Author: tarek

The Cleveland Plain Dealer has a new series on Ohio Gov. John Kasich’s ambitions to eliminate the state’s income tax, and the findings aren’t great for tax cut supporters.

The paper notes that eliminating the state’s second largest source of revenue could affect services, like education, and prompt local governments to raise taxes to offset the loss in money from the state; Ohio’s budget director “estimates that 85 percent of the state budget goes to education, local governments and counties.”

Kasich and his supporters (usual suspects The Heritage Foundation and Art Laffer) argue that eliminating the income tax will improve the business climate in the state and bring in new residents. Kasich, however, is careful to contend that the benefits won’t come overnight: “It’s like putting seeds in the ground. You don’t get the harvest until later.” That’s because far from attracting businesses and new residents, as supporters dubiously claim, eliminating the income tax will just bankrupt Ohio. One need look no further than Kansas, where Sam Brownback’s ALEC-tested, Laffer-approved tax breaks have the state staring down gargantuan budget deficits.

Ironically, eliminating the income tax would force Ohio to rely on taxes that hinder business (like the severance tax) and unfairly burden working Ohio families (like the sales tax). A report by Policy Matters Ohio, using data provided by ITEP, found that the state would have to almost double its sales tax to pay for income tax elimination, leaving Ohio’s middle class with a tax increase rather than a cut.

Meanwhile, the biggest benefits would go to the state’s top 1 percent, who would save “more than $31,000 a year in taxes.” In the words of our own Matt Gardner: “When people talk about repealing the income tax in Ohio and other states, they generally don’t like to talk about these things.” Any wonder why? 

An article in today’s Politico (subscription only) describes plans by congressional Republicans to change the budgeting rules to incorporate “dynamic scoring” of tax proposals should they gain control of the Senate.

Dynamic scoring is a fancy way of claiming tax cuts partly or completely pay for themselves.

This might sound strange to anyone not familiar with the fuzzy math employed by proponents of tax cuts. They rest on the extreme version of “supply-side” economics, promoted most prominently by Arthur Laffer, which claims tax cuts encourage work and investment so profoundly that the subsequent increase in incomes and profits will result in a revenue increase that partly or completely offsets the revenue loss from the reduction in tax rates.

Dynamic scoring is sometimes used to describe a way of estimating the revenue impact of tax proposals that accounts for this supposed effect on the broader economy. The official revenue estimates already do incorporate expected behavioral changes resulting from new tax policies, but not changes to the broader economy, which most economists consider too uncertain to predict.

If tax cuts really did pay for themselves to any significant degree, of course politicians of both parties would rush to enact more of them, knowing there would be little or no cost. But, alas, supply-side economics has been disproven so many times that even most members of Congress can understand the evidence stacked against it. Most famously, a report from President George W. Bush’s Treasury Department failed to find a positive dynamic effect of his tax cuts and concluded that they must be paid for somehow.

But Politico reports that Congress could, nonetheless, start to incorporate these supposed dynamic impacts if Rep. Paul Ryan, who chairs the House Budget Committee and is expected to chair the Ways and Means Committee next year, gets his way. He has long proposed steep tax cuts and has been vague on how he would avoid an increase in the budget deficit.

As several experts quoted in the article explain, there is simply no agreement among economists about how tax cuts affect the broader economy, which makes it impossible to incorporate such effects into an apolitical revenue-estimating process for Congress that is trusted by everyone. In fact, no one really even knows if cutting taxes encourages most people to work and invest more (because they get to keep more of their income) or less (because they can work and invest less and still achieve whatever after-tax income goal they have set for themselves).

Douglas Holtz-Eakin, former director of the Congressional Budget Office and economic adviser to George W. Bush and John McCain, is untroubled by the uncertainty involved. Politico tells us:

Holtz-Eakin recalled being asked to determine how much providing terrorism risk insurance would cost the government, which required him to predict the next terrorist attack. Another time, he said, he was asked to forecast — before the Iraq War even began — how much it would cost to pay $100,000 to the survivors of each soldier killed. “Tell me how to do that,” he said. “There are a lot of assumptions in all of this” and “I don’t think that dynamic scoring is all that different… The mystery surrounding it is overrated.”

Holtz-Eakin’s logic apparently is that because revenue-estimating sometimes involves guesswork, it’s alright if we incorporate a whole lot more guesswork. That’s hardly reassuring.

Perhaps the most damning aspect of the push for dynamic scoring is that proponents refuse to acknowledge the flipside to their logic. If tax cuts increase economic growth by putting money in the economy, then surely government spending could have the same effect. Does anyone really doubt that highways that facilitate commerce or education that provides a productive workforce help grow our economy? If tax cuts grow the economy enough to partly or completely pay for themselves, couldn’t the same be true of federal spending? It’s safe to say you won’t hear Paul Ryan talking about that.

Political leaders in New Jersey could be close to figuring out a fix for the state’s transportation funding crisis. The Transportation Trust Fund is set to run out of money soon, and Gov. Chris Christie has declared that all options are on the table — including, perhaps, an increase in the gas tax, which is currently second lowest in the nation (it has been more than 20 years since the tax was increased). The pledge represents a softening of the governor’s position; he has opposed any increase in the gas tax in recent years, and has also raided the trust fund to balance the state budget. State lawmakers could also consider indexing the gas tax to inflation, as they’ve done in Massachusetts, or applying the state’s sales tax to gasoline purchases, as advocated by New Jersey Policy Perspective, a leading nonpartisan think tank in the state.

The president of the South Carolina Chamber of Commerce recently announced that his group would support the first state gas tax increase in over 25 years (lowest in the nation — take that New Jersey). Otis Rawl says the chamber will push for a 1-cent-per-year increase for the next 10 years to address the state’s crumbling infrastructure, citing a poll that shows a majority of the state’s Republican voters would support such a measure. Both candidates for governor are on the record as opposing an increase in the gas tax, though their alternatives haven’t been well-received by state leaders. Incumbent Nikki Haley (R) has been criticized for refusing to reveal her “secret” plan to fix the state’s roadways, while challenger Vincent Sheheen would rely on anticipated revenue increases from the state’s general fund.

An analysis from Wyoming finds that the state’s 10-cent increase in the gas tax has not been entirely passed to consumers. The Casper Star-Tribune found that after the tax on gas and diesel was increased by 10 cents in 2013, the price of unleaded gasoline increased only 5 cents per gallon in 2014 while the price of diesel increased by 8 cents. Gov. Matt Mead (R), who signed the tax increase, has long argued that infrastructure investment is the conservative approach, since maintenance costs increase with less investment.

Transportation spending is a big issue in the Michigan governor’s race, with challenger Mark Schauer (D) calling out incumbent Rick Snyder (R) for his failure to convince state legislators to fix the states’ potholes and bridges. Snyder supports an increase in the state’s gas tax and wants to hike vehicle registration fees, while Schauer opposes an increase on the grounds that the governor has already raised taxes on ordinary Michiganders to pay for business tax cuts. Michigan’s gas tax is which is one of the nation’s highest at ten cents above the national average, but state road spending per driver is far below average. Meanwhile, the sale of tire and wheel insurance has skyrocketed across the state.

If you have a great state news item that we missed here, please send it to Sebastian at sdpjohnson@itep.org so we can spread the word.

Tennessee is already one of the ten most unfair states when it comes to tax policy. It is one of nine states that do not levy a broad-based personal income tax on their residents’ earnings (the state does collect a 6 percent tax on investment income from dividends, interest, and some capital gains income- see more below). Instead, the state relies heavily on regressive sales taxes to fund public services, and as a result the bottom 20 percent of Tennesseans pay four times as much of their income in state and local taxes as the top 1 percent. Sadly, instead of trying to create a more fair tax system, there are two efforts underway that would make a bad deal for working families even worse.

The first effort is Amendment 3, a ballot initiative (and political gimmick) that would permanently ban the state legislators from creating a broad state income tax. Never mind that any income tax bill has zero chance of passing, and that the last serious effort in 2002 ended in wild protests and bricks thrown through windows. The measure has many prominent cheerleaders, most notably the father of voodoo economics, pundit-for-hire and Nashville resident Art Laffer, and his sidekick Travis Brown. They claim that Tennessee’s economic success (43rd in unemployment rate, 30th in quality of labor supply, 40th in quality of life) is due to its “status as a no-income tax state.”  They see Tennessee as the vanguard of the “heartland tax rebellion,” a gaggle of shortsighted tax “reforms” pushed by Laffer and right-wing organizations in conservative states. Kansas was the poster-child until recent events caused the state to become a liability.

Amendment supporters also claim the measure will bring more jobs to Tennessee, since business owners would be absolutely certain there would never be any broad income tax imposed. As usual, the claim is made with no evidence or common sense; who are these fence-sitting job creators who refuse to set up shop in Tennessee because of the possibility of a new tax that isn’t even imposed on businesses? Perhaps supporters, who are making a clearly ideological choice, can’t conceive of any other way to make business decisions. 

Unfortunately for supporters, their claims are belied by pesky facts. John Stewart, an opponent of the measure and former state economic development official, asserts that he “never had one company raise the issue of income tax as to whether they were going to come or not. The one issue they always cared about was a skilled and trained workforce through our colleges.” Stewart notes that the measure will force future Tennesseans to pay higher sales, property, food and business taxes or cut services in order to balance the budget. A recent Standard and Poor’s report found that states without progressive income taxes will see revenues shrink due to growing income inequality.

The second effort is the ongoing fight to repeal the Hall tax, which taxes investment income from dividends, interest, and some capital gains income. Attempts to repeal the tax failed this year, so advocates – backed by the Koch brothers and Grover Norquist – will try again during the 2015 legislative session. An ITEP analysis found that nearly two-thirds of the benefits from repealing the Hall tax would go to the wealthiest Tennesseans – those earning an average of $970,000 a year. The next largest beneficiary would be the federal government, since investors would no longer be able to write off Hall tax payments on their federal returns.

The losers from the repeal of the Hall tax would be ordinary Tennesseans, who would see state and local spending decrease or other taxes increase. Last year, the tax generated $264 million in revenue, three-eighths of which went to local jurisdictions. The plan to repeal the Hall tax would require the state to reimburse cities and counties for any revenue losses, but doesn’t specify where the money would come from. An editorial in the Knoxville News-Sentinel gets it right: “Without new revenue sources, the state would have to cannibalize other parts of its perpetually lean budget….Repeal of the Hall tax at this time without finding alternative revenue sources does not make sense for the state, for local governments or for the people of Tennessee.”

Tennessee’s blind, ideological pursuit of tax cuts has prevented the state from making crucial investments that would actually make the state more competitive. Tennessee ranks 40th in teacher pay, yet the most recent state budget was passed without promised raises for teachers and state employees. Proposed higher education spending was also eliminated, meaning college students will see tuition jumps. The idea that states can cut their way to prosperity – despite the evidence all around us – is alive and well. 

What do a Manhattan skyscraper secretly purchased by the Iranian government, a Louisiana Congressman hiding half a million dollars in bribes and a Russian crime boss stealing $150 million from investors all have in common? All were made possible by shell companies incorporated in the United States, according to a new report from Global Witness.

It explains that some states in the U.S. require less identification from people forming corporations than they require from those applying for a library card. We have long noted that one result is the use of anonymous corporations formed in the U.S. for tax evasion by Americans and by people from all over the world, which in turn makes it much more difficult to persuade other countries to cooperate with the U.S. in stamping out tax evasion.

On the bright side, there is a bill — with Democratic and Republican cosponsors in both the House and Senate — that would address this problem. The Incorporation Transparency and Law Enforcement Assistance Act would require that each state finds out and records who is incorporating each company and make that information available for law enforcement purposes.

Arguably this information should be made public for all, but this bill would nonetheless vastly strengthen efforts to crack down on tax evasion, money laundering, terrorist financing and other crimes.

The Kansas dogpile continues, with the Washington Post editorial board launching the latest broadside against Gov. Sam Brownback’s tax cut fiasco. “Few if any governors, “it writes, “have undertaken such an extreme trial-by-revenue-deprivation in a state so clearly lacking the economic means to withstand it.” The board also notes that both Moody’s and Standard and Poor’s have downgraded the state’s credit rating, since they feel that budget is not “structurally aligned.” That’s fancy credit agency talk for Kansas is broke.

In Ohio, where state officials have apparently never heard of Kansas, enthusiasm for needless tax cuts continues unabated. Incumbent Gov. John Kasich, running for a second term, promises that if reelected he will make further income tax cuts a top priority. To make his case, he employed the canard that high income tax burdens have forced people to leave the state. Kasich has already cut income taxes by 10 percent — though, the “relief” hasn’t been evenly distributed. An analysis by ITEP and Policy Matters Ohio found that 70 percent of Ohio taxpayers will get an average tax cut of less than $100, while the top 1 percent of earners will pay $8,262 less, on average. Even worse, those making under $19,000 will actually pay more in taxes, after taking into account a sales tax hike meant to offset cuts elsewhere.

The tax debate started by Gov. Mike Pence in Indiana continues, as the governor gears up for the upcoming biennial legislative session. Tax reform is high on his agenda. Pence held a tax conference to bat around ideas to make Indiana’s tax system more competitive in June; some observers were dismayed that Art Laffer and Grover Norquist had speaking slots, while the general public (you know, the people affected by tax changes) were barred from attending. Meanwhile, the state superintendent is asking for more money so she doesn’t have to charge families for school textbooks.

Both candidates for governor in Arkansas are trying to one-up each other with voters by touting their plans for big tax cuts. Republican candidate Asa Hutchinson has pledged to cut the income tax by $100 million in his first year as governor, with the end goal of eliminating the tax entirely. Democratic candidate Mike Ross wants to cut the income tax by $575 million — but gradually, and only if the state can afford it. According to Ross, Hutchinson’s plan is fiscally irresponsible and would put Arkansas on a glide path to Kansas’ budget woes. Hutchinson claims that Ross is making big promises to voters without being specific. Neither plan would make Arkansas’ tax system less regressive; as it stands, the bottom 20 percent currently pay an effective tax rate nearly twice that of the top 1 percent. For more coverage of the race in Arkansas, check out our recent blog post. 

If you have a great state news item that we missed here, please send it to sdpjohnson@itep.org so we can spread the word. 

The Obama Administration’s action on Monday to crack down on corporate tax dodging by companies claiming to be foreign (corporate inversions) is the right decision, but Congress needs to act to address the significant problems that remain.

Current tax law blocks only the most outrageous attempts by American corporations to claim a foreign address for tax purposes. The administration’s actions enforce the law more effectively but do not strengthen it in any fundamental way.

For example, after a U.S.-foreign merger, the law treats the resulting merged company as domestic if it is 80 percent owned by former shareholders of the U.S. company. The new regulations will prevent corporations from avoiding this rule by, for example, making a party to the merger appear smaller or larger than it really is to create the appearance that the 80 percent threshold is met.

But Congress should fundamentally strengthen the law by lowering the threshold from 80 percent to 50 percent, which the Stop Corporate Inversions Act would accomplish. Under this approach, an American corporation could no longer merge with a foreign company and claim to be a new corporation based abroad even though the majority of its ownership has not changed.

It is also important to eliminate tax benefits that American corporations receive if they become foreign for tax purposes, which motivate inversions. One relates to profits earned in the past (and booked offshore) while another relates to future profits that can be shifted offshore through earnings stripping. Tax experts like Stephen E. Shay, Victor Fleischer and others agree that the plain language of our tax law gives the administration the power to address both of these. Unfortunately the administration’s regulatory action addresses the first problem (avoiding tax on profits earned in the past and booked offshore) but not the second (earnings stripping on future profits).

Congressional action can fully address both problems. First, Congress should require any U.S. corporation that inverts or becomes foreign to pay U.S. taxes it has deferred on profits held offshore. This rule would be similar to the one requiring individuals to pay the income tax they have deferred on capital gains when they renounce their U.S. citizenship.

Second, Congress should end corporations’ ability to strip earnings out of the United States by enacting the strong proposal first introduced by President Obama in his fiscal 2015 budget and recently introduced as legislation by Rep. Mark Pocan of Wisconsin.

These steps, combined with the Stop Corporate Inversions Act introduced by Rep. Sander Levin and Sen. Carl Levin in May, would put an end to the inversion crisis.

While Citizens for Tax Justice agrees with lawmakers that the ultimate goal of Congress should be to enact comprehensive tax reform, the cost of waiting for both parties to come to a sensible agreement is too high.

Congress should immediately enact the anti-inversion reforms outlined here. A decision to wait is a decision to allow more American corporations to pretend that they are foreign simply because loopholes in our tax laws allow it. The victims of inaction will be ordinary patriotic Americans, who pay their taxes every year.

Given the focus over the last few years on income and wealth inequality, it’s strange that almost no one in Congress has turned to the tax that was explicitly designed to mitigate such inequality: the federal estate tax. A proposal from Sen. Bernie Sanders would do this, and new state-by-state figures from Citizens for Tax Justice demonstrate why Congress should enact it.

Read the CTJ report.

The figures show that under the estate tax rules in effect today 0.1 percent — just one-tenth of one percent — of deaths in the U.S. result in federal estate tax liability. State-by-state figures show that even in “rich” states, the numbers are not much higher. For example, the figure in California is just 0.3 percent of deaths, and in Connecticut it’s 0.2 percent of deaths. In other words, the majority of the richest one percent of Americans are likely to be unaffected by the estate tax, thanks to dramatic reductions in the tax in recent years.

Even for the 0.1 percent of deaths that do result in estate tax liability today, the vast majority of the estates involved still go to heirs and charity. For the most recent year of data, more than 72 percent of these estates went to heirs while 11 percent when to charity. (For the 99.9 percent of estates not subject to the estate tax, all of the estate value went to heirs and charity.)

A bill introduced on Sept. 18 by Senator Bernie Sanders of Vermont would restore some of the revenue lost because of those estate tax reductions. The bill would exempt the first $3.5 million of every estate (double that for married couples) from the estate tax, which was the rule in 2009. Opponents of the estate tax will howl dramatically that this is socialism and an attack on freedom, but the figures in CTJ’s report show that only 0.3 percent of deaths nationwide in 2009 resulted in federal estate tax liability, so this legislation is not overly radical or far-reaching. Under Sen. Sanders’ proposal, the estate tax would still only affect the largest estates. 

President Obama has a similar proposal that would raise $85 billion over a decade, but Sen. Sanders’s bill is the better of the two because it would raise more revenue, thanks to a graduated rate structure that recognizes that a family inheriting a billion is even better off than a family inheriting $10 million.

Of course, Congress needs to do many, many things to address the growing inequality in our society. But the estate tax is an obvious place to start.

A new report from Standard and Poor’s that shows progressive income tax systems are better for state revenue could provide a boost to tax reformers in Massachusetts, according to The Boston Globe. Massachusetts is one of seven states with a flat personal income tax rate, and a bipartisan commission recently found that the state’s overall tax system places a greater burden on lower- and middle-income taxpayers than it does on the wealthy. They’ve recommended that the state adopt a graduated income tax structure — a move that would require a voter-approved constitutional amendment. Similar proposals have been defeated at the polls five times, most recently in 1994. For our take on the S&P report, check out this blog post from our director, Matt Gardner.

Meanwhile, Tennessee voters will soon decide whether to ban their state legislature from ever imposing a state tax on all personal income (Tennessee currently taxes interest and dividend income). The measure is largely superfluous, since there is little chance state lawmakers would ever consider a broader income tax. The last attempt to introduce a tax on personal income, in 2002, resulted in strident protests, including a brick thrown through the governor’s office window. Lawmakers ended up passing a sales tax increase instead, the last time any general tax increase was passed in the state. In last year’s Who Pays report, Tennessee ranked in the bottom ten states for tax fairness.

The Louisiana Film Entertainment Association (LFEA) commissioned a study on the economic impact of the state’s film tax credit incentive program. They’ve tapped HR&A Advisors, a consulting firm that has done similar analysis of film tax credits for the Motion Picture Association in Massachusetts and New York. The results of the state’s own studies, commissioned by Louisiana Economic Development, show that film credits were a net loss to the state in 2012, and each dollar collected on film credits cost $4.35 in state revenue. In 2010, the state spent $7.29 for each dollar collected. The LFEA study is sure to come up with much rosier numbers.

California Governor Jerry Brown recently signed a bill that would triple funding for the state’s film and television tax credit program. The measure is meant to keep film and television production from leaving the state, and is the culmination of a yearlong campaign by entertainment industry lobbyists. Hollywood has been hammered by aggressive competition from other localities – like New York, Vancouver and Atlanta, where incentives were more generous – and new business models, like Netflix and HBOGo. While the measure enjoys broad support, not everyone is happy about the tax credits: the state’s public education unions fear the measure will reduce the money available for schools, while others have questioned the effectiveness and transparency of the credits. 

With very few days left to legislate before the election, House Republicans are rushing through the Jobs for America Act, which includes several provisions to curb regulations as well as a grab bag of over $520 billion in tax breaks for businesses over the next decade. These tax cuts will do more to expand the deficit than expand employment.

The House already approved each of these tax breaks as separate pieces of legislation that went nowhere in the Senate. The first three of the breaks described below are usually temporarily extended as part of the “tax extenders” legislation that Congress usually enacts every couple of years. Making these breaks permanent, as this House bill would do, would destroy any hope that lawmakers will ever come to their senses and end this wasteful practice.

The five important tax provisions of the Jobs for America Act are as follows:

Make Permanent Bonus Depreciation – Bonus depreciation is a significant expansion of existing breaks for business investment. The Congressional Research Service’s (CRS) review of the research on bonus depreciation found that it does not affect the overwhelming majority of firms’ investment decisions. It cites CBO research concluding that bonus depreciation increases economic output by $0.20 to $1.00 for every dollar given up, while increased unemployment benefits increase economic output by $0.70 to $1.90 for every dollar given up. This suggests that throwing $269 billion more in bonus depreciation breaks at businesses over the next decade would be an enormous boondoggle.

Companies are allowed to deduct from their taxable income the expenses of running the business, so that what’s taxed is net profit. Businesses can also deduct the costs of purchases of machinery, software, buildings and so forth, but since these capital investments don’t lose value right away, these deductions are taken over time. In other words, capital expenses (expenditures to acquire assets that generate income over a long period of time) usually must be deducted over a number of years to reflect their ongoing usefulness.

Bonus depreciation is a temporary expansion of the existing breaks that allow businesses to deduct these costs more quickly than is warranted by the equipment’s loss of value or any other economic rationale. Unfortunately, Congress does not seem to understand that business people make decisions about investing and expanding their operations based on whether or not there are customers who want to buy whatever product or service they provide.

Make Permanent Section 179 Small Business Expensing – Like bonus depreciation, section 179 is a depreciation break, meaning it allows firms to deduct the costs of investment in equipment more quickly than they can under current law. As with bonus depreciation, a systematic review of section 179 by the CRS has found the tax break to be ineffective at promoting growth. Making it permanent would cost $73 billion over the next decade.

Section 179 allows firms to deduct the entire cost of a capital purchase (to “expense” the cost of a capital purchase) up to a limit. The provision in this bill would allow expensing of up to $500,000 of purchases of certain capital investments (generally, equipment but not land or buildings). The deduction is reduced a dollar for each dollar of capital purchases exceeding $2 million, and the total amount expensed cannot exceed the business income of the taxpayer. This means that this break is targeted to companies smaller than, say, General Electric, even if the beneficiaries are not exactly what most Americans think of as “small businesses.”

Make Permanent the Research Credit – The research credit is a wasteful tax break that is used primarily to subsidize activities that would have been carried out by companies even without any tax incentive. One of many problems is that accounting firms are helping companies obtain the credit to subsidize redesigning food packaging and other activities that most Americans would see no reason to subsidize. A CTJ report explains why Congress should either substantially reform the research credit or simply let it stay expired. Making the research credit permanent would cost $156 billion over the next decade.

Repeal of the Medical Device Tax – Enacted as part of healthcare reform, the medical device tax raises a critically needed $26 billion over the next ten years to help pay for the costs of expanding healthcare to millions of Americans. While some medical device companies complain that the tax will harm them, these hyperbolic claims ignore the fact that the healthcare expansion that is partly funded by this tax will massively expand the market for their products.

Ban States From Taxing Internet Access – While the argument for restricting state and local governments from placing any tax on internet access was weak back in 1998, it makes zero sense in 2014 to continue to coddle the goliath internet companies by allowing them to escape the kinds of taxes that states impose on other services. This legislation is actually worse than previous extensions of this policy in that it would disallow the seven states with grandfathered taxes on internet access from continuing them, resulting in an annual loss of over $500 million in revenues for those states.