTJ-ITEP corporate tax study makes it increasingly difficult for politicians to say with a straight face that fiscal responsibility requires cuts in health care, education, nutrition, environmental protection and other public investments while they do nothing to raise more revenue from profitable corporations.

The following are the stories of some of the most shocking tax dodgers we identify in our report.

TAX DODGER: GENERAL ELECTRIC (GE)
The Corporation Led by Obama’s “Jobs and Competitiveness” Chairman

TAX DODGER: HONEYWELL
The Corporation Led by a Member of Obama’s “Fiscal Responsibility” Commission

TAX DODGER: VERIZON
The Corporation Battling the Communication Workers of America to Cut $1 Billion in Employee Benefits

TAX DODGER: WELLS FARGO
One of the Biggest Bailed Out Banks

TAX DODGER: DUKE ENERGY
The North Carolina Corporation Pushing Senator Hagan and Others to Support a Repatriation Amnesty

TAX DODGER: BOEING
A Major Defense Contractor Lobbying Against Military Spending Cuts

The Corporation Led by Obama’s “Jobs and Competitiveness” Chairman

In March, activists called on Jeffrey Immelt, CEO of GE, to step down from his position as chairman of President Obama’s Council on Jobs and Competitiveness following revelations that GE had a negative corporate income tax rate over the past several years.

The New York Times had just reported that the nearly 1,000-person tax department of GE managed to achieve a negative corporate income tax rate over a 5-year period, partly by lobbying Congress for more tax loopholes. The article included all sorts of details that were damaging for GE. For example, it explained how the director of GE’s tax department literally “dropped to his knees” in the House Ways and Means office as he begged for — and won — the extension of a tax cut for financing through offshore subsidiaries.

A couple months earlier, President Obama had appointed Immelt chairman of his Council on Jobs and Competitiveness, which is to give “advice to the President on continuing to strengthen the Nation’s economy and ensure the competitiveness of the United States.” After the Times article was published, former U.S. Senator Russ Feingold launched a petition calling on Immelt to resign from his position as chairman of the council.

GE’s tax avoidance entered the spotlight again in July, when Immelt endorsed a proposed repatriation amnesty. This proposal would call off almost all U.S. taxes on profits that U.S. corporations are currently holding offshore. These profits are normally subject to the difference between the U.S. corporate income tax and whatever foreign corporate income taxes were already paid (if the U.S. tax is greater) when the profits are brought back to the U.S. A recent report from a Senate investigations committee headed by Carl Levin (D-MI) found that a lot of these profits are stashed away in offshore tax havens where the corporations are likely to be doing no real business.

The Corporation Led by a Member of Obama’s “Fiscal Responsibility” Commission

On November 17, the conservative Tax Foundation is presenting its “Distinguished Service Award” to Republican House Speaker John Boehner and Honeywell CEO David Cote, who was appointed by President Obama to serve on the National Commission on Fiscal Responsibility and Reform (often called the “Bowles-Simpson Commission”).

It’s unsurprising that Speaker Boehner’s obstruction of any deficit deal involving revenue has earned him an award from the (Anti-) Tax Foundation. The case of Cote is more interesting. As a member of the fiscal commission, he voted in favor of a broad plan that would rely on spending cuts to achieve two-thirds of its deficit reduction goal and revenue increases to achieve just one-third of that goal, a plan that was panned by CTJ and others. The deal also included “tax reform” that clearly would not raise taxes on corporations overall.

In April, Cote spoke at a public event about the budget deficit where he was asked twice about a press release issued by CTJ that morning explaining that Honeywell did not pay any corporate income taxes in 2009 or 2010 and paid very low taxes over the past several years despite its profits. Within a matter of hours, Honeywell sent a letter to CTJ essentially saying that the company correctly reported large profits to its shareholders for the last two years but used available tax loopholes to report losses to the IRS.

CTJ’s director, Bob McIntyre, wrote a letter back to Honeywell that concludes:

“So I think we agree on the following: The reason why Honeywell, despite reporting substantial pretax U.S. profits to its shareholders, paid no federal income tax in 2009 or 2010 (or more precisely, paid less than zero) is that it took advantage of legal tax breaks to wipe out its federal income tax liability. We may disagree, however, about whether these tax breaks should exist.”

(See the CTJ press release and correspondence between Honeywell and CTJ.)

The Corporation Battling the Communication Workers of America to Cut $1 Billion in Employee Benefits

In August, 45,000 Verizon employees went on strike to protest the company’s push for employees to give back $1 billion in health, pension, and other contract concessions.

CTJ commented at the time that Verizon’s stance is particularly galling given that Verizon is both highly profitable and already a model of poor corporate citizenship. Despite earning over $32.5 billion over the last 3 years, Verizon not only paid nothing in corporate income taxes, it actually received nearly $1 billion (the same amount as the concessions they are seeking) in tax benefits from the federal government during that time.

As Verizon’s tax avoidance again received media attention following the publication of CJT’s major report last week, the company responded that the president of the Communication Workers of America, which organized the strike against Verizon, sits on the board of CTJ.

We’re not entirely sure what this is supposed to prove. If having the CWA president on our board makes our analysis biased, then surely anything said by Verizon’s tax department or spokespersons is even more biased since they actually work for Verizon.

More importantly, Verizon never actually offers any profit or tax figures that conflict with those in the CTJ study. The company’s spokesperson complains that the study does not count “deferred” taxes. (These are taxes that a company may pay in the future but has not paid yet, rendering them irrelevant.) He also says that the company “fully complies with all tax laws and pays its fair share of taxes.” Of course, CTJ has said from the beginning that the tax avoidance techniques used by Verizon and other corporations are (as far as we know) legal, and that’s why we know the tax system needs to be reformed by Congress.