Author: tarek

One of the many problems with the copious tax breaks that Congress showers on corporations is that they provide perverse incentives for businesses to expand the definition of what they do so they can claim certain tax deductions, even if they haven’t changed anything about their business in practice.

An egregious example of this is Starz, the publicly traded media company best known for its cable channels Starz and Encore. The company’s annual report, released earlier this week, “concluded that its 2014 and 2013 programming packages met the… criteria” for a special tax break for manufacturers. In plain English, this means the company claimed the manufacturing deduction and reduced its federal income taxes by $20 million over two years because it “manufactured” original television productions such as Spartacus, Outlander and Da Vinci’s Demons.

We’ve criticized corporate tax breaks before for being so loosely written that corporations flout the intent of the law and claim the breaks for dubious activities. Even putting cynicism aside and conceding some tax credits for businesses could be a good idea, the manufacturing deduction is an example of how good intentions can lead to bad policy.

The U.S. Senate’s Finance Committee on Tuesday held a hearing, Tax Reform, Growth and Efficiency. In her testimony, Jane Gravelle of the Congressional Research Service singled out several corporate tax breaks that clearly make the U.S. economy less efficient. Among them was the “qualified production activities” deduction, otherwise known as the manufacturing deduction.

When congressional tax writers in 2004 declared their intention to provide a lower corporate tax rate for manufacturing to keep companies from moving production offshore, lobbyists from dozens of industries descended on Capitol Hill to convince lawmakers that their activities should fall within the legal definition of “manufacturing.” As a result, companies such as Starbucks are now able to say with a straight face that they’re eligible for the manufacturing tax break when they grind coffee beans, and Starz can join the charade and claim its “manufacturing” programming.

Gravelle told the Senate Finance Committee that Congress could “reduce distortion” in the corporate tax code by eliminating tax breaks, such as the manufacturing deduction, that “[favor] certain kinds of industries over others.” She also suggested that in lieu of repealing the manufacturing break, Congress could simply “confine it to corporate manufacturing.”

This is a polite way of suggesting that when most Americans think of the “manufacturing” capacity they want to see preserved in the United States, they don’t envision include Hollywood shoots featuring loincloth-wearing actors. Either of Gravelle’s suggestions would be a welcome improvement on the current corporate tax system—but outright repeal would be the simplest and most straightforward fix.  

Goldman Sachs’s latest financial report shows that the company avoided paying federal income taxes on almost half its United States profits in 2014. In fact, the company paid an effective tax rate of just 18.6 percent on $6.8 billion in U.S. profits.

Most of Goldman’s low tax rate (about half the statutory rate of 35 percent) can be attributed to a tax break that allows corporations to write off the so-called cost of issuing stock options to their executives in lieu of salaries. Goldman disclosed saving a whopping $782 million in income taxes through this break in 2014.

The stock option tax break allows corporations to give lavish compensation to employees in the form of undervalued stock and then take a tax write off for the difference between the stock option and its true value (e.g. give an employee stock at $10/per share stock for a stock ultimately valued at $18 per share). As we have noted, Goldman is just one of hundreds of Fortune 500 corporations benefiting from this scheme.

Tax reformers on Capitol Hill have had financial institutions such as Goldman squarely in their sights for higher taxes. Rep. Chris Van Hollen’s proposed financial transaction tax seeks to reduce the volume of financial speculation. And President Obama recently announced a plan to tax liabilities of “too big to fail” banks. While these proposals have merit, there are more straight-forward ways to ensure financial institutions are paying their fair share: close egregious loopholes, including the stock options break, that allow banks and other corporations to whittle away their federal tax bill. 

Another window into Goldman Sachs’s tax minimization strategies comes from its tax haven subsidiaries. The company has subsidiaries in 20 foreign countries, including nine in the Cayman Islands, that levy little or no corporate taxes. These subsidiaries may harbor much of the company’s large and growing stash of permanently reinvested foreign earnings—profits on which Goldman has not withheld U.S. taxes because, it says, it intends to keep these earnings offshore.  In the past year, Goldman added more than $2 billion to its offshore hoard, bringing its total permanently reinvested offshore profits to $24.9 billion. The problem with this, of course, is too often companies claim they have reinvested the profits through a subsidiary that does no real business—an obvious tax dodge.

Eliminating the excess stock option tax break, and ending the ability of U.S. multinationals to indefinitely defer paying U.S. taxes on domestic profits they’re hiding in beach-island tax havens, would help restore the federal income tax rates paid by Goldman and other profitable Fortune 500 companies to something resembling the tax rates paid by many middle-class American families.

Another year, another pass from the federal income tax for the profitable California-based utility giant Pacific Gas & Electric (PG&E).

The company’s annual report released earlier this week discloses it earned $1.8 billion in U.S. profits in 2014—and didn’t pay a dime in federal income taxes. In fact, the company received an $84 million federal tax rebate, which means its federal tax rate for the year clocks in at a healthy negative 4.6 percent.

For corporate tax observers, this is about as surprising as the sun rising in the east: PG&E has now avoided paying any federal income tax for seven straight years. That’s right, the last time PG&E wrote an income tax check to the federal government was during the administration of George W. Bush. Over this seven-year period the company enjoyed $9.99 billion in U.S. profits and received an astonishing net federal income tax rebate of $1.48 billion.

It’s not always easy to understand how companies get away with tax avoidance as extensive legislative hearings over Apple and Google have demonstrated.  But in PG&E’s case, it’s clear as day: it pays no corporate income taxes because Congress continues to pass tax policies that essentially mean it doesn’t have to.

… about those tax extenders

Like many utilities, PG&E zeroes out its corporate tax by claiming large “accelerated depreciation” tax breaks, which allow the company to write off the cost of its capital investments (such as machinery and other equipment) much faster than they actually wear out. In each year since 2008, the company has taken advantage of the tax code’s “bonus depreciation” provision introduced as a stimulus measure by Bush–and continually extended by Congress and President Obama as part of a larger package of so-called tax extenders— to further drop its tax bill.

The good news? The “bonus depreciation” provision expired two months ago at the end of 2014. So if Congress can restrain itself from once again resurrecting this giveaway during the ongoing debate over various corporate “tax extenders,” federal taxpayers—and Californians—can look forward to not having to pay for PG&E’s extended tax-free holiday. But incredibly, congressional leaders seem poised to extend not just bonus depreciation but a whole raft of other misguided temporary tax breaks in the months to come. PG&E is a highly profitable company. Its seven-year tax break should help jog lawmakers back to their senses. 

Illinois Gov. Bruce Rauner unveiled his budget on Wednesday to mixed reviews.  The proposal does not include any new revenues despite a $7 billion budget gap, and relies heavily on slashing state spending. Democratic legislators, including powerful House Speaker Michael Madigan, pushed back against the governors’ budget. They argue that his proposed cuts, including $1.5 billion in Medicaid spending reductions and hundreds of millions of dollars cut from social services and transit, would hurt low-income working families the most. Rauner has also proposed $600 million worth of cuts in local government aid (while paradoxically pushing for a freeze in local government property tax rates) and $387 million in higher education cuts. ITEP’s recent Who Pays report found that the bottom 20 percent of Illinois taxpayers pay almost three times more of their income in state taxes than the top 1 percent. The governor’s budget will make an unequal situation worse by slashing programs that many of the less fortunate depend on.

Wisconsin Gov. Scott Walker, who likes to tout his bona fides as a “fiscal conservative,” decided to address his state’s $238 million deficit by not paying its bills. Walker made the decision this week to defer over $100 million in debt payments, opting instead to restructure the debt to the tune of an additional $19 million over the biennium. Many observers have pointed out that Walker’s $2 billion in new tax cuts since taking office – most of which went to the wealthy and corporations – are to blame for the state’s current budget woes. Meanwhile, progressive Wisconsinites slammed Walker for continuing to refuse $345 million in federal dollars to expand Medicaid, arguing that accepting the money could reduce the deficit and help reverse $300 million in higher education cuts proposed by the governor. Walker has also supported cuts to the state park system, science positions in state government, and recycling programs, to the consternation of many.

Connecticut Gov. Dannel Malloy outlined an ambitious budget on Wednesday that combines tax cuts, spending increases and new revenue to address a $1.3 billion deficit. Malloy wants to lower the sales tax from 6.35 to 5.95 percent to support low-income and middle-class families, but also repeal a sales tax exemption on clothing set to take place in July. On the business side, the governor would make a 20 percent surcharge on the corporate profits tax permanent, reduce the size of business tax credits for research and development and capital purchases, and eliminate the $250 business entity tax on small businesses. Altogether, Malloy’s changes to business taxes would increase revenue by $300 million. The rest of the deficit would be made up for with deep cuts elsewhere; Medicaid and mental health services would be especially hard hit, and the budget for state parks would be cut by 25 percent. Malloy affirmed his commitment to avoiding cuts in state aid to municipalities.  He also did not propose using rainy day funds to close the state’s budget gap.

Texas Gov. Greg Abbott, not to be outdone by his lieutenant governor, unveiled a budget proposal with $4.2 billion in tax cuts for businesses and property owners. Half of these cuts would come through a reduction in the state’s business franchise tax – $1 billion more than what the Senate budget proposes – and the other half would come from property tax cuts. Abbott pledged that his budget would make whole any school districts impacted by his property tax cuts. Critics feel that the tax cuts are an irresponsible move, given the state’s worsening economic climate.

State of the State Addresses This Week:
Texas Gov. Greg Abbott (watch here)

Governors’ Budgets Released This Week:
Alaska Gov. Bill Walker (amendments offered)
Connecticut Gov. Dannel Malloy (read here)
Illinois Gov. Bruce Rauner (speech here)
New Hampshire Gov. Maggie Hassan (read here)

Shell games have been with us since ancient times, and the tax shift proposals of today indicate that the basic concept has a long shelf life. A “conjurer” who makes fantastic claims that are later found too good to be true? Kansas Gov. Sam Brownback and many other governors fit the bill. A “shill” who enthusiastically vouches for the legitimacy of the game and who stands to make a hidden profit? Any number of supply-siders who claim that tax cuts will promote prosperity or that tax increases will lead to a mass exodus. A “mark” who plays the game in hopes of winning, never realizing that it’s been rigged from the start? Unless you sit in the uppermost tax bracket, the mark is likely you.

Tax shifts lower one tax and increase another in a way that is purportedly revenue neutral. All too often, such proposals reduce taxes for top earners and stick low- and middle-income people with the bill by increasing regressive, consumption taxes. As ITEP’s Who Pays report shows, every state tax system asks more of the poorest residents than they do of the rich. Tax shifts allow elected officials to serve political goals, posing as fiscal stewards acting in the public interest even though their tax policies are detrimental to state budgets and critical programs such as education, infrastructure and public safety.  

There is a right way to do a tax shift. Last year, the District of Columbia broadened its sales tax base to include more services used by businesses and well-off residents. At the same time, it lowered taxes for middle-income earners and strengthened the Earned Income Tax Credit to put more money in the pockets of working people. Unfortunately, states currently considering tax shifts are focused on cutting taxes for the highest-income households.

Below are the top tax shift trends that ITEP is following in legislatures across the country:

1) Hiking Taxes on Low Income Families to Pay for Tax Cuts for Wealthy Families
Ohio: Gov. John Kasich’s budget includes yet another massive tax shift away from well-off taxpayers to the middle-class and working poor. He wants to slash income taxes for the second time since he’s been in office, cutting rates by 23 percent over two years, with an immediate 15 percent cut in 2015. The cuts would cost an estimated $4.6 billion in revenue over the biennium. Kasich also wants to eliminate the income tax for business owners with $2 million or less in annual receipts at a two-year cost of $700 million dollars, and increase the personal exemption allowed for those with $80,000 or less in annual income. He would pay for these massive income tax cuts through regressive tax hikes. The governor wants to increase the sales tax rate from 5.75 to 6.25 percent and broaden the sales tax base to include a number of additional services. He also wants to increase excise taxes on cigarettes and other tobacco products, two measures that hit low-income households the hardest. ITEP ran an analysis of the tax shift plan and found that the top one percent of Ohio taxpayers would receive an average tax break of $12,010, while the bottom 40 percent of taxpayers would actually see their taxes go up by about $50. For more on the ITEP analysis read this report from Policy Matters Ohio.

Maine: Gov. Paul LePage has proposed a sweeping tax shift package that would hike sales taxes to help pay for significant personal and corporate income tax cuts and would also eliminate the estate tax. All together, the governor’s tax changes would cost $260 million when fully phased in. LePage wants to increase the sales tax rate and broaden the tax base to include some services. His plan would also eliminate cost-sharing with local governments, which could force them to hike property taxes. The governor described his plan as a way to move the state from an income-based tax system to a “pay-as-you-go” consumption-based tax system – a dangerous and ill-advised shift in the way Maine funds its crucial public investments.  But, wait; there’s more!  In his State of the State address, LePage announced his intention to fully eliminate Maine’s income tax in three steps (we saw how that worked out for Kansas). Eliminating the state income tax would result in the loss of half of the state’s $3 billion in annual revenue, necessitating deep cuts and major tax shifts to more recessive revenue sources. 

Idaho (updated 4/6/2015): Idaho lawmakers have given serious thought to a number of tax shifting ideas, almost all of which would make the state’s regressive tax system even more unfair.  The House recently decided to move forward with some of these ideas, passing a bill that would have flattened the income tax for many taxpayers, raised the gasoline tax, eliminated the Grocery Credit Refund, and exempted groceries from the sales tax.  ITEP found that the overall impact (PDF) of these changes would be higher taxes for low- and middle-income taxpayers, and dramatically lower taxes for the affluent (the top 1 percent of earners would receive an average benefit of $5,000 per year).  Fortunately, the Senate killed the bill and seems to be interested in refocusing on the original objective that inspired it: raising money for transportation.

Michigan: This May, Michigan voters will be asked to approve a major tax package that would boost funding for transportation and education by some $1.7 billion per year.  The package relies entirely on regressive tax changes to raise revenue, notably through a 1 percent sales tax increase and a gasoline tax restructuring that would raise the tax rate by roughly 12 cents per gallon.  However, the package also includes a valuable progressive offset for low-income families in the form of a significant expansion to the state’s Earned Income Tax Credit (EITC), from 6 to 20 percent of the federal credit.  Unfortunately, lawmakers are now sending signals that if voters approve this package, they may squander some of the revenues on a personal income tax cut that would be no good for the state’s economy and would make the state’s regressive tax system even more unfair.  According to an ITEP analysis provided to the Michigan League for Public Policy, the income tax rate cut under consideration would give low-income taxpayers an average reduction of $12 per year, while handing over $2,600 per year to each of Michigan’s top 1 percent of earners.

2) Using Tax Shifts as Political Cover to Raise Revenue to for Infrastructure
South Carolina: Gov. Nikki Haley has said that she won’t support a gas tax increase without an across the board income tax cut. Raising gas taxes while cutting income tax rates would result in a tax shift from well-off South Carolinians to middle income and working families. Her proposal would phase in income tax rate reductions over 10 years, resulting in a top income tax rate cut from 7 to 5 percent, and increase the gas tax from 16 to 26 cents. This shift away from progressive income taxes coupled with a regressive gas tax hike would be problematic for state coffers over the long term, and low-income folks would undoubtedly feel the brunt of this tax shift.

New Jersey: Lawmakers in New Jersey seem to agree that the state is facing a transportation funding crisis and that an increase in the gas tax is needed.  However, it appears more and more likely that a gas tax increase will not be enacted without a tax cut elsewhere. The taxes lawmakers are considering reducing or even eliminating to get the much needed gas tax boost?  The estate and inheritance taxes, which only impact roughly 4 percent of New Jersey families each year and have zero connection to the need to boost transportation funding in the state.  As our friends at New Jersey Policy Perspectives have argued, the other problem with this proposal is that it does nothing to help low- and moderate- families who will actually be hit hardest by a gas tax increase.  Restoring the state’s Earned Income Tax Credit to 25 percent of the federal (cut to 20 percent in 2010) makes much more sense as the tax cut to propose alongside a gas tax hike, rather than eliminating taxes which benefit only the wealthiest families in the state.

3) Other States to Watch
Arizona: Online shoppers In Arizona (and every other state) often fail to pay sales taxes because e-retailers shirk their tax collection responsibilities.  In 2013 the U.S. Senate passed legislation that would have closed this gap in sales tax enforcement, but the House failed to act on it.  Now, some Arizona lawmakers say that if the federal government ever does act on this important issue that any additional revenue collected through improved enforcement should be immediately sent back out the door in the form of a regressive income tax cut.  Fortunately, legislation aimed at accomplishing this end was recently voted down by a narrow margin in the Arizona House, though the sponsor is still trying to find a way to resurrect the proposal.

Mississippi (updated 4/6/2015): Mississippi lawmakers showed zeal this session for changing the state’s tax code.  Gov. Phil Bryant recommended a nonrefundable Earned Income Tax Credit and Lt. Governor Tate Reeve’s proposal would have cut personal and corporate income tax rates and eliminated the state’s franchise tax.  But, the most extreme plan emerged from the House where members passed a bill that would have phased out the state’s personal income tax over several years with more than two-thirds of the cut flowing to the richest 20 percent of taxpayers in the state at a cost of nearly $2 billion. Thanks in part to ITEP’s number crunching on all of the plans, which advocates in Mississippi shared with the media and lawmakers and put to use in publications, the House and Lt. Governor’s tax cutting proposals failed to muster enough support to move forward this session.

New Mexico: We are closely following a bill in the New Mexico legislature that would eliminate most of the taxes currently levied in the Land of Enchantment and replace the revenues with a 1 percent tax on gross receipts.  Similar tax-shifting legislation was introduced in 2013 and gained little traction.

4) The Cautionary Tale: Kansas
Kansas: The most notorious case of tax shifting continues to unfold in Kansas. In 2012 and 2013 Gov. Brownback pushed through two rounds of very regressive income tax cuts that lowered taxes on wealthy Kansans while hiking taxes on low-income Kansans, and he’s now proposing more regressive tax hikes to help balance the state’s budget. The income tax cuts already passed will cost Kansas $5 billion in lost revenue over the next seven years. Given the state’s budget situation, Brownback has been forced to delay further income tax cuts planned for this year. He also has been forced to raise taxes, though not the ones you would think: his budget proposal would increase the excise tax on cigarettes by nearly 300 percent, from $0.79 to $2.29 per pack, and taxes on liquor would rise from 8 percent to 12 percent. The governor’s regressive tax hikes would fall  on the same Kansans hurt the most by his failed economic stewardship. They also drive home some of the consequences that could arise from other officials’ rosy tax shift plans. Aggressive tax shifts that favor businesses and the wealthy at the expense of low- and middle-income families can result in states having difficulty adequately funding basic public obligations over the short and long-term.

Massachusetts Gov. Charlie Baker is facing a blizzard of criticism in the wake of a series of massive snowstorms that have revealed the inadequacy of public transit in Boston. The MBTA – which runs the city’s fleet of subways, busses, commuter trains and ferries and currently faces $9 billion in debt and a $3 billion backlog in maintenance – was forced to suspend service on Tuesday after riders were stranded on a train for two hours. Yesterday, the MBTA’s embattled general manager resigned, but not before revealing in a press conference that the governor hadn’t spoken to her directly about her agency’s woes. Baker, who ran on an anti-tax platform, recently proposed cutting the state’s transportation budget by $40 million (including $14 million from the MBTA), but insisted that it wouldn’t impact service. Given the depth of the problems exposed over the past week and the ire of disgruntled passengers, Baker may have a hard time selling his proposed cuts.

Mississippi Lt. Gov. Tate Reeves introduced the Taxpayer Pay Raise Act, which is mostly a package of tax cuts aimed at business and corporations. His measure would eliminate the 3-percent income tax on the first $5,000 of taxable income, which would benefit working families. However, the proposal would also cut taxes for business owners and eliminate the state’s franchise tax on property and capital owned by corporations. Reeves’s plan would cost Mississippi $400 million in revenue every year, and over half of that money would go back to corporations – the franchise tax brings in $242 million in revenue and accounts for 45 percent of corporate tax revenue in the state. As the Mississippi Economic Policy Center points out, corporate tax cuts are unlikely to make Mississippi more competitive since the state has failed to adequately invest in the quality of its workforce.

The latest revenue forecast out of North Carolina shows that the state will collect $271 million less than estimated due to lower-than-expected income tax receipts. This measure is higher than the $199 million shortfall projected in December. State officials have blamed weak growth in wages for the gap, but the North Carolina Budget and Tax Center, using ITEP data, points to the 2013 tax plan as the real culprit. The income tax cuts included in the plan will cost the state almost $1 billion this fiscal year, almost twice what the plan was originally estimated to cost.

The Arizona House considered a bill this week that would force the state to cut income taxes if Congress passes the Marketplace Fairness Act, which would allow states to collect sales tax on online purchases. The bill failed by a close margin on Tuesday, but received a reconsideration vote after one was requested by sponsor Rep. J.D. Mesnard. The Arizona Children’s Action Alliance came out against the bill, arguing that it would tie the hands of future legislators and eliminate a possible revenue source. Citing ITEP data, they note that two-thirds of the income tax cuts would go to those with incomes above $94,000. With the combined impact of lower income taxes and higher sales taxes, 80 percent of Arizona taxpayers would see a net increase in their tax bill.

Following Up:
Oklahoma: A tax exemption for manufacturers and wind farms came under fire as being too generous before a House committee this week. 

In a testament to the power of health industry lobbying, lawmakers on both sides of the aisle have expressed support for repealing the medical device tax, a levy created as part of the Affordable Care Act that is expected to raise $29 billion over the next 10 years to help fund broader access to health care.

The medical device tax is a 2.3% tax that applies to firms selling medical devices including artificial hips and joints, pacemakers, and MRI machines. It excludes items such as eyeglasses, contact lenses, hearing aids and any medical device purchases made by the general public from retail stores for individual use. Exported items are also exempt from the tax.

Health insurance providers, pharmaceutical companies, and the medical device industry are all expected to gain from the ACA by earning greater profits as more people enter the healthcare marketplace. The tax is intended to reciprocate those benefits by tacking on a small flat rate to a firm’s revenue.

Medical device manufacturers have been trying to gut the tax since it passed in 2010. The industry spent more than $200 million successfully lobbying Congress and waging a campaign using the typical anti-tax talking point that claims any new levy is a jobs and innovation killer. But the argument for repealing the medical device tax does not hold up.

A new analysis by the Congressional Research Service (CRS) found that in all predicted scenarios, the tax would have minimal effects on the medical device industry and job loss. The CRS suggests that it could have as much as a 0.2 percent impact on output, and little if any effect on research, development, and innovation. The report attributes this low impact on the fact that the tax is relatively small, exports are exempt from taxation, and consumer demand is relatively inelastic.

At the very least, any repeal of the medical tax should pay for the $29 billion in revenue that would be lost, yet those fighting the tax have not found a politically viable way to replace the lost revenue. In addition, a repeal would set a precedent for the repeal of other taxes used to fund the ACA, creating a dangerous cycle that could weaken the law, which is clearly the intent of some lawmakers.

Other sectors of the healthcare industry have successfully incorporated ACA taxes, and without brouhaha, and we now have the numbers to show that the medical device industry can, too.

The tax plan recently proposed by Ohio Gov. John Kasich would be a massive tax shift away from well-off taxpayers to the middle-class and working poor, according to a new report released by Policy Matters Ohio that incorporates ITEP data. His plan follows similar tax shift proposals from Maine and South Carolina and shows that plenty of governors around the country are doubling down on regressive tax “reform,” despite arguments to the contrary.

Taking into account the governor’s proposed changes to income and consumption taxes, the top one percent of Ohio taxpayers will receive an average tax break of $12,010, while the bottom 40 percent of taxpayers will actually see their taxes go up by about $50. Gov. Kasich has touted his plan as a measure to boost small businesses, but in reality his policy will benefit the wealthy and leave working families in Ohio further behind.

Gov. Kasich has proposed slashing income taxes for the second time in his administration. His new plan would cut rates by 23 percent over two years, with an immediate 15 percent cut in 2015. These cuts would cost an estimated $4.6 billion in revenue over the biennium. Kasich also wants to eliminate the income tax for business owners with $2 million or less in annual receipts at a two-year cost of $700 million dollars, and increase the personal exemption allowed for those with $80,000 or less in annual income. The benefits of the governor’s income tax proposals would put, on average, $13,000 back into the pockets of the top one percent of Ohio taxpayers annually, while those at the bottom would see an average $16 tax cut. Those in the middle would see a $219 tax cut on average.

Worse than the lopsided benefits that would accrue to the rich are the regressive tax increases Gov. Kasich proposes to pay for his cuts. The governor wants to increase the sales tax rate from 5.75 to 6.25 percent and broaden the sales tax base to include a number of additional services. He also wants to increase excise taxes on cigarettes and other tobacco products. These measures hit low-income households the hardest and explain why overall tax rates will increase for the bottom 40 percent. While wealthier households will pay a higher dollar amount under the sales tax increase, low-income households will have to pay a larger percentage of their income. Similarly, the cigarette and tobacco tax increase will have a larger impact on low-income households. ITEP’s recent Who Pays report shows that states that rely disproportionately on consumption taxes rather than income taxes are less fair and more unequal in the distribution of tax obligations. 

Kasich’s proposal also includes other measures meant to help pay for his tax cuts or reduce taxes for businesses. He would means test three tax provisions geared toward income earned by senior citizens, raise the rate of the Commercial Activity Tax while reducing the minimum paid by some companies, and increase the severance tax on oil and gas.

A number of legislators have balked at the governor’s plan. Rep. Kevin Boyce argued that the increase in the income tax personal exemption for lower-income taxpayers would be negated by the increase in sales taxes, while Rep. Denise Driehaus questioned whether the measures for business owners would be enough to spur job growth.

The governor could actually help working Ohioans by expanding the state’s Earned Income Tax Credit (EITC). While Gov. Kasich often highlights his expansion of the EITC from 5 to 10 percent, this is not nearly enough to truly make a difference for low-income families – as Policy Matters Ohio and ITEP have previously argued. The bottom 20 percent of tax filers receive an average of just $5 in savings from the EITC, while the next 20 percent receive an average $60 in savings. These meager savings would be wiped out by the governor’s proposed sales tax increases. A truly progressive tax proposal would increase the EITC further and make the credit refundable so that working families would receive the full benefit.

What Ohio needs is a tax policy that will help low-income and working families get a leg up, not reward the well-off with lower taxes. We hope the governor will make fairness a part of his economic agenda. 

With at least twelve states looking seriously at gas tax increases this year, now is a good time to survey the landscape of state gas tax policies.  Two new briefs from ITEP do exactly that.

While the cost of asphalt, concrete, and machinery has been rising, too many state gas tax rates haven’t budged.  Twenty-two states have gone a decade or more without a gas tax increase, and sixteen of those states have not acted in two decades or more.  Alaska (44.8 years) and Oklahoma (27.8 years) are the top two gas tax procrastinators and it’s unlikely that will change this year.  But Iowa and South Carolina (tied for #3 at 26.1 years each) are seriously considering gas tax increases, as are #6 Tennessee (25.6 years) and #8 New Jersey (24.6 years).

All of these states have one thing in common: a fixed, cents-per-gallon gas tax that is guaranteed to fall short over time as inflation chips away at its “real” value.  Fortunately, our other brief shows that a large, and growing, group of states now levy smarter, variable-rate gas taxes that trend upwards over time.  Eighteen states, home to over half of the county’s population, have this type of gas tax—either with a price-based (sales tax) on gas, or a gas tax rate that’s simply indexed to inflation.  And as we noted recently, more states such as Minnesota, South Dakota, and Utah could join that list soon.

Stagnant gas tax rates that have not been updated in years, or even decades, are not generating enough revenue to cover the growing cost of maintaining and expanding our infrastructure.  To accomplish that goal, outdated gas tax rates need to be increased, and gas taxes need to be set on a more sustainable course by adopting variable-rate structures better geared for long-run growth.

Read the briefs:

How Long Has it Been Since Your State Raised Its Gas Tax?

Most Americans Live In States with Variable-Rate Gas Taxes

Rumors abound in Springfield that a gas tax increase could be in the works. Though Illinois Gov. Bruce Rauner has downplayed reports that he supports such a measure, in his state of the state address last week he said the state needs to “restructure” its motor fuel tax to pay for infrastructure investments. Leaked documents from Rauner’s business allies detail possible fixes, including a 13-cent increase in the gas excise tax and increasing the cost of registering, titling, and driver’s licenses.

Arkansas Gov. Asa Hutchinson signed his proposed middle-class tax cut into law on Friday after the measure passed both chambers of the legislature by wide margins. The bill passed with a proposed capital gains tax measure intact. The exemption for capital gains will fall to 40 percent from 50 percent – less than the 30 percent proposed in the Senate version of the bill, but still a significant improvement in making the state’s tax system fairer. The tax cuts exclude the 40 percent of Arkansans earning less than $21,000 per year. If no additional changes are made, the disparity between the tax rate paid by low-income workers and other Arkansans will worsen; Arkansas ranks 11th in the Who Pays Inequality Index.

Oklahoma lawmakers have turned their sights on a glut of tax credits and incentives that cost the state more than $1 billion annually. Facing a $300 million shortfall, some legislators argue that many of the incentives, though well-intentioned, do not perform well or live up to their promises. Leaders in the House and Senate have proposed a four-year review process for tax credits and incentives. Meanwhile, policymakers have taken the Kansas lesson to heart and pushed proposals to slash the state’s income tax to the backburner.

Governor’s Budgets Released This Week:
Kentucky Gov. Steve Beshear (Tuesday)
Texas Gov. Greg Abbott (Wednesday)