“Made in Missouri” Business Enticements Come at High Cost to Elderly Residents

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In September, Missouri lawmakers are expected to reconvene for a special session aimed at passing a jobs creation package to promote economic development. Legislation that increases corporate tax exemptions and general business incentives, though deeply flawed as policy, isn’t a novel concept.  Yet, leaders in Jefferson City are expected to do more than simply give money to corporations: lawmakers are actually planning to pay for these giveaways by revoking property tax credits for elderly and disabled renters.

The Associated Press reports that the legislation “would authorize tax breaks to attract international shippers to Lambert-St. Louis International Airport…. It also would create incentives for science and technology companies, computer-based data storage centers and big-time amateur sporting events. And it would revamp existing programs so Missouri could offer incentives to retain companies being enticed by other states – a provision particularly intended counteract Kansas’ efforts to lure companies from Kansas City, Mo.”

Of course, there is little evidence that these giveaways will actually produce jobs for Missourians, or expedite business decisions to expand in the Show Me State.

But, it’s been demonstrated repeatedly that programs like low income property tax circuit breakers, which mitigate the cost of property taxes, do produce results – and make an enormous difference in the budgets of low income folks.

Missouri lawmakers should take a serious step back and reexamine their intentions.  Taking property tax credits away from elderly renters to pay for dubious breaks for corporations isn’t a legacy lawmakers can feel proud of.

Photo via Tim 7423 Creative Commons Attribution License 2.0

New State Policy Briefs Roll-Out Begins With Sales Tax Topics

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The Institute on Taxation and Economic Policy (ITEP) offers a series of Policy Briefs designed to provide a quick introduction to basic tax policy ideas that are important to understanding current debates at the state and federal level.  Over the coming months, ITEP will be releasing updated and new Briefs weekly to help inform taxpayers, lawmakers and the media.

This week, be sure to check out the following updated briefs:

 

House Ways and Means Committee Considers a National Sales Tax Proposal that Would Increase Taxes on Low- and Middle-Income Households

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On Tuesday, the House Ways and Means Committee held a hearing to consider a national sales tax (often misleadingly called a “Fair Tax” by its proponents) and a value-added tax (VAT).

A national sales tax and a VAT are both consumption taxes and therefore both have the same regressive effect. Poor families have little choice but to spend all of their income on consumption while rich families tend to save most of their income. So a tax on consumption will naturally take a much larger share of income from poor and middle-income families than from rich families.

Proposals to implement a VAT take many forms and are usually discussed as a supplement to existing revenue sources. Proponents of a national sales tax, however, are usually describing a very specific proposal (and a specific bill that is reintroduced each year) misleadingly called a “Fair Tax.”

The so-called “Fair Tax” would replace the federal personal income tax, corporate income tax and estate and gift taxes with a 30 percent sales tax. (Proponents use a convoluted calculation to claim that it’s actually a 23 percent rate.) The tax would apply to all types of consumption, including those that would be difficult or impossible to tax in the real world (like rent, health care services, and, oddly, government spending.)

The proposal includes a rebate to all families that proponents claim mitigates the gross unfairness of the sales tax. The rebate would basically be a cash grant that would vary only by family size.

But as Citizens for Tax Justice and its research wing, the Institute on Taxation and Economic Policy (ITEP), have long explained, the national sales tax would be extremely regressive. ITEP’s classic report from 2004 illustrates that the poor and middle class would pay much more under a national sales tax (the so-called “Fair Tax”) in every state. (State-by-state figures are included in the report.)

Unfairness is not the only problem. Proponents of a national sales tax vastly understate what the sales tax rate would have to be in order to replace the revenue collected under the current federal tax system. As the ITEP report explains, sales-tax proponents’ convoluted claim that the national sales tax rate would be 23 percent instead of 30 percent is only the beginning of the distortions. To truly raise as much revenue as the current federal tax system, the theoretical rate would have to be between 45 and 53 percent. And because such a high rate would encourage cheating, the real rate would have to be higher still.

Sales-tax advocates sometimes try to make their plan look less regressive by focusing on the taxes people pay over their entire lifetimes. Professor Laurence Kotlikoff of Boston University used this technique during his testimony before the Ways and Means Committee to argue that the “Fair Tax” can be progressive! The non-partisan Congressional Research Service notes however that the use these sorts of “highly stylized life cycle models” is actually rather controversial.

Kotlikoff seems to be arguing that because everyone is going to use their income for consumption sooner or later, then a tax on consumption is not inherently any more regressive than a tax on income. A flat 30 percent tax applied to spending, he asserts, would have the same effect as a flat 23 percent tax applied to income over the course of someone’s life. Adding the rebate included in the Fair Tax proposal, Kotlikoff and other proponents claim, makes it progressive.

Here’s why this argument is all wrong. First, rich people don’t eventually use all of their income for consumption but leave a great deal of it to others after they die.

Second, a flat 23 percent tax on income would, of course, be more regressive than our current system, which taxes poor and middle-income people at rates below that and rich people at rates above that.

Third, the rebates included in the Fair Tax would not be enough to offset this regressive impact since the current income tax provides negative taxes for many low-income families.

Other advocates of a national sales tax have made even wilder arguments, like the claim that retail prices will somehow not rise even when the new national sales tax is included in the price, or the claim that the IRS would become unnecessary because states would voluntary collect the tax and remit it to the federal government. (This sounds a lot like the failed Articles of Confederacy, which were replaced by the U.S. Constitution in order to give the federal government the power to raise revenues on its own, rather than relying on voluntary contributions by the states.)

Many of the pro-sales-tax arguments were cogently refuted in testimony given by Bruce Bartlett, a former Reagan administration official. Bartlett has written a great deal about the Fair Tax and its history, starting with the original sales-tax proposal by the Church of Scientology.

Photo via John Beagle & Chasing Fun Creative Commons Attribution License 2.0

Press Release: Sales Tax Holidays: PR Bonanzas, Policy Boondoggles

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UPDATE: The Boston Globe is reporting that Massachusetts Governor Deval Patrick will sign a controversial 2011 sales tax holiday bill for the Bay State, conceding, “We do it frankly, not because it’s particularly fiscally prudent but because it’s popular…. It costs the state about $20 or $25 million. But as revenues come back, people want it. We think we can swing it.’’


For Release: July 26, 2011

Washington, DC — While politicians in seventeen states prepare to reap the public relations benefits of sales tax holidays, the Institute on Taxation and Economic Policy (ITEP) is asking if these events actually achieve the benefits for working families and retailers their proponents claim. 

“We just don’t know if anyone really benefits from sales tax holidays,” says Matthew Gardner, ITEP’s Executive Director, “largely because there is no transparency or accountability.  Of course politicians love the great PR, but with all the time they spend planning, promoting and implementing these events, they’d do better to focus on long term solutions with real benefits for more taxpayers.”

Sales tax holidays are implemented with the goal of giving working families a break on spending, typically during the back to school season.  Many have observed, however that other kinds of consumers benefit as much – if not more – from these holidays, including out-of-state shoppers and more affluent consumers with flexibility to spend whenever they like.  And obviously, the more a consumer spends, the greater their tax savings, so sales tax holidays tend to reward those with the most money to burn. 

To truly help so-called working families to make ends meet, ITEP endorses permanent reforms, including targeted tax credits which are more cost-effective because they ensure the benefit goes specifically to taxpayers the provision targets.

Targeted sales tax credits help compensate for the relatively high cost of basic necessities for lower income households. Using Bureau of Labor Statistics data, ITEP estimates that while the wealthiest families spend only one-sixth of their income on items that are subject to sales taxes, low-income families spend three-quarters of their income on taxable purchases. For households in the middle, about half of their income is spent on taxable items.  Put differently, a six percent sales tax amounts to roughly a one percent income tax rate for families in the highest income brackets, a three percent tax on middle-income families and a 4.5 percent tax on the poorest families.

“This is what makes the flat sales tax a textbook case of a regressive tax,” said Gardner.  “A dollar costs a poor person more than it costs a rich person.”  Targeted sales tax credits generally give a flat dollar amount for each family member and are available only to taxpayers with income below a certain threshold. Eight states currently provide sales tax relief in this form.

Sales tax holiday are also promoted as a boon for a state’s retailers because they are said to boost sales.  Evidence supporting this claim is weak, and common sense suggests it may not be true.  Incentive programs are more likely to merely shift the timing of purchases made than to motivate an unplanned purchase. “Cash for Clunkers,” for example, was used to purchase about 690,000 new cars, but only 125,000 of those would not have otherwise been purchased during that six months period, according to Edmunds.com.

To level the playing field for retailers within their jurisdictions, lawmakers in seven states have begun requiring Internet-based retailers to collect state sales taxes for online purchases (if they partner with business based in those states to solicit sales).  Growing numbers of consumers are migrating to the Internet and away from brick and mortar stores. This back to school season, nearly one third of families report they will shop online, according to the National Retail Federation.

“It also doesn’t hurt,” adds Gardner, “that state and local governments stand to gain billions in lost revenues if they start requiring online outlets to collect sales taxes from consumers.”

If retailers and hard pressed consumers do benefit in any significant way from sales tax holidays, the burden is on lawmakers who implement them to demonstrate those benefits – and the costs.  The recession has seen several states cancel or fail to renew their annual sales tax holidays because they couldn’t afford the revenue loss.  “There is sexy tax policy and popular tax policy, and then there is good tax policy,” said Gardner. “Sales tax holidays are popular. Targeted tax credits and Internet transaction taxes are decidedly unsexy but they are great policy.”

In anticipation of the sales tax holiday season, ITEP is releasing updated versions of its policy briefs on the relevant issues below at http://www.itepnet.org/policy_briefs/policy_briefs.php.

– Sales Tax Holidays

– How Can States Collect Taxes Owed on Internet Sales

– Progressive Options for Sales Tax Relief

– Applying Sales Taxes to Services

– Earned Income Tax Credit

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 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. ITEP’s full body of research is available at www.itepnet.org.

Does the U.S. Tax Code Contribute to Job Loss at Home? In a Word, Yes.

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Blue Dog Research Forum asked CTJ for 500 words on whether the U.S. corporate tax code encourages companies to offshore jobs. Our legislative director leapt at the chance to engage with these thoughtful political centrists. His essay, “U.S. Jobs Hurt by Our International Tax Rules, Not Tax Rates” is here, and says, in part:

“Because the U.S. does not tax profits generated offshore (unless the profits are repatriated), corporations can pay less in taxes by moving production to a country with lower corporate income taxes [and] disguise their U.S. profits as “foreign” profits.”

CTJ’s essay appears alongside competing arguments from Senator Mike Enzi, Rep. Loretta Sanchez and conservative think tanker Alan Viard, and is the only one of the four proposing tax reform that’s revenue-positive.

Anti-Tax Forces Have Lost the Public. Will the White House Fight or Cave?

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Recent polling makes clear that most Americans do not agree with the Tea Party-backed members of Congress who believe the only “concession” they should make in deficit negotiations is to prevent a calamitous default on U.S. debt obligations. The question is, will the White House use this advantage and demand a balanced approach, or will it back down again to anti-tax, anti-government lawmakers who are outside the mainstream of public opinion?

More polling has been released indicating that a large majority of Americans want Congress to address the federal budget deficit with a combination of tax increases and spending cuts. The latest polling also shows that 82 percent of respondents understand that failure to raise the debt ceiling will do serious harm to our economy and far more respondents blame Republican leaders than Obama for being unwilling to compromise.

Last week, the Republican leadership in the Senate began pushing a proposal that would allow the President to raise the debt ceiling after symbolic but meaningless votes, with no guarantee of spending cuts. There has been talk of adding some amount of spending cuts to that plan to make it more palatable to Tea Party-backed lawmakers, but it’s unclear whether they can be satisfied with any compromise.

Republicans in the House have taken a particularly extreme stance. On Tuesday they passed the “Cut, Cap, and Balance” Act that would allow the U.S. to default on its debt obligations unless the U.S. amends the constitution to bar budget deficits, require a two-thirds supermajority of both chambers of Congress to approve any tax increase, and shrink the government to a level not seen in most of our lifetimes.

Meanwhile, the “Gang of Six” U.S. Senators who have been negotiating for months behind closed doors on deficit reduction finally released the outlines of a plan this week, although it’s not clear how or whether it could affect the negotiations over the debt ceiling.

Citizens for Tax Justice released a statement blasting the “Gang of Six” plan because it would reduce revenue by $1.5 trillion compared to current law, and because it includes a “territorial” tax system that would exempt corporate profits that are earned offshore, or simply shifted offshore into tax havens.

Unfortunately, the deal President Obama has been negotiating is even worse in the sense that he has proposed to extend $4.7 trillion worth of tax cuts and only raise $0.7 trillion in new revenue through tax increases, compared to current law. Republican leaders, who want to extend all the Bush tax cuts, would reduce revenue even more, as explained in a statement released by CTJ last week.

As of this writing, several media outlets are reporting that the White House is negotiating a deal with Speaker Boehner, possibly one with massive cuts in public services but no guarantee of any revenue increases.

We hope the reports are wrong, and we hope that we won’t see a repeat of the last major “compromise” that marked a capitulation to anti-tax lawmakers whose views were out of sync with the American people.

Tax Dodgers in the Cross Hairs

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Congress, the Internal Revenue Service, and the Department of Justice continue the attack against tax dodging, including schemes using offshore tax havens.

Congress

In Congress, Senator Carl Levin (D-MI) has introduced the Stop Tax Haven Abuse Act, which would strengthen the disclosure rules for foreign accounts and impose harsh penalties on taxpayers and tax shelter promoters who facilitate tax evasion.

Also in Congress, Sen. Charles Grassley (R-IA) has offered an amendment that would crack down on the use of offshore tax havens by charities. In a hearing last year, Senators learned that the Boys and Girls Club of America was holding more than $50 million in offshore investments in order to avoid paying the tax that is usually imposed when charities engage in business activities that are not related to their mission.

Justice Department and IRS

Meanwhile, Zurich-based Credit Suise confirmed that the U.S. Department of Justice was investigating its role in helping U.S. clients evade their tax obligation. The bank is the target of a criminal investigation prompted in part by information supplied to the Internal Revenue Service in its offshore account voluntary disclosure program.

Today, a Manhattan federal court unsealed an indictment charging a Swiss financial adviser with helping U.S. customers hide $184 million in assets from the IRS. The Swiss banking giant UBS is one of the banks where the adviser helped his clients hide their accounts.

In Virginia, a federal judge permanently barred HedgeLender LLC from promoting a tax shelter scheme called the HedgeLoan transaction. The Justice Department’s Tax Division challenged the deals where clients purportedly pledged their appreciated stock for a “loan” to realize the cash without paying capital gains taxes.

In other tax dodging news, a U.S. Magistrate handed down a 28-month sentence to Rapper Ja Rule for failing to pay $1.1 million in taxes on the more than $3 million he earned in 2004-2006.

Small Business Owners

Some small business owners are also taking aim at tax dodging and tax havens. A recent op-ed from Business for Shared Prosperity argues that the opportunities that large corporations have for tax avoidance puts small businesses at an unfair disadvantage. It also points out that some of the most egregious corporate tax dodgers are those benefiting the most from public services and public investments that the rest of us pay for.

Photo via Mzrr1970 Creative Commons Attribution License 2.0

“Duck, Dodge, and Dismantle” Bill Passes House, Faces Defeat in Senate

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On Tuesday night, the House of Representatives passed the Cut, Cap, and Balance Act (CCBA), which would cap spending at levels set forth in the Ryan budget and allow an increase in the debt ceiling only after the adoption of a constitutional amendment severely restricting future budget and tax measures.

The balanced budget amendment required as a precondition to the debt ceiling increase would be even more extreme than previous incarnations. It would limit spending to about 16.7 percent of gross domestic product and require a two-thirds majority for any increase in revenue, in addition of course to requiring that government spending equal government revenue.

Although the CCBA passed with 234 votes, the tally signaled that the ultimate adoption of a balanced budget amendment in the House is unlikely. A constitutional amendment would require a two-thirds vote to be adopted, and that’s 56 more votes than CCBA received.

A less extreme amendment received 300 votes in 1995.

Fortunately, the CCBA faces “stiff opposition” in the Senate, where it is unlikely to pass at all. (Update: The CCBA was defeated in the Senate a 51-46 vote.)

President Obama has threatened to veto the CCBA if it passes the Senate and labeled the measure an attempt to “duck, dodge, and dismantle.” Nine of the Republican presidential candidates, including current frontrunner Mitt Romney, support the CCBA.

The Center on Budget and Policy Priorities has blasted the balanced budget amendment called for by the CCBA, noting how it would tie the hands of lawmakers to react to changing economic conditions. Five Nobel Laureate economists voiced their opposition to the amendment in a letter to the President and Congress.

The radical spending cap provision would force draconian cuts to essential government programs like Medicare and Social Security, which main stream economists believe would reduce consumer demand and make it far more difficult to create jobs. The amendment would require nearly $9 trillion in cuts over 10 years, which goes well beyond the extreme measures of the infamous Ryan budget.

The proposed amendment would be so damaging that over 240 national organizations have come together to oppose it.

Even the Wall Street Journal editorial page, well known for its extremism and willingness to disregard the facts to support spending and tax cuts, opposes the BBA. The paper notes that not even Ronald Reagan’s policies would have passed muster under the radically stringent amendment.

Former Republican Senator Judd Gregg summed up the debate over the CCBA perfectly, writing, “Lord save us from the well intentioned and those who are trying to score political points or raise money” by pursing this form of “conservative misdirection.”

Photo via Speaker Boehner Creative Commons Attribution License 2.0

Illinois’ First Corporate Income Tax Reform Hearing Concludes: No Surprise What Business Wants

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Here’s a headline that shouldn’t surprise anyone: “Business groups complain about Illinois taxes.”  That’s the headline that ran in Tuesday’s State Journal-Register after a hearing in Chicago on Illinois corporate income taxes adjourned. Three more hearings on this same issue will be held across the state through the summer. The hearings are a direct result of companies threatening to leave Illinois because of legislation this year that temporarily increased the state’s corporate income tax rate.

Senate President John Cullerton asked that businesses testify at the hearings. He also said he was hoping, through the hearings, “to take a holistic approach to business taxes as opposed to the continued piecemeal policies that often pit one business against another.” This is a laudable goal, but it doesn’t take a crystal ball to predict that the some in the business community will keep making the same basic demands.

Some corporations want to reduce the corporate income tax rate, while others say that tax credits or special incentive programs should be expanded. Of course, these are costly propositions that will make it even harder for Illinois to balance its budget.

We applaud Illinois lawmakers for delving more deeply into corporate tax reform and specifically tax expenditure reform. But it’s important that the committee hear from a range of voices rather than just the same old group saying the same old thing – that their taxes are too high.

Photos via Jimmy Wayne Creative Commons Attribution License 2.0

Minnesota Government Shutdown Over, But at What Cost?

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From Duluth to Edgerton the wheels of Minnesota government will start turning soon.  Wednesday morning Governor Mark Dayton signed into law legislation that will end the nation’s longest state shutdown in a decade. The compromise legislation was passed during a marathon legislative session that started Tuesday and ended early Wednesday morning. 

Governor Dayton and the legislature finally came together in a compromise that balances the budget by delaying payments to schools and issuing bonds against future tobacco settlement monies. Despite wide voter approval, the progressive tax policy proposals that the Governor pushed during his campaign and during the budget fight never came to fruition.

The Minnesota Budget Project (MBP) reminds us that the compromise reached comes at a huge cost. For example, in the budget agreement higher education was cut by $351 million.  The compromise budget also includes a $54 million cut to transportation. Obviously, it’s a good thing that Minnesota will be up and functioning shortly, but in terms of spending and taxes, the budget is a real disappointment after Governor Dayton’s promising start.  MBP puts it best, “the compromise agreement means Minnesota will fail to maintain the investments we need to create the workforce of the future.”

Photo via Governor Dayton Creative Commons Attribution License 2.0