New Report from CTJ: 400 Highest-Income Americans Paid an Effective Rate of 18.1% in 2008

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Should Tax Hikes on these Americans Be “Off the Table?”

As House Speaker John Boehner and other Republican leaders in Congress continue to assert that tax increases even on the very wealthiest Americans are “off the table,” one rationale sometimes advanced for this view is that Americans who work hard and become successful have to pay over a third of their income in federal income taxes.

A new CTJ report describes data recently released from the IRS showing that this is not remotely true. The IRS data show that the federal income tax rates paid by the highest-income Americans have dropped substantially since 2000, largely due to cuts in the tax rates on capital gains and dividends pushed through by the Bush Administration.

Read the report.

State Governments Rush to Squander Improved Revenue Outlook

California, Delaware, Michigan, New Jersey, Oregon, and Wisconsin have all experienced better than expected revenue growth over the past few months.  This is unambiguously good news, but for many lawmakers it’s unfortunately an excuse to ditch any restraint on tax-cutting.

California

In California, stronger-than-expected revenue growth has made the GOP even more vocal in opposing efforts to extend a variety of temporary income, sales, and vehicle tax increases.  Governor Jerry Brown’s continued push to extend these tax hikes is very sensible given that the unanticipated revenue boost was still quite small compared to the state’s total budget.  

Brown has behaved much less sensibly, however, in deciding to abandon efforts to end a variety of business tax credits.  As Jean Ross of the California Budget Project points out, “One of the virtues of the original budget was that there was some level of shared sacrifice.  But now, some businesses are going to come out ahead of where they were last year.”

Delaware

In Delaware, a surprise bump in revenue collections has inspired the state’s Democratic Governor, and a number of Republican legislators, to begin pushing for tax cuts.  

Specifically, the Governor has proposed cutting taxes for banks, businesses, and individuals with taxable incomes of over $60,000.  

In reference to the windfall that banks would receive under the Governor’s plan, Rep. John Kowalko argues that “They do pretty damn well with the federal handouts … I want to see a return on the investment before I will blindly vote on that.”

Michigan

In Michigan, better-than-expected revenue growth in the current fiscal year may be used to reduce cuts in school spending that are currently under consideration.  

Any unexpected revenue growth in subsequent fiscal years, however, will be swallowed up by the massive business tax cuts that Michigan’s legislature passed last week.

New Jersey

In New Jersey, unanticipated revenue growth is expected to be used by Governor Chris Christie as yet another excuse for doling out billions in corporate tax breaks.
 
As New Jersey Policy Perspective points out, however, “the state remains stuck in a very deep hole … even with that growth, the state’s revenue collections would still be $3.4 billion less than was collected in FY2008, the year prior to the recession … the state must choose to invest these revenues wisely, using the money to restore the devastating cuts made to services and to pay into the state pension system.”

Oregon

In Oregon, unexpected revenue growth will likely be used to restore cuts to human services and public safety, at least in the short term.  By 2013, however, the state’s “kicker” law will probably require that some amount of revenue growth be dedicated to tax cuts.  

As Rep. Phil Barnhart points out, “Because this budget is so bad, we don’t take care of schoolchildren, basic health issues and maintaining prisons — and we have a kicker at the end … We are stuck with this kicker law when we really need to spend some of this money on the budget.”

Wisconsin

Finally, in Wisconsin, Governor Scott Walker has stubbornly refused to adapt to changing conditions on the ground.   If Walker gets his way, $1 billion will still be slashed from public schools, despite the state’s recently improved revenue picture.

A Mystery Solved: Why Florida Lawmakers Refused to Repeal the Corporate Income Tax This Year

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Less than a month ago, Florida Governor Rick Scott was still pushing his campaign proposal to repeal the state’s corporate income tax. Yet his “Tea Party”-inspired promise never lit a fire under the Republican leadership in the state legislature. Republican Senate president Mike Haridopolos even noted that “I’m in my 11th session now and I’ve had very few people come to me and say the reason they didn’t come to Florida was because of the corporate tax rate.”

An Orlando Sentinel article by Scott Maxwell suggests one sensible reason why the otherwise-anti-tax GOP leadership couldn’t get behind this idea: hardly anyone is paying the corporate tax to begin with.

Maxwell requested unpublished data from Florida’s Department of Revenue on the number of companies that paid any corporate tax in the last decade, and found that in fiscal year 2010 just 24,112 companies paid even a dime of corporate tax. Since 218,000 companies filed corporate income tax returns in the state of Florida in that year, this means just over 10 percent of companies filing returns actually owed any tax.

It’s important to recognize that there can be perfectly good reasons for this. Many of the 218,000 companies were likely unprofitable in 2010, which means they have no income to tax. But it’s also likely that many of these no-tax corporations were quite profitable in reality, and managed to reduce their Florida taxable income to zero by artificially shifting profits to other states.

As a 2009 report from the Florida Center for Fiscal and Economic Policy notes, Florida lawmakers interested in fixing this problem could productively enact “combined reporting” along with a number of other reforms to make the corporate tax fairer and more sustainable.

But in the short-run, the most sensible reform option for Florida lawmakers might be to enact legislation mandating basic disclosure of which profitable companies pay no income tax, which tax breaks they use to achieve this result, and how many Florida-based jobs were created as a result of these tax breaks.

And one important lesson for advocates seeking to inform corporate tax reform debates in other states is that sometimes the only way to get this vital data is to ask state government officials, as Maxwell did.

Wisconsin’s Budget Doesn’t Have to Trample on Working Families

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In his recent budget address, Wisconsin Governor Scott Walker said, “The facts are clear: Wisconsin is broke and it’s time to start paying our bills today.” Perhaps the “facts” aren’t entirely clear for the Governor, given new improved revenue forecasts as well as more balanced revenue options that are available to lawmakers and described in a new report.

The Wisconsin Budget Project is reporting that the state’s revenue forecast has improved. The Legislative Fiscal Bureau released an updated revenue estimate saying that the state is likely to have an additional $636 million in revenue before the end of the 2013 fiscal year compared to earlier estimates. This breaks down into $233 million above current projections for the current fiscal year and $200 million more in each of the next two years.  

Even without this revenue boost, of course, there are ways to address budget gaps that don’t include union busting, cutting recycling programs, and massive cuts to education. The Institute on Wisconsin’s Future (IWF) recently released their updated Catalog of Reform Options for Wisconsin, which outlines a set of options for reforming the sales tax, business taxes, and personal income tax.

Wisconsin lawmakers will certainly find more useful ideas in IWF’s catalog than in Governor Walker’s proposals.

Kansas: Budget Battle Highlights Divisions Within Republican Party

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Late last week, the Kansas Legislature adjourned a dramatic session that ended at 3 a.m. Friday morning, when a controversial budget that slashed spending for schools, social services, and the arts was finally approved. In total, 2,000 state positions were eliminated. And the cuts could have been even worse.

Early in the session, conservative groups like Americans for Prosperity Kansas urged the legislature to repeal last year’s temporary sales tax increase, which raised the state sales tax from 5.3 to 6.3 percent. Thankfully this extreme policy didn’t receive the votes necessary to pass out of the House. In fact, repealing the sales tax hike was dismissed by moderate Republicans and even Republican Governor Sam Brownback.

Shortly after he was elected Governor, he understood that the state’s dire fiscal situation meant that the temporary sales tax hike would need to stay. When asked whether the sales tax increase should be repealed he said, “We’re short of resources for the state, and I don’t think it’s something that we should be doing at this time. Our fiscal situation is not stable.”

One key sticking point for the Senate and House during the budget negotiations was whether or not the state should beef up its cash reserves. Conservatives in the House wanted to put money aside for a rainy day while the Republican-controlled Senate wanted to use that reserve money to curb some of the dramatic spending cuts.

The $14 billion budget cuts overall spending between 5 and 6 percent. But the cutting spree isn’t enough for some conservatives, who say that the budget as passed isn’t one that the state can afford. Conservative Representative John Rubin said, “I’m a fiscal conservative. I encourage our governor to liberally use his line-item veto.”

Missouri and Minnesota: Attacking Anti-Poverty Tax Breaks

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In Missouri and Minnesota, property tax “circuit breakers” ensure that property taxes do not take more than a limited percentage of income from taxpayers of modest means. As ITEP has explained, it is widely accepted that property taxes are passed on by landlords to renters in the form of higher rents, which is why these circuit breakers are usually available to renters, as well as homeowners. However, lawmakers in these two states have tried to change that.

Effort to Take Credit from Renters Fails in Missouri

In Missouri, a victory for tax fairness came in the form of inaction. The Missouri legislature ended its session on May 13th without passing legislation that would have eliminated the property tax credit for renters. Making the property tax “circuit breaker” unavailable for renters would have left thousands of low-income families and individuals unable to claim the credit.

The measure would have cut off $57 million in critical tax relief for individuals making less than $27,500 a year, in the name of budget austerity.

Supporters of the circuit breaker tax credit questioned the legislature’s priorities, as it sought to end this benefit for low-income individuals while showering a single air freight facility with as much as $33.4 million annually in tax credits.

New Proposal in Minnesota

Even as a temporary victory was won in Missouri, the Minnesota’s legislative tax conference committee is proposing to cut the state’s renter’s credit by a proposed $186 million next year.

According to the Minnesota Budget Project, under the proposal, seniors and people with disabilities would face an average reduction in their credit of $190, while all other families would face an average reduction of $335. In fact, about 72,500 households would lose their refund entirely.

The move to eliminate the renter’s credit will be especially harmful in Minnesota, which already ranks dead last in rental affordability among low-wage workers.

Circuit breaker property tax credits are one of the most effective ways to use the tax system to reduce poverty. During a recession, states should be considering ways to enact or expand these credits, rather than scaling them back.

Corporate Tax Reform: Consumer Groups, Labor Unions, Faith-Based Groups at Odds with Obama on Goals

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On Wednesday, U.S. Senators and Representatives received a letter from 250 organizations, including organizations in every state, calling on Congress to close corporate tax loopholes and use the revenue saved to address the budget deficit and fund public investments.

The 250 non-profits, consumer groups, labor unions and faith-based groups call for a corporate tax reform that raises revenue. This differs sharply from calls by President Obama and Treasury Secretary Geithner for “revenue-neutral” corporate tax reform. The Obama administration is expected to release a plan for “revenue-neutral” corporate tax reform sometime in the near future.

As the letter explains, “Some lawmakers have proposed to eliminate corporate tax subsidies and use all of the resulting revenue savings to pay for a reduction in the corporate income tax rate. In contrast, we strongly believe most, if not all, of the revenue saved from eliminating corporate tax subsidies should go towards deficit reduction and towards creating the healthy, educated workforce and sound infrastructure that will make our nation more competitive.”

Read the letter.

Citizens for Tax Justice has called for revenue-positive tax reform in a recent op-ed in USA Today, a report explaining why Congress can raise more revenue from corporations, and in CTJ director Bob McIntyre’s recent testimony before the Senate Budget Committee.

Corporate Interests Push Congress to Exempt Offshore Profits Permanently (Territorial System) or Temporarily (Repatriation Holiday)

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Republican House Ways and Means Committee Chairman Dave Camp called the Chief Financial Officers of four different corporations to testify in favor of a “territorial” tax system on Thursday.

A territorial system exempts offshore profits of U.S. corporations from U.S. taxes. American corporations can already “defer” their U.S. taxes on offshore profits until those profits are repatriated (brought back to the U.S.). This creates incentives to move operations (and jobs) offshore and also creates incentives to shift profits offshore by disguising U.S. profits as “foreign” profits.

A territorial system would increase these incentives because U.S. taxes on offshore profits would be eliminated (not just deferred).

The hearing occurred just days after Republican House Speaker John Boehner spoke in favor of a territorial tax system. Boehner’s comment came at the same event where he announced that he would prefer the U.S. to default on its debt obligations unless trillions of dollars are cut from spending.

The Problems with a PERMANENT Exemption for Offshore Profits

Among the tax experts who testified before the Ways and Means Committee was Jane Gravelle with the Congressional Research Service. She explained that a territorial tax system is not efficient because it encourages investment to flow to any countries that have lower tax rates rather than creating an even playing field. Reduced investment in the U.S. would result in fewer jobs and lower wages.

A territorial system would also, she argued, worsen the problem of offshore profit-shifting by corporations.

Our tax system can either be “residence-based,” meaning U.S. taxes are paid by any taxpayer (including corporations) that resides in the U.S., or it can be “source-based,” meaning a taxpayer pays U.S. taxes only to the extent that the U.S. is the source of its income.

Gravelle argued that it’s much easier for a company to move its profits to another country (change the “source” of its income) than it is to move its headquarters to another country (change its “residence.”) That means a “source-based” system (a territorial tax system) makes it much easier for U.S. corporations to change their behavior in ways to avoid U.S. taxes than a “residence-based” system would.

The U.S.’s corporate tax system right now is a hybrid between a “residence-based” system and a “source-based” system. To adopt a true residence-based system, Congress would need to repeal the rule allowing U.S. corporations to “defer” U.S. taxes on their offshore profits. This is a reform that has been endorsed by Citizens for Tax Justice, and Gravelle said that it would be simpler to administer.

The Problems with a TEMPORARY Exemption for Offshore Profits

Some corporate leaders have argued that if Congress does not permanently exempt their offshore profits, then lawmakers should temporarily exempt them with the sort of tax holiday for repatriated corporate profits that Congress enacted in 2004.

Several studies of the 2004 effort showed that the repatriated profits went to shareholders and not to job-creation, despite the promises made by corporate lobbyists. An economist with the U.S. Chamber of Commerce recently admitted that any attempt by Congress to attach job-creation requirements to the tax holiday simply will not work.

Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) on Wednesday to provide another repatriation holiday. (See related story.)

Not all corporate leaders are willing to give up the fight for a territorial system and settle for a repatriation holiday. The CFO’s testifying Thursday said that they did NOT support a repatriation holiday, because they feel that it would distract corporate America from a larger tax policy goal of enacting a territorial system.

Three Republicans and Three Democrats Introduce Amnesty for Corporate Tax Dodgers

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On Wednesday, Rep. Kevin Brady (R-TX) introduced a bill (H.R. 1834) to provide a tax holiday for corporations that repatriate offshore profits, similar to the widely panned repatriation holiday enacted in 2004. The holiday is essentially a temporary tax exemption for corporate offshore profits, which some corporate leaders see as a second best alternative to a permanent exemption. (See related story.)

Brady’s bill, like the 2004 measure, would reduce the federal corporate income tax rate on repatriated offshore profits from 35 percent to a token 5.25 percent.

Most companies with offshore profits would not actually have to pay 35 percent even under current law if they repatriated them, because they receive a credit for any foreign taxes that they have already paid. The final section of CTJ’s recent report explains that the repatriation holiday therefore provides the greatest benefits to those corporations that shift their profits to countries with no corporate income tax (tax havens).

A recent report from the Center on Budget and Policy Priorities summarizes the various studies concluding that profits repatriated under the 2004 measure largely went to shareholders in the form of increased dividends or stock buybacks rather than job creation.

Rehashed Trickle-Down Economics

Some business leaders say that increased dividends is itself a positive result because it means increased income in the U.S.

The problem is that this tax cut comes at a huge cost and is funneled to wealthy shareholders. Congress’s Joint Committee on Taxation recently found that a repeat of the 2004 repatriation holiday would cost over $78 billion over the course of a decade.  In other words, the argument in favor of a repatriation holiday that boosts dividends is simply a rehash of trickle-down economics.

Encouraging Companies to Shift More Profits and Jobs Offshore

But even if Congress wanted to encourage corporations to repatriate their offshore profits (regardless of what those profits are used for) the repatriation holiday fails at that goal in the long-run.

Enacting a second repatriation holiday will send a signal that Congress is willing to call off almost the entire corporate income tax on offshore profits every few years. This would actually encourage companies to shift even more profits offshore to countries where they are not taxed very much (tax havens) and then simply wait for the next repatriation holiday.  

Democrats Supporting Repatriation Holiday Have Long History of Opposing Fair and Responsible Taxes

Brady’s bill has five co-sponsors, and the three Democrats among them are likely to receive the most attention.

One is Jared Polis (D-CO) who famously drafted and circulated a letter in 2009 that was signed by several freshmen House Democrats who opposed the surcharge that the Democratic caucus was considering to help finance health care reform.

The letter, which included factual inaccuracies, argued that higher taxes on the rich hurt small businesses. The Democrats changed their surcharge so that it would only affect millionaires, as a result of this letter.

The other two Democratic co-sponsors are Jim Cooper (D-TN) and Jim Matheson (D-UT). Both signed a letter last year calling for the extension of the Bush tax cuts even for the richest taxpayers. Both also signed a letter calling specifically for the extension of the special low rate of 15 percent on capital gains and dividends, perhaps the most indefensible provision among the Bush tax cuts.

Microsoft-Skype Deal Shows Need for a True Worldwide Corporate Tax

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Microsoft’s purchase of Skype for $8.5 billion provides a perfect illustration of why adopting a true worldwide corporate income tax system is critical to our economic future.  

According to the Wall Street Journal, the cash for Microsoft’s purchase of Skype (a Luxembourg-based company) will come out of its $42 billion in liquid assets held in foreign subsidiaries.

Because it is purchasing a foreign company with its overseas assets, Microsoft can avoid paying any U.S. tax that would be due if it had repatriated foreign earnings in order to purchase a US company for the same amount. Based on the company’s effective foreign income tax rate disclosed in their most recent SEC filings, a repatriation of $8.5 billion dollars would cost Microsoft somewhere in the neighborhood of $1.1 billion in U.S. tax.

As a Forbes commentator opines, the Microsoft-Skype deal demonstrates the harmful incentive created in our current system that encourages companies to invest in overseas companies rather than domestic ones. The fear is that this deal may just be “a harbinger of things to come.”

How can the US stop encouraging companies to invest abroad rather than at home?

By adopting a pure worldwide tax system.

Under a pure worldwide system, any US company’s foreign profits would be immediately subject to the US tax rate with a credit for any foreign taxes paid. This is similar to the current system except that the company would not be allowed to “defer,” or delay indefinitely, its U.S. taxes by keeping its foreign profits offshore.

A pure worldwide system would mean that Microsoft would face the same tax rate regardless of where it earned its profits. This would remove any incentive for shifting profits offshore and remove any obstacles to repatriating foreign profits.

Spinning the Truth

Never missing an opportunity to toe the line of corporate leaders and their shareholders, the business press tried to spin the news as proof that the US needs to enact corporate tax cuts and a repatriation holiday. They argue that high rates in the US are the cause of US companies like Microsoft holding billions in profits overseas rather than investing them domestically.

They could not be more mistaken in their solution.

First, tax repatriation holidays may actually worsen the situation by encouraging companies to hoard profits abroad in order to wait for the next holiday or even to use them as a hostage in demanding another repatriation holiday.

In fact, Microsoft is part of a coalition lobbying for a repatriation holiday so that it can bring some of its $42 billion in overseas liquid assets back to the U.S. and pay little or no tax.

Second, as CTJ’s Director Bob McIntyre explained in his testimony to the Senate Budget Committee, simply lowering corporate taxes is unlikely to be effective and would encourage a race to the bottom as other countries feel pressure to respond by further reducing their rates.

Finally, lower corporate income taxes would of course deprive us of revenue that we need to reduce our budget deficit.   

We hope that the Microsoft-Skype deal can be seen for what it is: another reason for the adoption of a pure worldwide corporate income tax system.