Author: tarek

Despite reporting nearly $10 billion in domestic pre-tax profits between 2008 and 2010, the Boeing Corporation, which was granted a contract worth as much as $35 billion to build airplanes for the federal government earlier this week, did not pay a dime of U.S. federal corporate income taxes during this three-year period.

Read the report.

CTJ’s critique of claims that wealthy New Yorkers are fleeing the state’s so-called “millionaires’ tax” was publicized by two media outlets this week.  Similar claims being made in Connecticut and Rhode Island were also shot down in the media.

In last week’s Digest, CTJ pointed out numerous distortions in the Partnership for New York’s claims that wealthy New Yorkers were fleeing as a result of a recent tax increase on high-income earners.  (The Fiscal Policy Institute also issued a detailed rebuttal). 

For starters, the Partnership erroneously claimed that a “9.4 percent decrease in the state’s taxpayers who earn $1 million or more” occurred between 2007 and 2009.  But the data it used (but failed to cite) actually show a 9.4% drop in New Yorkers with wealth exceeding $1 million.  Since New York’s income tax obviously applies to income — not wealth — this is an important distinction. 

The Partnership has since revised its report to correct this mistake, but it continues to ignore a much more important one: according to the same dataset, every state in the country saw its number of wealthy taxpayers decline between 2007 and 2009 (due to the recession) and 43 states experienced declines exceeding New York’s 9.4% drop.  In fact, Phoenix International – the firm that released the data – made very clear in its 2009 press release that the U.S. as a whole saw its millionaire population decline by nearly 14%.  So it’s a little odd, to say the least, that the Partnership would interpret New York’s 9.4% rate of decline as providing any evidence that could be useful in its crusade against taxing high-income earners.

Fortunately, Robert Frank at the Wall Street Journal’s Wealth Report quickly publicized CTJ’s analysis, and labeled the Partnership’s migration claims a “myth.”  Frank also followed up with the Partnership’s CEO, who when confronted with the data problems described above retreated by saying: “It’s a very difficult thing to measure… We get a lot of it anecdotally.”

Crain’s New York Business similarly picked up on the CTJ analysis, ultimately declaring that “the nationwide decline suggests that New York lost millionaires primarily because New Yorkers made less money and saw their property values drop during the recession, not because they moved to other states.” 

Crain’s does err, however, in claiming that the data might partially reflect the fact that “New Yorkers could have left the state in mid-2009 and filed 2009 tax returns as residents of their new states.”  The 2009 data in question was actually released in early July 2009, and was left unchanged in the September 2010 update.  It is exceedingly unlikely that a dataset released just two months after the May 2009 enactment of New York’s “millionaires’ tax” could have captured the effects of any tax-induced wealth flight.

In addition to beating back ridiculous claims in New York, the WSJ’s Wealth Report also recently debunked similar claims being made in Connecticut by the Connecticut Policy Institute.  The story is a familiar one:

“How do we know why or even if high-earners moved out? It is possible that some previously high earners simply fell below the $1 million-dollar-a-year mark because their incomes fluctuated. In the land of hedge funds, this seems to be just as likely as people moving to Florida. It also is unclear whether the population of high-earners in Connecticut is aging and simply moved to warmer, more golf-friendly climes…The report doesn’t break down the destinations. Still, it says many go to Florida and New York. Florida, of course, has no state income tax. But New York state has a top tax rate of 8.97% and New York City’s top rate is 3.876%. Combined that is nearly twice as high as Connecticut’s tax. If the rich decide where to live based on taxes, why would they be moving to a higher-tax city? Perhaps because the quality of their life matters as much or more than the quantity of their taxes—up to a point, of course.”

Finally, Rhode Island claims of wealth flight ran into similar resistance in the media when Politifact took a lengthy look at the Ocean State Policy Research Institute’s (OSPRI) migration claims, and ultimately found them to be “false.” 

OSPRI’s report attempts to show that “the most significant driver of out-migration [from Rhode Island] is the estate tax.”  But as Politifact notes, “IRS data cited by OSPRI shows that Florida was increasingly attractive to Rhode Island taxpayers in the years when it had an estate tax. The flow slacked off significantly when the [Florida estate] tax was eliminated. That runs contrary to the trend OSPRI claims to have proven.” 

Moreover, Politifact points out that even the conservative Tax Foundation — hardly a big fan of the estate tax — hasn’t jumped onto the migration bandwagon: “Kail Padquitt, staff economist for The Tax Foundation … said he hasn’t seen any proof that the prospect of paying estate taxes drives people to move.”  We certainly haven’t either.

Huge changes to Missouri’s tax system are being debated, ranging from terrible ideas (repeal of the main business tax and replacing the income tax with an enormous sales tax) to excellent (making the state’s tax structure more progressive than it is now).

In bad news, the state Senate has voted to gradually phase out the state’s corporate franchise tax. This is a tax that was established in 1917 and is levied on the greater of either the total assets of a corporation or the value of its paid up capital stock.  Now it’s up to the House of Representatives to see if it will follow suit and eliminate this tax, which in fiscal year 2009 brought in $83 million for the state. In even worse news, the so-called “Fair Tax” continues to move forward. This proposal would eliminate the state’s income tax and replace the revenue with a broader sales tax. The latest news we reported was that the State Auditor couldn’t estimate what the sales tax rate would need to be to make the proposal revenue-neutral.

Despite the lack of such basic information, the legislature approved the various versions of the ballot initiative (which would all basically do the same thing) for the 2012 ballot. Meanwhile, efforts are still underway to enact the “Fair Tax” through the legislature, without a ballot measure.

On a much brighter note, Representative Jeanette Mott Oxford (D-St. Louis) and 23 co-sponsors have filed HB 637, which would modernize the state’s income tax rates and brackets, eliminate the state’s deduction for federal income taxes paid, and introduce a per-person refundable credit.  The bill would make the state’s tax structure more progressive while also providing much needed revenue. This legislation is a bright light in the darkness of Missouri’s tax debate.

The Iowa House of Representatives has approved a bill to cut income taxes by 20 percent, despite an analysis from ITEP showing that the richest 1 percent of Iowans would receive an average of $6,822 while those in the bottom quintile would enjoy a break of just $18 on average.

The bill, H.F. 194, which reduces income tax rates by 20 percent across the board, will now go to the Senate. For more information, see the Iowa Policy Project’s brief on this enormous tax cut.

Debate over the recommendations from Georgia’s Special Council on Tax Reform continues. Should the state flatten its income tax rates? Should the state broaden the income tax base? Folks are likely still making up their minds about how they feel about adding groceries back to the sales tax base, among other possible changes.

Georgians concerned about tax fairness should read the new brief from the Georgia Budget and Policy Institute. It offers several alternatives (using ITEP data) that would tweak the Council’s recommendations and would improve the tax fairness implications of the Council’s initial proposal.

The budget outline released by President Obama this week, just like last year’s proposal, includes about $3.5 trillion in tax cuts over ten years. Most of that cost comes from his $3.1 trillion proposal to make permanent most of the Bush tax cuts, which would cost 81 percent as much as extending all the Bush tax cuts.

The President’s budget outline does include several laudable provisions to raise revenue, but not nearly enough to offset the costs of the proposed tax cuts.

The net effect of the tax proposals in the budget plan would be to reduce federal revenue by $2.8 trillion over ten years, compared to what would happen if the Bush tax cuts simply expired (as they will under current law if Congress does nothing).

Read the report.

It seems that each week brings another round of regressive tax proposals from the states, but there are a few bright spots. As previously reported, the governors in Connecticut, Hawaii and Minnesota have been strong proponents for taking a balanced approach to their state’s budget gaps and have unabashedly supported raising revenue in mostly reform-minded and progressive ways.  More details emerged this week on the Connecticut and Minnesota governors’ revenue-raising proposals.   Also, Illinois Governor Pat Quinn, who recently backed a successful initiative to increase the state’s flat personal income tax rate, started sending positive messages this week about the need to make his state’s tax system fairer.

On Wednesday, Connecticut Governor Dan Malloy released his plan to deal a budget gap exceeding $3 billion. As promised, his plan would not to rely solely on spending cuts to close the gap. He offered a $1.5 billion package of new revenues including reforms to the personal income tax, sales tax, business taxes, and estate tax.
  
Under his plan, the state’s personal income tax would expand from 3 to 8 brackets, the top marginal rate would increase from 6.5 to 6.7 percent, and the bottom marginal rate of 3 percent would phase out for high-income earners.  The plan also eliminates an existing property tax credit which is most beneficial to middle-income families. 

Perhaps most significantly, Governor Malloy would buck a recent trend by adding a refundable state Earned Income Tax Credit (EITC) set at 30 percent of the federal program.  If enacted, Connecticut would become the 26th state to have an EITC.
 
Governor Malloy also proposed expanding the sales tax base by taxing several services, including pet grooming, boat repairs and hair cuts, eliminating the exemption on clothing under $50, and imposing an additional 3 percent sales tax on “luxury items.  The state sales tax rate would increase from 6 to 6.25 percent. 

Governor Malloy also supports positive changes to business taxation including adopting what is known as the “throwback rule,” which mandates that sales into other states or to the federal government that are not taxable will be “thrown back” into the state of origin for tax purposes.  His plan would improve the estate tax by lowering the taxable estate threshold from $3.5 million to $2 million.

Minnesota Governor Mark Dayton ran on a pro-tax platform, promising to increase taxes on his state’s wealthiest households in order to stave off massive spending reductions.  Governor Dayton released a plan this week to raise $4.1 billion in new revenues over the next two years to help solve a $6.2 billion budget shortfall.   Sticking to his campaign pledge, the majority of the new revenue would be raised from the wealthiest 5 percent of taxpayers in the state. The plan would add a new top income tax bracket, charge a 3 percent surtax on filers with taxable income above $500,000, and add a new statewide property tax on homes valued at more than $1 million.

The Minnesota Budget Project had the following to say about Governor Dayton’s proposal: “The Governor’s tax proposal seeks to add balance to the state’s tax system. Over time, the state has cut progressive taxes (like the income tax) during good times and increased regressive taxes (like property taxes) during the bad times. These policy changes, combined with economic trends, have led to a tax system that has shifted more of the responsibility for funding state and local services on to low- and moderate-income Minnesotans. People at the highest income levels pay a smaller share of their income in state and local taxes (8.9 percent) than the average for all Minnesotans (11.2 percent).”

Illinois lawmakers should be applauded for temporarily raising the state’s flat income tax rate from 3 to 5 percent in January to help fill a $15 billion budget gap. However, they missed an opportunity to fix the state’s broken, outdated, and unfair tax system rather than just raise rates.  But the opportunity may still be available.  This week, Governor Pat Quinn asked state lawmakers to consider modernizing the tax system and making it fairer.  He did not offer specific suggestions on how to achieve this goal, but explained that Illinois’ tax system is regressive, requiring more from its poorest residents than from the rich. 

In response to his call for reform, some Democratic lawmakers offered a few suggestions, including moving the state to a graduated income tax, expanding the sales tax base to include services, and relying less on property taxes to pay for schools.

The Virginia Senate voted down a bill this week which would have provided tax credits to corporations that give scholarships to low-income children in order to attend private schools.  The proposal was backed by Governor McDonnell as part of his “Opportunity to Learn” initiative and passed the House of Delegates on February 8.

Critics of the bill argued that the tax credit would divert the state’s general fund dollars away from the public school system towards private schools.  Proponents, including the Governor, claimed it would afford low-income students educational opportunities they would otherwise not be able to access.

The debate over the education tax credit bill contrasts vividly with Virginia’s reduction in Earned Income Tax Credit (EITC) benefits last year.  Virtually every state with an EITC ties its benefits to the federal program.  However, when President Obama expanded the federal EITC, Virginia was one of two states that decided to “decouple” its EITC from the federal changes.  Obama’s EITC expansion increased benefits for families with three or more children and reduced the marriage penalty.  This would have made a minimal impact on the cost of Virginia’s EITC, which is set at 20 percent of the federal level, yet would have provided greater benefits to low-income families.

Of course, decoupling creates administrative difficulties, because it’s far easier to calculate a state EITC that is simply a percentage of the federal one.

Soon, Virginia will again be faced with this decoupling issue.  The federal tax compromise enacted in December of 2010 extended the Obama EITC expansion through 2012.  When the issue arises again, lawmakers and citizens should grapple with why Virginia’s governor and House members seem willing to provide a tax credit to corporations for removing low-income children from public schools, but not a credit that goes directly into the hands of hard-working Americans.

In what is surely a blow to anti-taxers and so-called “fair tax” advocates, Missouri State Auditor Tom Schweich recently said that the impact of ballot initiatives to eliminate the state’s income tax and replace the revenue with an expanded sales tax cannot be estimated.

Through a Freedom of Information Act request, the Kansas City Star determined that “Schweich’s office said the impact on state revenues could not be determined because there are too many actions required by lawmakers and too many uncertainties about how consumers will respond to the new tax.”

One of the largest questions about these initiatives is what the sales tax rate would need to be to ensure that this radical shift is revenue-neutral. Despite the Auditor’s misgivings about offering an estimated rate, ITEP and others have. For example, a recent ITEP analysis based on legislation from last year found that the rate would need to be more than 11 percent. Jim Moody, a lobbyist who used to be Governor John Ashcroft’s Commissioner of Administration, found that the sales tax rate would need to be more than 12 percent. He went further, calling the ballot initiatives “fiscally untenable” and suggested that they would “either bankrupt the state or, in the alternative, bankrupt the poor and the working lower- and middle-income classes.”

Tax rate estimates aside, if the State Auditor can’t estimate the impact of this radical change to the state’s tax structure, that should be the first clue that perhaps this ballot initiative, bankrolled by millionaire anti-taxer Rex Sinquefield, isn’t in the best interest of most Missouri families or businesses.

It’s pretty evident that state corporate income taxes are especially flawed and riddled with loopholes. But, of course, that doesn’t have to be the case. In fact, there are lots of things that legislators can do (given the political will) to strengthen their corporate income taxes, including enacting combined reporting, increasing corporate tax disclosure, and closing selected loopholes.

Despite all these options to strengthen the corporate tax, lawmakers from coast to coast are doing their best to undermine this inherently progressive tax. This seems especially sort-sighted given the revenue needs of many states.

Here are some recent bad ideas regarding state corporate income taxes:

Arizona Governor Jan Brewer’s budget outline includes a proposal that would phase out the state’s corporate income tax over four years.  

Florida Governor Rick Scott has proposed reducing the corporate income tax rate from 5.5 to 3 percent.

Indiana’s Senate is considering a bill to reduce the state’s corporate income tax by 20 percent. This bill recently passed the Senate Committee on Tax and Fiscal Policy.

Iowa Governor Terry Branstad has said that he would like to cut Iowa’s corporate income tax in half, despite evidence that this tax change would only benefit large corporations.

Recently, bills have been dropped in the both the Kansas House of Representatives and the Senate which would phase out the state’s corporate income tax altogether.

North Carolina Governor Beverly Perdue is proposing that the corporate income tax rate be reduced to 4.9 percent from 6.9 percent.

Instead of slashing or completely eliminating the state corporate income tax, lawmakers should be working to strengthen this revenue source.