Author: tarek

One of the Biggest Bailed Out Banks

Last week a federal court decided against Wells Fargo in an $80 million tax shelter case. In the challenged deal, which government attorneys called a “charade” and an attempted “raid on the federal Treasury,” Wells Fargo claimed a $420 million capital loss from the transfer of “underwater” leases to a subsidiary and a related sale of stock to Lehman Brothers. The transaction had no business purpose other than tax avoidance, the court said, and was a sham tax shelter purchased from the international accounting firm KMPG for $3 million.

Our corporate tax study found that the financial industry as a whole had an average effective federal income tax rate of 15.5 percent for the 2008-2010 period and Wells Fargo’s rate was -1.4 percent. Wells Fargo also topped the list of companies with the largest tax subsidies, receiving $17.9 billion in tax subsidies over that three-year period.

A significant factor in their low tax rate is the deduction of net operating losses (NOLs) that were bought in the Wachovia acquisition. Tax law normally limits the deductibility of acquired NOLs, in order to keep companies from acquiring other companies just to reduce their taxes, but the Bush Treasury Department gave Wells Fargo a one-time exception from those rules. Congress quickly passed a law to prohibit Treasury from granting those exceptions in the future, but the law does not apply retroactively, which means Wells Fargo continues to enjoy the tax savings from Wachovia’s NOLs.

The North Carolina Corporation Pushing Senator Hagan and Others to Support a Repatriation Amnesty

In June, the organization Third Way hosted an event in Washington at which a group of politicians, corporate leaders and others argued in favor of a tax amnesty for profits U.S. corporations hold offshore. (See the transcript of the event.) CTJ and other groups have long opposed a repatriation amnesty, noting that it provides the greatest benefits to those companies that simply shift their profits into tax havens.

Jim Rogers, the CEO and president of the North Carolina company Duke Energy, spoke in favor of a repatriation amnesty, as did North Carolina’s Democratic Senator, Kay Hagan.

Towards the end of the event, the audience members asked a series of questions that the panelists were unable to answer adequately. For example, a CTJ staffer commented to the panelists:

If I understand, I think what you’re saying is that the nonpartisan Congressional Research Service was wrong in issuing a study that said that the last time this was tried it did not create jobs, and that the nonpartisan Joint Committee on Taxation was wrong recently when it had its analysis saying that if we repeat this repatriation holiday, it will cost $79 billion over 10 years, partially because some of those profits would have been brought back anyway; partially because, ultimately, corporations will shift even more profits offshore, meaning even if your only goal is to get more of these profits into the U.S., even in that limited goal, you fail on that. So do I understand correctly that you think that the nonpartisan Congressional Research Service and the nonpartisan Joint Committee on Taxation are incorrect and Congress should ignore these analyses?

We were not entirely surprised that no one had a good response to this. What did surprise us, however, was that Duke Energy is already avoiding corporate income taxes, which we learned as we prepared our major corporate tax study.

Duke Energy had profits of $5.5 billion over the 2008-2010 period but received $216 million from the IRS over that period, for a three-year effective tax rate of negative 3.9 percent.

Despite its already remarkable tax subsidies, Duke Energy now wants to bring its offshore profits back to the U.S. and pay almost no U.S. taxes on them.

A Major Defense Contractor Lobbying Against Military Spending Cuts

In June, James Zrust, vice president of tax for the defense contractor Boeing, testified before the House Ways and Means Committee in favor of a steep reduction in the corporate income tax rate. One member of the committee, Congressman Pete Stark of California, cited a short report from CTJ explaining that Boeing’s effective corporate tax rate was already negative.

Boeing made $9.7 billion in profits over the 2008-2010 period but received $178 million from the IRS over that period, for an effective corporate income tax rate of negative 1.8 percent. How much lower does Boeing think its effective tax rate should be? Interestingly, Boeing actually had negative effective tax rates in all three of those years.

Given Boeing’s recent $35 billion deal to build airborne tankers (that is, $35 billion paid by U.S. taxpayers) it’s reasonable for Americans to expect Boeing to pay taxes when it makes a profit.

Defense spending has increased 70 percent since 2001 and many usually hawkish pundits and analysts are now calling for defense cuts. Boeing, of course, is lobbying against any defense cuts and disputing the commonsense notion that cuts in defense should play some role in deficit reduction.

On Thursday, a subcommittee hearing on a proposed IRS rule veered towards the absurd when Citizens for Tax Justice and the Obama administration were accused of supporting dictators, kidnappers and terrorists.

CTJ’s Rebecca Wilkins testified before a House Financial Services subcommittee in favor of a proposed rule that would require U.S. banks to report to the IRS any interest payments made to foreign account holders in the same way they report interest payments made to U.S. resident account holders.

Read Rebecca Wilkins’s Written Testimony

Watch Rebecca Wilkins’s Testimony

The U.S. government taxes interest payments made to U.S. residents but not those made to foreigners, so it never bothered to require banks to report those made to foreigners. But the IRS has proposed to change that rule in order to reduce tax evasion by Americans directly (to help identify Americans who evade U.S. taxes by posing as foreigners) and indirectly (by helping other countries enforce their tax laws so that they’ll help us enforce ours).

Wilkins faced off against three witnesses opposed to the proposed rule and a panel of lawmakers controlled by bank supporters. Chairman Spencer Bachus read a letter from the Florida delegation, which apparently is protective of its banks even when they facilitate tax evasion. Many people who live in unstable countries and have U.S. bank accounts, the letter argues, are “concerned their personal bank account information could be leaked to unauthorized persons in their home country government or to criminal or terrorist groups upon receipt from U.S. authorities, which could result in kidnapping or other terrorist actions…”

In other words, Bachus and the Florida delegation believe we should help all foreign individuals break their home countries’ tax laws because some of those countries have corrupt governments.

Never mind that the IRS would only hand over information to foreign governments in response to a careful, limited request under a tax information exchange agreement, as Wilkins calmly explained. Even more important, Wilkins explained, is that the rule in effect now actually helps criminals, corrupt government officials, terrorists and money launderers by allowing them to hide their money in the U.S.!

“America should not be a tax haven,” Wilkins told the panel.

Towards the end of her opening statement, Wilkins addressed her opponents directly:

“Chairman Bachus said, ‘Do we want to have blood on our hands, as a result of these rules?’ I want to tell you, the U.S. already has blood on its hands. For every dollar of tax revenue that is taken out of the governments of developing countries, it impairs the ability of those countries to provide health and safety measures, to feed its citizens, to provide sanitation, to provide health care, to provide military and police that are not corrupt. Every time we facilitate a dollar coming out of those economies, we have blood on our hands.”

Perhaps the most remarkable comment came at the end of the hearing from Bill Posey of Florida, who said to Wilkins, “Your advocacy for the government of Venezuela and, um, ultimately someday maybe Iran, North Korea and Cuba and the like, startles me, quite frankly. Most of us here try to put America first.” Posey then went on, not about putting Americans first, but about the plight of the people living under these dictatorships who hide their money in American banks. 

Wilkins had already explained that the IRS would not be required to provide foreign governments with the information it collects, but would be able to respond to a limited request under a tax information exchange agreement. Perhaps if Wilkins had been allowed to respond to Posey’s comments, she might have addressed some of his confusion, starting with his apparent belief that the United States has tax information exchange agreements with North Korea, Iran and Cuba.

The St. Louis Post Dispatch calls Missouri’s special legislative session that just wrapped up a fiasco. We’ve written about this saga of a special session that started September 6 and was convened with the promise of helping spur the Show Me State’s economy.  But from the Governor’s misguided support for eliminating a credit that keeps seniors and the disabled in their homes, to the debacle of a plan to make the St. Louis airport a futuristic hub for freight between China and the Midwest, this special session was doomed by a growing skepticism among the state’s lawmakers that tax giveaways for businesses will help grow the state’s languishing economy. Sensibly, many lawmakers refused to accept new tax breaks unless procedures (such as sunsets) were put in place to make sure these tax breaks actually work.

Despite having clear majorities in the Senate (26-8) and House (105-54), the state’s Republican lawmakers weren’t able to get much done, and it’s one of those times that stalemate was actually a good thing. 

Photo of Missouri Capitol via David Shane Creative Commons Attribution License 2.0

On Tuesday, the Blue Ribbon Commission on Maryland Transportation Funding voted to recommend a set of tax and fee increases that would boost funding for the state’s roads and transit systems by some $870 million annually.  The largest component of those reforms is a long-overdue increase and restructuring of the state’s gas tax, which has been unchanged for nearly two decades and lagging behind the cost of everything else the tax pays for. These recommendations should have a major impact on the transportation funding debate expected when the legislature convenes in January.

The proposed 15 cent increase in the state’s gasoline tax, phased-in over a three year period, is smart because Maryland’s fixed-rate gas tax (23.5 cents per gallon) hasn’t been raised since 1992, and this change would return the tax roughly to its previous buying-power (that is, adjusted to consider the rising cost of road construction).

The proposal is something legislators and their constituents should get behind because poor road conditions and traffic congestion are estimated to cost the average Maryland driver over $2,200 in vehicle repair, gasoline, and safety costs each year.  The gas tax increase, however, should only cost the average driver about $77 per year according to a forthcoming Institute on Taxation and Economic Policy (ITEP) analysis.

But while the 15-cent increase is vitally important to Maryland’s roads and transit systems today, this change will only be a Band-Aid fix if legislators fail to combine it with another one of the Commission’s recommendations: allowing the rate to rise alongside the rising cost of construction.  Florida already links (or “indexes”) its gas tax rate to the general inflation rate, and thirteen other states allow their gas taxes to grow alongside gas price growth.  Just a few months ago, a commission in Pennsylvania proposed a similar measure that would allow their tax rate to grow over time with the price of fuel, and an influential Republican legislator there declared just last week that he would introduce legislation containing that reform.

These gas tax reforms are desperately needed because Maryland’s transportation system, like nearly every other state’s, is vastly underfunded, and for many daily commuters, time can be even more important than money.  Baltimore was ranked as having the 6th worst traffic congestion in the nation, and the DC area as having the absolute worst.  Recognizing that these shortcomings have real costs in terms of lost productivity, both the Maryland Chamber of Commerce and the Greater Baltimore Committee have come out recently in support of the gas tax increase.  And Maryland Governor Martin O’Malley also appears likely to support the increase.

Enthusiasm for the gas tax increase, however,  is only justified if it includes provisions to protect the lower income Marylanders who are likelier to feel its effects. However overdue this tax may be, it remains, like many of the fee increases being proposed, a regressive change – meaning it will disproportionately impact low-income families relative to their incomes.  Seven states currently offer low-income tax credits designed to offset the effect of these sorts of “regressive” consumption taxes, and most states (including Maryland) offer similar credits that accomplish broadly the same goal. 

If Maryland’s gas tax update is paired with offsetting relief provided via low-income tax credits, it’s a winning proposal with widespread benefits that deserves support.

Photo of Maryland Road Construction via Bank Bryan Creative Commons Attribution License 2.0

In June of 2012, North Dakota voters will have the opportunity to vote on a proposed Constitutional Amendment that would eliminate all property taxes.  If passed, the initiative would make North Dakota the only state in the nation to completely abandon this cornerstone of local government finance. 

Although property taxes are somewhat regressive, they are a vitally important revenue source, and serve as an important complement to state income taxes by ensuring that families with large quantities of property wealth pay more than those without such reserves.  The initiative’s sponsors, Empower the Taxpayer (E.T.), gloss over these realities with simplistic arguments that “government has become too big,” and “property taxes penalize the homeowner.”

E.T. also contends that the state is empowered only to provide for the general welfare, and property taxes are currently being used to somehow provide kickbacks to “special interest” groups, three of which they identify as most egregious being the higher education system, state employees, and the health and human services system.

Since when did the public interest become a special interest?

E.T., we should mention, is spearheaded by Robert Hale, a successful lawyer in Minot, ND, who is also a builder and developer who, one can imagine, would benefit financially if he could legally avoid paying property taxes.

One final note: while E.T. calls for property tax elimination to be financed through deep cuts in public services, they also float local sales taxes as a more “democratic and fair” alternative to the property tax, never mind that they are a starkly regressive kind of tax, impacting the poor far more heavily than any other group.  

Regressive taxes, however, and massive service cuts are what we should probably expect from this organization which, as it happens, chooses that monocle-wearing millionaire from the Monopoly game, Rich Uncle Pennybags, for its logo.

Reforming a state’s tax structure and the planning, meetings, and discussions that go into such a monumental and consequential project shouldn’t happen behind closed doors.  After all, taxes are fundamental to government and its activities and they impact everyone.

But apparently Kansas Governor Sam Brownback’s administration sees it differently.

The media has been reporting that the Governor will come out with a new tax reform proposal before the end of the year. We know that he’s enlisted the help of mega-supply sider Arthur Laffer to assist him and that Laffer is getting paid about $75,000. But that’s where the information stops. We can assume a task force or committee of some type is meeting, but that’s really all anyone knows.

The Lawrence Journal-World recently sent an email to the Brownback administration to attempt to gain “access or copies of minutes, agendas and policy papers of the task force.” But the governor’s people are throwing up bureaucratic excuses and indicated they might need seven weeks to comply. At which point the task force might be disbanded and Governor Brownback’s plan already complete.

Governor Brownback, his administration and his task force group should abandon this secrecy strategy.  The Wichita Eagle points out that given the political climate in Kansas, transparency is of paramount concern: “With the 2010 election having left the Legislature rich with conservatives ready to implement Brownback’s sweeping agenda without much second-guessing, transparency and scrutiny are needed now.”

State Senate President Steve Morris, R-Hugoton, agrees. “Right now,” he said, “there are a lot of ideas being floated around, but what they all seem to be missing is citizen input.”

You know what they say about sunlight – it’s time for Governor Brownback to let it shine on this important policy-making process.

Photo of Art Laffer via Republican Conference and photo of Sam Brownback via KDOTHQ Creative Commons Attribution License 2.0

For much of the last century, estate and inheritance taxes have played an important role in helping states to adequately fund public services in a way that exempts middle- and low-income taxpayers. This is an especially vital role at the state level because most of the taxes levied by state and local governments fall most heavily on low-income families. Recent changes in federal estate tax laws give states an opportunity to re-examine the design of their own estate and inheritance taxes.

Read more about options for making state tax structures more fair though estate and inheritance taxes in the Institute on Taxation and Economic Policy‘s updated policy brief.

Labor unions, small business associations and good government groups have lined up to oppose proposals to exempt corporations’ offshore profits from U.S. taxes on a permanent basis (by enacting a “territorial” tax system) or temporary basis (by enacting a “repatriation” amnesty). These organizations also oppose any overhaul of the corporate income tax that fails to raise significant revenue.

The organizations spell out their positions on corporate tax reform in a letter sent to members of the Joint Select Committee on Deficit Reduction (commonly called the “Super Committee”) today.

Read the letter.

These positions put the organizations at odds with House Ways and Means Chairman Dave Camp, who today proposed a corporate tax overhaul that includes a territorial system and that would be “revenue-neutral.”

The letter asks the Super Committee to do four things:

1. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes permanently (by enacting a “territorial” tax system).

2. Reject any proposal to exempt U.S. corporations’ offshore profits from U.S. taxes temporarily (by enacting a “repatriation” amnesty).

3. Require any overhaul of the corporate income tax to raise significant revenue.

4. Require that the revenue-positive result be estimated using traditional revenue scoring procedures as opposed to controversial alternative procedures (often called “dynamic” scoring).

To learn more, see CTJ’s fact sheet about raising revenue through corporate tax reform and CTJ’s fact sheet about territorial/repatriation proposals.

Photo of Rep. Dave Camp via Michael Jolley Creative Commons Attribution License 2.0